INGENIEUR
Brandon in The Bank of Boston case was ‘‘the
same test in different language’’. Lloyd LJ held
that for all ordinary purposes, the modern law of
equitable set-off is to be taken as accurately set
out by the Court of Appeal in Hanak v Green. He
said that it is not sufficient that the cross-claim is
somehow related to the transaction giving rise to
the claim. The cross-claim and the claim must be
so closely connected that it would be manifestly
unjust to allow the plaintiff to enforce payment
without taking the cross-claim into account.
Simon Brown LJ in Esso Petroleum Co Ltd v.
Milton [1997] 1 WLR 938 was of the opinion that
the “mere fact that both claim and counter-claim
arise out of a single trading relationship between the
parties is … wholly insufficient to supply the close link
necessary to support an equitable set-off.”
After saying that the modern law of equitable
set-off is to be found in Hanak v Green and The
Nanfri, he restated the test as follows:
For equitable set-off to apply it must
therefore be established, first that the
counterclaim is at least closely connected
with the same transaction as that giving
rise to the claim, and second that the
relationship between the respective claims
is such that it would be manifestly unjust to
allow one to be enforced without regard to
the other.
That test is very similar to Lord Denning’s.
The correct test for equitable set-off has
recently gained the attention of the Court of Appeal
in Geldof. Rix LJ considered the formulation by
Lord Denning in The Nanfri, without any reference
to the concept of impeachment, as the best
statement of the test, and the one most frequently
referred to and applied, namely: “cross-claims …
so closely connected with [the plaintiff’s] demands
that it would be manifestly unjust to allow him to
enforce payment without taking into account the
cross-claim”.
In Permodalan Plantations, Salleh Abbas
LP said that “if a cross-claim relied on by the
defendant as a set-off does not and cannot
absolve the plaintiff’s claim because it arises
from a separate transaction, we agree that the
cross-claim is not necessarily a set-off, though it
is so described, and that such cross-claim could,
because of its nature and quality, only amount to
a counterclaim.” He added:
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VOL 55 JUNE 2013
It is, therefore, clear that a counterclaim
is wider than a defence of set-off and that
whilst the former is a separate action by a
defendant against a plaintiff, the latter is
essentially a defence, although a defendant
is entitled to add it as counterclaim. Being
a defence to a plaintiff’s action, the matter
sought to be set-off must essentially be
connected with or form part of the matter
upon which the plaintiff’s action is founded.
In Bukit Cerakah Development Sdn Bhd v
L’Grande Development Sdn Bhd [2008] 3 MLJ
547, an employer was the developer of a project
comprising two phases. It engaged the same
contractor for both phases. For each phase,
the employer and the contractor entered into a
contract in the PWD form. After disputes erupted
between the parties, the contractor filed two
separate suits against the employer in respect of
the two phases.
In the Phase 2 suit, the contractor claimed for
sums due under interim certificates. The employer
met this by a defence and counter-claim alleging
fraud, breach of contract and negligence by the
contractor. In his counterclaim, the employer
claimed a sum of RM46,210,924.68 for reason
that 243 out of the 331 units lacked structural
integrity and had therefore to be demolished. For
this purpose, it relied on interim certificate 14
issued by the architect.
In the Phase 1 suit, the contractor claimed for
the sum of RM3,665,582.94 purportedly due on
interim certificates. The employer put up a defence
and counter-claim to the contractor’s claim. Among
the pleas taken, the employer sought to set-off
monies owing from the contractor to the employer
under the Phase 2 contract against any sum that
might be due from the employer to the contractor
under the Phase 1 contract. The employer relied
on clause 50 of the Phase 2 contract for his right
to a set-off. The Court of Appeal stated as follows:
The starting point is the general law
regarding the defence of set off in the
context of a building contract. It is a
principle of general application that both
an employer and a builder have a right of
set off against each other in the absence
of a contrary intention expressed by the
parties. Such a contrary intention may
appear from express words used by the