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If two parties have monetary claims against one another, they may be entitled to claim a right of set-off, as a result of which the liability of one to the other may be reduced or eliminated altogether.
Although this may seem obvious, straightforward and fair, the courts do not necessarily apply it automatically.
The law generally recognises four main rights of set-off:
Each of these rights is subject to its own limits:
With contractual set-off, the issue is most likely to be the wording of the contractual clause in question. Commonly a right of set-off (legal or equitable) is in fact excluded although insolvency set-off is not capable of exclusion.
In order for insolvency set-off to apply, there need to have been mutual credits, mutual debts or other mutual dealings between the insolvent company and the creditor, although the extent to which insolvency set-off can apply in relation to companies in administration is limited.
A recent reported decision of the High Court shows some of the limitations of legal and equitable set-off arguments.
Equitable set-off arguments are frequently successful where claims arise out of the same contract but where that is not the case, the close connection requirement presents a significant barrier to success.
In situations where the claim is not fixed or ascertained either, then in the absence of contractual set-off rights, a party seeking to argue for set-off may be in some difficulty.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by Field Seymour Parkes LLP.