20

Equitable Set-off
pg turn er

20.1 Introduction
Set-offs are processes of high utility and, in some points, technical
delicacy. Used in a general sense, ‘set-off’ means any of several processes
by which a monetary demand held by party A against party B and
a monetary cross-demand held by party B against party A are set against
one another. Set-offs dispense with the need for both the demand and the
cross-demand to be fully performed. Only the party whose monetary
liability is not exhausted by the set-off remains liable, and then only to a
correspondingly reduced extent. The means of reaching those results
vary between the various species of set-off, each species having distinct
governing rules.
It should not be thought strange to speak of set-offs in a book on
commercial remedies. Writers refer to set-offs as remedies, following a
familiar manner:1 when speaking of remedies, common lawyers often
mean those measures to which a person can have resort in a conflict with
another. Seldom is ‘remedy’ confined to mean relief ordered by a court.2
As measures to which persons commonly resort in disputes with others,
set-offs are a proper subject of enquiry in an investigation of commercial
remedies.
In English law, the species of set-off have come into being at different
times. The first in a series of enactments to establish so-called ‘insolvency

The author is grateful for the comments and suggestions of those who attended the
conference at which this chapter was initially presented, as well as to the Hon JC
Campbell, Ms Jessica Hudson and the Hon Justice Leeming. The usual disclaimers apply.
1
E.g. Phillip Wood, English and International Set-off (Sweet & Maxwell 1989) [4–49];
Sheelagh McCracken, The Banker’s Remedy of Set-off (3rd edn, Bloomsbury Professional
2010); Louise Gullifer, Goode on Legal Problems of Credit and Security (5th edn, Sweet &
Maxwell 2013) [7–01], [7–05].
2
Cf Peter Birks, ‘Rights, Wrongs, and Remedies’ (2000) 20 OJLS 1, 19–25.

465

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 466 pg tur n e r

set-off’ was made in the reign of Queen Anne.3 Extended from natural
persons to registered companies, insolvency set-off is of great importance
today. Two decades after the creation of insolvency set-off, a second
species – so-called ‘legal set-off’ – was established by a statute of 1728;
statute confirmed it in 1734.4 Legal set-off permits unconnected liqui-
dated demands that are due and payable to be set off at the conclusion of
litigation. And by analogical extension, equity sometimes permits liqui-
dated demands to be set off where the requirements of these Statutes of
Set-off are not strictly satisfied. Thirdly, the common law and equity
courts together developed a purely procedural species by which judg-
ments, and orders for costs can be set off by order of the court.5 Though
discretionary and accurately enough described as ‘equitable’ on occasion,
analytically this variety of set-off is not a creature of the equity jurisdic-
tion as such.
Each species of set-off experiences controversy today. This chapter is
concerned alone with a further kind of set-off, known as substantive or
true equitable set-off.6 This is wholly equitable in origin. Its origin
remains fundamental to its workings and development, for while sub-
stantive equitable set-off is not new to the remedial scene, its nature has
changed as the procedural setting in which it applies has altered.
Working through the consequences has taken time.
Focusing on situations where the set-off is asserted against a common
law demand, this chapter addresses five controversies. What is the test for
substantive equitable set-offs? What is entailed by this type of set-off
being substantive? To what extent is substantive equitable set-off a
self-help doctrine or remedy? Can substantive equitable set-offs operate
where one of the parties is insolvent, given that insolvency set-off exists?
Finally, it will be asked in what way discretion attends substantive
set-offs.
Answers are bound up with the most basic elements of equitable set-
off. Attention will therefore be turned to the history of equitable set-off in
order to explain the procedural changes that found the controversies of
today. Once understood, those changes supply possible answers to the
questions considered in this chapter.

3
4 & 5 Anne c 4, s 11 (1705). 4 2 Geo II c 22 (1728); 8 Geo II c 24 (1734).
5
E.g. State of New South Wales v Hamod [2011] NSWCA 376, [36]; Fearns v Anglo-Dutch
Paint and Chemical Co Ltd [2010] EWHC 2366 (Ch), [2011] 1 WLR 366 [36]–[39].
6
‘Transaction set-off’ can refer either to substantive equitable set-off or to common law
abatement: Wood (n 1) [1–11]–[1–12], [1–23]. Abatement is not discussed here.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 467

