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Get Set (Off)

By D

Fearns (t/a “Autopaint International”) v Anglo-Dutch Paint & Chemical Company Ltd & Ors [2010] EWHC 2366 (Ch)

This case was mentioned in the most recent edition of Legal Action’s Housing law update but it is not a housing case. Bear with Legal Action and us however as the case is useful. What is in there is a full discussion and explanation of the right of set-off and how it works.

The facts of the case are not particularly important but in summary there was a dispute between the two sides which left the Claimant being owed a sum of money in Pounds Sterling by the Defendant’s while the Claimant owed one of the Defendants a significant sum in Euros. However, over the period of the dispute the respective value of the Euro as against Sterling has changed a lot due to a few financial issues. I will not comment on the financial part as I may go off on a rant against the stupid arrogant bas…..(sorry).

Anyway, all of this meant that the date on which set-off could be claimed had a significant impact on how much money went to which party so it was a key argument.

The Law of Set-Off
Set-Off actually refers to two distinct things.
The first of these is where a sum owing by one party to another is offset due to monies owed in the opposite direction so that both parties essentially get what they are due but unnecessary funds transfer is minimised. In this case it is merely a matter of transferring monies which result from liquidated debts and in the transfer the liabilities themselves are extinguished.
However, set-off can also refer to a situation where a party has a claim against another party but is prevented from enforcing it because that other party has a claim against him. In this case the two liabilities remain intact (at least for the time being) and they operate almost as an estoppel against one another.
The first of these types of set-off is known as Legal Set-Off, the second as Equitable Set-Off.

Legal Set-Off
Legal set-off is a procedural device. It allows the Court to try two claims, even if on separate matters, together and produce a judgement which nets the monies owed on the two claims together producing an efficient judgement. Although the two rights exist separately and are independent liabilities they are brought together in one judgement and are extinguished at that stage. It is because of this fact and the fact that such a set off can only be exercised as a component of legal proceedings that this form of set off is described as procedural. This form of set off requires that sums are due and are either liquidated or can be ascertained precisely (without any valuation or estimation) at the time of pleading.

Equitable Set-Off
Equitable set off is totally different. This allows for cross-claims which are so closely connected with the claim that it would be unjust to enforce the one without taking into account the other. What is important about equitable set off is that it does not require the amounts to be ascertainable when it is claimed and it can operate independently of proceedings and can arise as an immediate answer to monies that are due.

It has been suggested that the right of set off applies immediately form the time the set off is available and acts to extinguish liabilities from this date. This is potentially very powerful in a housing context as it would mean that if a tenant was in arrears but was also claiming set off for disrepair any interest calculated on final judgement could only be calculated on the part of the rent arrears which exceeded the quantum of disrepair.

Sadly for tenants this is not the case. In Fearns the High Court has held that absent an agreement between the parties setting a date of set off it is for the Court to set such a date. Further, while it can elect to set the offset of the liability to some earlier (or later) point (under CPR 40.13(2)) the starting point for the date of offset must be the date of the order itself, as that is the point at which the liabilities were finally determined.

Therefore the correct approach in the rent arrears/disrepair scenario described above is for the Court to establish the arrears of rent, to establish the amounts due as compensation for disrepair, calculate the interest due on both sums, AND THEN offset the two sums against one another. If the tenant wishes to argue that the offset should happen at some other date then it is for them to do so and the Court has a discretion to allow it.

Therefore, where a rent arrears/disrepair matter is proceeding the practitioners should consider the value of the arrears claim as against the value of the disrepair claim and then consider whether they wish to disturb the standard position or whether it would be advantageous to try to get the date of set off adjusted to benefit their respective client.

D is a solicitor specialising in landlord and tenant matters with a London firm.


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