Set Offs – a recap
The recent NSW Supreme Court decision of Smith v Acquire Asia Pacific Philippines (Case) examined set off rights in a contractual context. A set off right creates a defence, reducing a claim to the extent of the available set off. Set off rights can be complex, particularly in equity. We will highlight a few of the basic set off principles.
The NSW Civil Procedure Act 2005 (Act) in section 21 creates a statutory right of set off for mutual debts (“debts” are defined as liquidated claims) but not unliquidated claims. A claim for a breach of warranty is an unliquidated claim. This right can be excluded by contract: see subsection (3). Parties can also create set off rights in their contract. The Sale of Goods Act (NSW) allows a buyer to set off a breach of warranty claim against the price: section 54.
Equitable set off is a less well defined defence, which is still available in NSW due to section 21(4) of the Act. It can involve unliquidated claims and can also be excluded by contract.
The Case issue, simplified, was whether alleged breaches of warranties of the seller of shares, could delay the release to the seller of escrowed purchase monies, apparently held to meet other post completion adjustments. The buyer did not want those funds released. The contract did not expressly exclude a right of set off by plain words (which it could have done).
In the Case, McDougall J. stated when an equitable set off may be available, namely:
- The set off claim must be more than a cross claim. It “must be of a nature that it impeaches the ground of the plaintiff’s claim”: McDougall J. at .
- It arises “because it would be unconscionable to permit the adversary to enforce its claim without taking into account the cross claimant’s opposing claim”: McDougall J. at .
McDougall J. found that, based on his construction of the contract, the alleged warranty claims could not be set off against the escrow sum held in relation to the sale of shares and an equitable set off had been excluded. Equitable set off was also unavailable, as no unconscionable conduct of the seller had been proven.
Drafting the contract to better deal with set off rights could have avoided the Case dispute.
A counter claim is different from a set off. It is an independent claim one party can raise against either another party suing them in the same proceeding, or third parties having claims connected with the plaintiff’s claims: section 22 of the Act. Section 90(2) of the Act allows a judgment to be given for the balance of claims and cross claims. This discretionary power may practically achieve a set off, but only at the time of a judgment.
A limited statutory right of set off for dealing with proofs of debt exists in the Bankruptcy Act and Corporations Act. These cannot be excluded by contract. Set off is probably unavailable to a creditor to meet an unfair preference claim. Set off may be available to a director however, such as for a loan account, to meet all or part of an insolvent trading claim. We have utilised set offs effectively in one insolvent trading matter for a director defendant.