Can I set-off a debt?
How does set-off arise?
Often two parties will undertake multiple construction projects at the same time, either engaging over several different projects or several elements of the same project. This can lead to a situation where both have financial claims against each other (i.e. both parties owe each other money).
What is set-off?
In certain circumstances, where two parties have monetary debts against each other, a right of set-off may arise. A right of set-off allows one party to take into account the amount owed to it by a second party against any money it owes to that second party, so that only the balance is due:
X enters into a contract with Y for X’s project management services for which it is agreed that X will pay £100,000 (“Contract A”). X also enters into another contract (in relation to the same project as Contract A) with Y for Y’s engineering services for which it is agreed X will pay £50,000 (“Contract B”). If X establishes a claim against Y in respect of Contract B due to faulty workmanship which causes £30,000 worth of damage can X off-set one contract against the other and pay X just £120,000?
Types of set-off
There are different types of set-off including banker’s set off and insolvency set-off, but we will focus on (a) equitable set off and (b) contractual set-off.
Common law provides that these two key features that must be present for equitable set-off to arise:
- Mutuality of debts (each party must be the sole beneficial owner of the debt it is owed and the sole person liable for the debt it owes).
- The claims each party has must be for non-payment of money.
If both of these conditions are met then you may be able to benefit from the right of set-off!
However, for equitable set-off to be claimed, the claims being set-off have to be of the same nature (i.e. both contractual) and must be so closely connected that it would be “manifestly unjust” to enforce one without taking the other into account.
Taking our example above, it would seem likely the claim of £30,000 damages would be considered closely connected enough to Contract B that it would be manifestly unjust to allow the enforcement of Contract B without taking into account the cross-claim for damages.
However, it might be a bit different if one contract related to works in Newcastle and the other to works in Newquay. The Housing Grants Construction and Regeneration Act 1996, as amended in 2011 was arguably enacted to prevent this situation arising.
To summarise, a right of set-off could be included in the contracts to allow X a contractual right to set-off the damages against any contract between the two parties. Or it could be specifically excluded to prevent any right of set-off occurring at all!