What is the right set-off in commercial contracts?

It is not unusual in commercial disputes for one party to argue, because they have a right of set-off that they are not liable to pay all or part of a claim made by the other party. Set-off is a common law right allowing commercial parties which have debts owing to each other to set them off.

Contractual set-off

Parties sometimes agree a contractual right of set-off when they have an ongoing business relationship.

Alternatively, the parties may agree to exclude set-off rights.

Equitable set-off

This only applies to closely connected claims where it would be manifestly unjust or unconscionable for a claim to be enforced without taking account of a cross-claim subject to any contractual exclusion that may apply.

The 'impeachment of title' case study

In Goldsmith & Anor v AMP Life Ltd (2021), a landlord was re-developing a shopping centre, and its tenant had to relocate within the centre. A new lease had been negotiated, but the tenant fell behind with their rent. The issue was, could the right to compensation under the original lease be set against the tenant’s debt under the new lease?

In accepting the equitable set-off, the Court reiterated the principles for its availability:

-there must be a sufficient connection between the two claims;

-one claim must impeach (‘go to the root’ of) the other such that it would be unfair to allow one claim and not the other;

- set-off can arise even where claims involve different legal instruments (two leases but one renovation in this case).

When defending a claim, it is worth considering if there is any right of set-off that may be relevant.

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Szabo & Associates Solicitors can provide expert advice on commercial law matters, including disputes. Please call us on 02 9281 5088 or complete the online contact form.