It is common in commercial disputes for a party to argue that, because they have a set-off, they are not liable to pay the amount claimed.
The party might argue they have an equitable set-off relying on a claim under a different contract or arising out of other dealings between the parties. But a set-off cannot be claimed in all circumstances.
In a recent decision, the Queensland Court of Appeal clarified the circumstances where claims arising out of different leases between a landlord and tenant can be set-off against each other.
What is a set-off?
A set-off is a legal procedure where two competing claims are ‘netted’ against each other.
The result of a set-off is that, rather than both sides of a dispute being entitled to obtain judgment against each other for the full amount of their claim, their claims are set-off with the result that there is either a single amount payable by one party to the other or no amount payable at all.
For example, if A has a claim against B for $1,000 and B has a claim against A for $750, the result of a set-off would be that B only has to pay $250 to A.
However, it is important to note that an equitable set-off is not available in every dispute.
Goldsmith v AMP Life Limited
In this case:
- the tenant sought compensation under a lease relating to redevelopment works carried out by the landlord at the shopping centre
- before the redevelopment works began, a new lease was negotiated where the tenant would relocate its business in the centre
- the landlord was owed rent by the tenant under the second lease
- the dispute was whether the right of compensation under the first lease could be set-off against the debt under the second lease.
The Court of Appeal summarised some of the relevant principles for determining whether an equitable set-off is available:
- there must be a sufficient connection between the two claims
- to be sufficiently connected, one claim must be said to ‘impeach’ or ‘go to the root of’ the other claim, such that it would be unfair for one claim to be allowed without accounting for the other
- a set-off can arise where the claims are based on different legal instruments between the same parties.
Applying these principles, the Court accepted that the claim for compensation under the first lease could be set-off against the unpaid rent under the second lease. The Court noted that, in substance, both claims arose out of ‘one continuing relationship affected by the [landlord’s] renovation of the shopping centre’.
The Court’s decision demonstrates that the relevant principles can apply to a wide variety of factual circumstances, and that the courts will generally take a ‘substance over form’ approach.
However, a set-off is not available in every case, and, where the competing claims arise out of different transactions, instruments or circumstances, the factual context needs to be evaluated to determine whether the claims are sufficiently connected.