Geldof Metaalconstructie NV v Simon Carves Ltd

Factual and Procedural Background

This appeal concerns rights of set-off between two contracts entered into by the appellant, Company A, and the respondent, Company B. Company A was the main contractor for the construction of a bioethanol plant in The City and contracted Company B for two separate contracts: a supply contract for pressure vessels and an installation contract for storage tanks at the plant site. The supply contract was concluded first, followed by the installation contract. Company B invoiced Company A for part of the supply contract price, which Company A did not pay, leading Company B to seek summary judgment for that amount.

Company A counterclaimed damages for repudiation of the installation contract and sought to set off this counterclaim against Company B's claim for payment under the supply contract. The trial judge, a High Court judge sitting in the Technology and Construction Court, held that Company A was not entitled to set off its unliquidated damages claim for repudiation against the claim for the supply contract price and granted summary judgment to Company B for the unpaid sum. Other smaller set-offs were allowed, and the counterclaim was to be tried later.

Legal Issues Presented

1. Whether the appellant (Company A) is entitled to set off its counterclaim for damages for repudiation of the installation contract against the respondent's (Company B's) claim for payment under the separate supply contract, either under the common law doctrine of equitable set-off or pursuant to a contractual set-off clause.
2. The proper construction and scope of the contractual set-off clause (clause 24) in the supply contract, particularly whether it permits set-off of unliquidated damages claims that have not been adjudicated or agreed.
3. The applicable test for equitable set-off, including the relevance of the connection between the claim and counterclaim and the requirement of manifest injustice if the claim is enforced without regard to the counterclaim.

Arguments of the Parties

Appellant's Arguments

• Although the supply and installation contracts were separate and independently tendered, both related to the same bioethanol plant project and were linked by the main contract with the plant owner.
• Company B linked the two contracts by conditioning continuation of installation work on payment of invoices under the supply contract, thereby creating an inseparable connection between the claims.
• The counterclaim for damages for repudiation of the installation contract should thus be treated as "amounts lawfully due" under the contractual set-off clause or, alternatively, satisfy the test for equitable set-off due to the close connection and manifest injustice if set-off is denied.
• The contractual clause 24 should be interpreted broadly to permit set-off of unliquidated damages claims that are recognized or recognisable at law, even if unadjudicated or unagreed.

Respondent's Arguments

• Company A's acceptance of repudiatory breach was not properly pleaded, as the relevant termination letter was an express notice under the contract rather than an acceptance of repudiation.
• The counterclaim did not arise from the dealings giving rise to the claim for payment under the supply contract and lacked the requisite close connection for equitable set-off.
• The contractual set-off clause does not permit set-off of unliquidated damages claims unless such claims have been adjudicated or agreed.
• The judge's decision denying set-off of the unliquidated damages counterclaim was correct and should be upheld.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by examining the contractual set-off clause (clause 24) which allowed the purchaser to set off "any amounts lawfully due" from the supplier, whether under the purchase order or otherwise. The judge below had held that the phrase did not cover unliquidated damages claims that had not been adjudicated. The court rejected this narrow interpretation, reasoning that the clause should be given a broad commercial construction consistent with facilitating cash flow management, allowing set-off of claims recognized or recognisable at law even if unadjudicated.

Turning to the common law doctrine of equitable set-off, the court reviewed the relevant jurisprudence extensively. It noted that the traditional "impeachment of title" test has been superseded by a test requiring that the claim and counterclaim be "so closely connected" or "inseparably connected" that it would be manifestly unjust to allow the claim to be enforced without regard to the counterclaim.

Applying this test, the court acknowledged that the supply and installation contracts were separate, independently tendered, and concluded at different times. However, the court found that the conduct of Company B in conditioning continuation of the installation contract on payment of the supply contract invoices intertwined the two contracts in a way that created an inseparable connection. This connection was further cemented by Company A’s termination of the installation contract in reliance on Company B’s repudiatory conduct coupled with the insistence on payment under the supply contract.

The court emphasized the practical and commercial links between the contracts, including the fact that the supplied vessels were useless without proper installation, and the warranty provisions linked to the plant’s completion. It concluded that enforcing payment under the supply contract without taking into account the counterclaim for repudiation damages would be manifestly unjust.

The court also addressed the respondent’s argument that Company A’s acceptance of repudiation was not properly pleaded and found it to be a substantive point going to the merits rather than a matter relevant to the set-off doctrine. The court cited authority confirming that repudiation may be accepted even if the reasons given are incorrect.

Holding and Implications

The court ALLOWED THE APPEAL and quashed the summary judgment entered against Company A. It held that Company A is entitled to set off its counterclaim for damages for repudiation of the installation contract against Company B’s claim for payment under the supply contract, both under the contractual set-off clause and the common law doctrine of equitable set-off.

The immediate effect of this decision is to prevent Company B from obtaining summary judgment for the supply contract invoice without considering Company A’s substantial counterclaim. The case is remitted for trial of the counterclaim and further proceedings consistent with the set-off entitlement.

No new precedent was established beyond clarifying the application of existing equitable set-off principles and the construction of a contractual set-off clause in a two-contract commercial context.