Geldof Metaalconstructie NV v Simon Carves Ltd
| Jurisdiction | England & Wales |
| Judge | Maurice Kay,Rix,Patten L JJ |
| Judgment Date | 11 June 2010 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 June 2010 |
[2010] EWCA Civ 667
Court of Appeal (Civil Division).
Maurice Kay, Rix and Patten L JJ.
Stephanie Barwise QC (instructed by Kennedys Solicitors) for the claimant/ respondent.
David Friedman QC and Alexander Hickey (instructed by Hill Dickinson LLP) for the defendant/appellant.
The following cases were referred to in the judgment of Rix LJ:
Aries Tanker Corp v Total Transport (The Aries)WLR[1977] 1 WLR 185.
Bankes v JarvisELR[1903] 1 KB 549.
Bank of Boston Connecticut v European Grain and Shipping Ltd (The Dominique)ELR[1989] AC 1056.
Bim Kemi AB v Blackburn Chemicals Ltd[2001] CLC 1166.
Dole Dried Fruit & Nut Co v Trustin Kerwood LtdUNK[1990] 2 Ll Rep 309.
Esso Petroleum Co Ltd v Milton[1997] CLC 634; [1997] 1 WLR 938.
Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri)ELR[1978] 2 QB 927.
Gilbert Ash (Northern) v Modern Engineering (Bristol) LtdELR[1974] AC 689.
Hanak v GreenELR[1958] 2 QB 9.
Leon Corp v Atlantic Lines and Navigation Co Inc (The Leon)UNK[1985] 2 Ll Rep 470.
Newfoundland v Newfoundland Railway CoELR(1888) 13 App Cas 199.
Rawson v SamuelENR(1841) Cr & Ph 161; 41 ER 451.
Stocznia Gdynia SA v Gearbulk Holdings LtdUNK[2009] EWCA Civ 75; [2009] 1 CLC 134; [2010] QB 27.
Contract Set off Building of bioethanol plant Claim for price of pressure vessels supplied Counterclaim for damages for repudiation of separate agreement between parties for installation of storage tanks Purchase order gave purchaser right to set off any amounts lawfully due from supplier whether under purchase order or otherwise Test for equitable set-off involved considerations of both closeness of connection between claim and cross-claim and justice of case Counterclaim in circumstances fell within scope of equitable set-off Counterclaim also amount lawfully due in terms of purchase order and thus available for set-off.
This was an appeal by a main contractor (SCL) against a decision that it was not entitled to set off a counterclaim for damages for repudiation of an installation contract against the claim of the respondent (Geldof) for the price of equipment which SCL bought from Geldof under a supply contract.
SCL was the main contractor for the building of a bioethanol plant in Teesside. As such, it needed to purchase pressure vessels for the plant, and also required storage tanks to be installed on the plant site. It made a contract with Geldof for supply of the pressure vessels. That was concluded by the acceptance of SCL's purchase order. Clause 24 provided that: Purchaser, without waiver or limitation of any rights or remedies of Purchaser or Owner, shall be entitled from time to time to set off against the Purchase Order Price any amounts lawfully due from the Supplier to the Purchaser whether under this Purchase Order or otherwise.
The vessels were delivered to site and Geldof invoiced for the sum of 1,692,000 due on delivery. Payment was due 45 days later.
In the meantime the parties had entered into the installation contract in relation to the storage tanks. SCL alleged that Geldof was in breach of the installation contract and issued notice of default and then notice of termination on the basis that Geldof's conduct constituted an unlawful suspension and/or abandonment of the works, alternatively a suspension or abandonment without reasonable cause. Geldof had made it clear by letter that it would not restart works under the installation contract unless payment had been made of the sum claim in the invoice.
When Geldof sought payment of its invoice under the supply contract, SCL sought to set off its unliquidated but provisionally quantified claim for damages for repudiation of the installation contract in the sum of about 5.3m. The judge held that SCL was not entitled to do so. He considered that whatever the words all amounts lawfully due meant in cl. 24, they did not cover unliquidated damages, or possibly did not cover such damages when they had not been the subject of adjudication. Applying BimKemi AB v Blackburn Chemicals Ltd[2001] CLC 1166, the judge held that the claim and counterclaim were not so closely connected as to make it unjust to allow the enforcement of the claim without regard to the counterclaim.