20.2 Procedure
Equitable set-offs derive their substantiveness from an important change
in the procedure for their enforcement. Before the Judicature Acts of
1873 and 1875 commenced – in 1875, in England7 – a party who
successfully asserted an equitable set-off in Chancery was awarded an
injunction to restrain the enforcement of the other party’s legal demand
or the execution of a judgment thereon. The cross-claimant thus needed
an injunction to restrain proceedings or execution at law: a common
injunction, that is. Once law and equity could be administered together in
all superior courts, common injunctions were dispensable. Their aboli-
tion in the Judicature legislation8 laid the way for a different formulation
of doctrine, as Morris LJ explained in Hanak v Green9 and as Derham has
since explained so well.10 Equitable set-offs could no longer be said to
arise where a court of equity would restrain proceedings at law for the
entirety of the demand (or execution of judgment therefor). The source
of restraint – the common injunction – no longer existed.
However, the Judicature legislation did not as such change the doc-
trines of equitable set-off. The Judicature Acts and Rules contained three
provisions relevant to equitable set-off. First, as a matter of mere proce-
dure, the 1875 Rules provided that a defendant might ‘set-off, or set up,
by way of counter-claim against the claims of the plaintiff, any right or
claim, whether such set-off or counter-claim sound in damages or not’,
but not when, in the opinion of the court, ‘such set-off or counter-claim
cannot be conveniently disposed of in the pending action, or ought not to
be allowed’.11 Secondly, the 1873 Act provided that the assignees of
choses in action should take ‘subject to all equities which would have
been entitled to priority over the right of the assignee if this Act had not
passed’, including equities amounting to equitable set-offs.12 The third
provision is the most significant. By the 1873 Act, it was ‘provided that
matters that formerly gave rise to an equitable defence or to the right to
an injunction to restrain proceedings’ – i.e. a common injunction –
‘should thenceforth give rise to a defence in a court possessing both
common law and equitable jurisdiction’.13
7
With exceptions too minor to warrant discussion here, the Judicature Act 1873 and the
Judicature Act 1875 commenced on 1 November 1875. Regarding the London
Bankruptcy Court, see the Bankruptcy Act 1883, ss 93, 102(3).
8
Judicature Act 1873, s 24(5). 9 [1958] 2 QB 9 (CA).
10
Rory Derham, Derham on the Law of Set-off (4th edn, Oxford University Press 2010) ch 4.
11
Judicature Act 1875, Sch 1 O XIX r 3. 12 Judicature Act 1873, s 25(6).
13
Ibid s 24(1)–(2).

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 468 p g t urn e r

Though these provisions did not change the occasions on which an

equitable set-off would be found, they changed the procedure by which
a set-off gained force. Before 1875, equitable set-offs gained force from
the plaintiff’s common injunction to restrain the enforcement of the
defendant’s common law demand or judgment. After 1875, that force
came from the merely notional availability of a common injunction; it
could not come from a common injunction because no such thing now
existed. The substantive rationale of equitable set-off was unchanged –
before and after 1875, a plaintiff needed an equity to inhibit the full
enforcement of a cross-demand – but the procedural notion at the root of
equitable set-offs was altered.
Steadily, legal reasoning changed too. Some courts after the Judicature
system commenced tested for equitable set-offs by asking whether a court
of equity before Judicature would have granted an injunction restraining
the claimant from enforcing a demand in full.14 Other courts omitted the
reference to practice before 1875 and asked simply whether an injunction
would issue to restrain the enforcement of the demand in full.15 On either
view, it became necessary to formulate the doctrine of equitable set-off in
terms recognising that a set-off might exist where no kind of injunction
had been sought or obtained. From these changes the controversies
discussed in this chapter arise.

20.3 Tests
The most basic is that over when there will be a substantive equitable set-
off. This controversy has been a staple of the past forty or so years.16 With
each pronouncement on set-off by a court, lawyers dare to hope that the
law will, at last, settle. That the disturbance goes on is due to the courts’
hesitance to acknowledge that each of the several available tests depends
on a different combination or balancing of the competing values at stake.
It is likely that the law will settle satisfactorily in England only once
either the Court of Appeal or the Supreme Court openly evaluates the

14
E Pellas & Co v Neptune Marine Insurance Co (1879) 5 CPD 34 (CA) 41; Hanak (n 9)
23–24, 26; Bank of Boston Connecticut v European Grain and Shipping Ltd
(The Dominique) [1989] AC 1056 (HL) 1101; Filross Securities Ltd v Midgeley [1998] 3
EGLR 43 (CA) 45 (CA).
15
British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB
137 (QB) 155.
16
For another treatment of the controversy, see Andrew Berriman, ‘Classical Equitable
Set-off’ (2013) 25 Bond L Rev 89.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 469