Heldallowing the appeal:
1. The test for equitable set-off involved considerations of both the closeness of the connection between claim and cross-claim, and of the justice of the case. That was not to say that there was a two-stage test. Rather there was both a formal element in the test and a functional element. The importance of the formal element was to ensure that the doctrine of equitable set-off was based on principle and not discretion. The importance of the functional element was to remind litigants and courts that the ultimate rationality of the regime was equity. The best restatement of the test was that the cross-claim had to be so closely connected with the claim that it would be manifestly unjust not to take it into account. (Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri)ELR[1978] 2 QB 927 applied.)
2. Geldof, by insisting on the payment of the supply contract invoices as a pre-condition of returning to work on the installation contract, brought the two contracts into intimate relationship with one another, even if unjustifiably, and that relationship became inseparable and irrevocable when SCL brought the installation contract to an end, as it arguably did, in reliance on Geldof's poor performance under the installation contract coupled with its insistence of prior payment. Even if the two contracts had not been connected up to that point, those events brought the two contracts into a close and inseparable relationship with one another, and made it manifestly unjust to enforce payment under the supply contract without taking into account the cross-claim for repudiation of the installation contract. It was true that, in one sense, the cross-claim did not arise from the supply contract and the claim made under it by Geldof. But it did arise from the use to which Geldof had sought to put its supply contract claim. That would suffice, on any formulation of the test for equitable set-off. Further there were significant practical links between the two contracts.
3. SCL was also entitled to rely on clause 24. The words any amounts lawfully due were to be regarded as going beyond the common law, including the law of equitable set-off. Clauses which limited or excluded the common law right to set off were frequently found, but a clause which extended the right was a rare animal. Moreover, the phrase whether under this Purchase Order or otherwise demonstrated that the extension was intended to be a wide one. Business sense and the intended width of the clause pointed to the correct construction of the phrase all amounts lawfully due as including amounts which were claimed to be due and which were recognised or recognisable at law.
Rix LJ:
1. This is an appeal about rights of set-off. The appellant, Simon Carves Limited (SCL), seeks to set off a counterclaim for damages for repudiation of an installation contract into which it entered with the respondent, Geldof Metaalconstructie NV (Geldof), against Geldof's claim for the price of equipment which it, SCL, bought from Geldof under a separate supply contract. The issue is whether either common law doctrines of equitable set-off or a special set-off clause in the supply contract permits SCL to do that. The judge, HHJ Raynor QC, sitting in the Technology and Construction Court as a judge of the High Court, held by his judgment dated 29 September 2009 that SCL was not entitled to the set-off claimed and gave judgment against it for 1,329,437.55. That order was made on an application for summary judgment brought by Geldof. A trial of the counterclaim is due later this summer.
2. The background to the making of both contracts was that SCL was the main contractor for the building of a bioethanol plant in Teesside for Ensus UK Limited. As such, it needed to purchase pressure vessels for the plant, and also required storage tanks to be installed on the plant site. It turned to Geldof for both these needs, and discussions took place leading to Geldof tendering for both contracts. The two companies held a meeting on 5/6 June 2007 to discuss the tenders. Other than that both the pressure vessels and the storage tanks were necessary ingredients of the bioethanol plant, there was no connection between these items.
3. The first of the two contracts to be made was the supply contract. This was concluded by the acceptance, on or about 3 July 2007, of SCL's purchase order dated 21 June 2007. The price of the pressure vessels was 5,640,000. The contract description was 3960C Bio Ethanol Plant. Delivery was to be at the plant at Teesside, between 22 and 29 September 2007. Payment terms provided for 10% to be paid on approval of drawings, 50% on receipt by Geldof of the main materials, 30% on delivery, and the final 10% on completion. Invoices were to be paid on a 45 day basis. The pressure vessels were covered by a warranty which was to last for 24 months after start up of the main plant but no later than 36 months after the ex-works delivery date. The warranty was to extend not only to SCL as purchaser but also to the bioethanol plant's owner, Ensus UK. The purchase order was subject to General Supplier Quality Surveillance (SAS) Requirements, Ensus UK Ltd Bioethanol Plant Project Number 3960C. There was provision for liquidated damages for late delivery. A documentation clause, clause 14, stated that All documentation is to be sent to Document Controller Ensus Project.
4. Clause 24 was headed Right to Offset and provided as follows:
Purchaser, without waiver or limitation of any rights or remedies of Purchaser or Owner, shall be entitled from time to time to set off against the Purchase Order Price any amounts lawfully due from the Supplier to the...
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