competing value judgments; identifies convincing reasons for favouring

a particular value judgment over others; and formulates a test for equi-
table set-off embodying the chosen combination and balancing of values.
The controversy over the test for equitable set-offs has arisen from the
changed procedure for enforcing equitable set-offs. However, the con-
troversy has roots in three more particular sources which must be men-
tioned if the current state of English law is to be understood.
One root lies in the Privy Council’s decision in Government of
Newfoundland v Newfoundland Railway Co17 on appeal from
Newfoundland where, in effect, the Supreme Court possessed a
Judicature system.18 At the time, the leading English decision on equi-
table set-off was Rawson v Samuel,19 in which Lord Cottenham LC said
that the cross-demand must ‘impeach’ the opposing demand if an equi-
table set-off is to arise. However, in Government of Newfoundland, the
Privy Council upheld a set-off against an assignee of a chose in action
without speaking of impeachment, and without ritually restating that
Rawson v Samuel was authoritative. Hence the (fragile) supposition that
the Privy Council intended to formulate a test of equitable set-off wider
than Lord Cottenham’s.20
A second root lies in the Court of Appeal’s decision in Hanak
v Green.21 There Morris LJ conducted a ‘masterly’,22 ‘authoritative’23
and ‘definitive’24 survey of the decided cases and formulated a test with-
out employing the word ‘impeachment’. He did not purport to alter the
law,25 yet Hanak v Green has fuelled controversy. With the agreement of
Hodson LJ and Sellers LJ, Morris LJ found an equitable set-off in circum-
stances where prior decisions suggested that no equitable set-off would
exist.26
For now it suffices to mention a third root of controversy, which brings
the survey to the beginning of the forty years just elapsed. This is the

17
(1888) 13 App Cas 199.
18
Mark R Gillen and Faye Woodman (eds), The Law of Trusts: A Contextual Approach (2nd
edn, Emond Montgomery Publications 2008) 58.
19
(1841) Cr & Ph 161, 41 ER 451. 20 See Derham (n 10) [4.12], [4.27], [17.06]–[17.09].
21
Above n 9.
22
Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 (HL) 717
(Lord Diplock).
23
BICC plc v Burndy Corp [1985] Ch 232 (CA) 247. 24 Fearns (n 5) [19].
25
Hanak (n 9) 20–21, 23–25. He referred to impeachment in his account of the develop-
ment of equitable set-off, but did not make impeachment an element of his preferred
formulation.
26
Wood (n 1) [4–42]; Derham (n 10) [4.05].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 470 p g t urn e r

judgment of Lord Denning MR in the Federal Commerce and Navigation

Co Ltd v Molena Alpha Inc (The Nanfri),27 in which his Lordship said it
was unnecessary and undesirable to look back to old cases, particularly
those decided before the Judicature reforms took effect, in order to decide
in what circumstances an equitable set-off will arise. While he looked to
the future, Lord Denning also looked to the past. He said that equitable
set-offs will properly occur where a cross-claim ‘go[es] directly to
impeach the plaintiff’s demands’.28 Expressed in more ‘modern’ lan-
guage, he thought that that was the same as saying that the cross claim
must be ‘so closely connected with the [plaintiff’s] demands that it would
be manifestly unjust to allow [the plaintiff] to enforce payment without
taking into account the cross-claim’.29 From Lord Denning’s treatment
of the law, the points of controversy arising have included his putative
refusal to use authorities, whatever their status, predating 1875 and
whether he sought to alter the grounds on which equitable set-offs arise.
In the period since The Nanfri, these roots have sustained controversy
in which the stems are so closely twined together that they are impossible
to pull apart. As far as the test for equitable set-off is concerned, it is
submitted that this controversy exists as a competition among rival
formulations of the test for equitable set-off.
Between the formulations in several cases there are various differences
in nuance of meaning. What they should do with those formulations is
a difficulty felt by the courts. According to Potter LJ, the Court of Appeal
has wisely refused to become bogged down in the analysis of differences
of wording and meaning.30 Rix LJ later remarked that Potter LJ was
himself wise to notice that wisdom – and, he implied, to have heeded
it.31 However, no judge is known to have said that analysis of the
differences of nuance of meaning in different formulations should
never be undertaken – although few judges appear eager to undertake it.
To maintain that such analysis should never be done would be too
absolute a position. When sophistry thwarts justice, it is wisely eschewed.
But the persistence of rival tests suggests that more is at stake than a mere
choice of words. Some analysis by a court of the differences in nuance of
meaning among the rival formulations of the tests for equitable set-off is
likely to prove necessary, for a survey shows that at least four approaches
27
[1978] QB 927 (CA). 28 Ibid 975 29 Ibid 974–75.
30
Bim Kemi AB v Blackburn Chemicals Ltd [2001] EWCA Civ 457, [2001] 2 Lloyd’s Rep
93 [29].
31
Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667, (2010) 130 Con
LR 37 [43](iii).

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 471

are available for courts to take. That indeterminacy affords judges

a leeway to choose among formulations, and reach judgments, resting
on inconsistent values.
First, there are cases adopting ‘traditional’ formulations of doctrine and
applying them in a ‘traditional’ manner. Normally these cases formulate
the test for equitable set-off in terms of impeachment and apply that test
consistently with Rawson v Samuel.32 Owing perhaps to a stricter adher-
ence to stare decisis, courts in Australia, for example, acknowledge Rawson
v Samuel – rather than Hanak v Green or subsequent English decisions – as
the leading authority.33 Certain decisions in England display the same
intention to keep the basis and limits of equitable set-off the same as
they were before Judicature. Hence the reasoning of Lord Wilberforce,
for the House of Lords, in Aries Tanker Corp v Total Transport Ltd.34
Some decisions are awkward to categorise. In Edlington Properties Ltd
v JH Fenner & Co Ltd,35 Neuberger LJ applied an impeachment formula-
tion. He saw this as the same, in substance, as the formulation of Morris
LJ in Hanak v Green which, in fact, was applied more loosely than the
impeachment test as traditionally understood. Did Neuberger LJ there-
fore see himself as applying the impeachment test in the way Lord
Cottenham LC understood it, in which case Edlington Properties falls
under this heading? Or did Neuberger LJ see himself as applying
a formulation in language familiar to Lord Cottenham LC, while also
allowing for looser application? If the latter, then his Lordship’s pro-
nouncements instead fall within the fourth category, below.
Secondly, some cases adopt new formulations of the test for equitable
set-off without intending thereby to narrow or extend the doctrine’s
ambit. For example, although not all interpretations of his judgment
agree, in Bank of Boston Connecticut v European Grain and Shipping
Ltd (The Dominique), Lord Brandon of Oakbrook arguably sought to
‘dethrone’ the impeachment formulation of the grounds on which equi-
table set-offs arise without affecting the substance of the law.36 Whether
Lord Denning, in contrast, intended to change the law and the language

32
Subject, that is, to allowance for the consequences of procedural changes wrought by the
Judicature legislation.
33
JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity:
Doctrines and Remedies (5th edn, LexisNexis 2015) [39–060](g), [39–080].
34
[1977] 1 WLR 185 (HL) 193. See also Leon Corp v Atlantic Lines and Navigation Co Inc
(The Leon) [1985] 2 Lloyd’s Rep 470 (Ch) 473–75.
35
[2006] EWCA Civ 403, [2006] 1 WLR 1583.
36
Bank of Boston (n 14) 1101, 1106. See Geldof Metaalconstructie (n 31) [28]–[31].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 472 p g t urn e r

of the test for equitable set-off is less clear. In The Nanfri, his Lordship
posed an impeachment formulation alongside a formulation in terms of
close connection and manifest injustice. He identified the two formula-
tions as equivalents of each other.37 Did either formulation correspond
with the doctrine as understood in the Rawson v Samuel line of authority?
Lord Denning’s use of the impeachment formulation is one sign that both
did. However, there are signs in the opposite direction. Lord Denning
wished to free modern courts of the ‘burden’ of having to find, understand
and read prior authorities on equitable set-off. Modern courts, he thought,
ought to develop the law anew, case by case, unconstrained by Rawson
v Samuel. His Lordship’s reasoning displays contradictions. Nevertheless,
in substance he seems to have wished to change both the law and the words
by which equitable set-offs are tested.
A third kind of case expresses the test for equitable set-off both without
referring to impeachment and in a novel manner. On the interpretation
given above, Lord Denning’s judgment in The Nanfri is an instance.
The judgment of Simon Brown LJ in Esso Petroleum Co Ltd v Milton38
is a second instance; it is joined by other cases in which the ‘manifest
injustice’ element of Lord Denning’s test is read as making equitable set-
offs a function of judicial discretion.39 A third instance may be Morris
LJ’s judgment in Hanak v Green. If Morris LJ was conscious that the set-
off in that case would not have arisen on prior authority, then his
Lordship not only reformulated the test for equitable set-off: he also
sought to reform the principle. The true reading is obscure. A fourth
instance may be the Privy Council’s decision in the Newfoundland
Railway Co, which some think reformulated and reformed the law of
equitable set-off.40 However, it is not clear that Derham’s scepticism41
can be gainsaid.
Fourthly, there may be cases in which the impeachment formulation
continues to be maintained while also intending that formulation to
apply more loosely. If the decision of Neuberger LJ in Edlington
Properties Ltd v JH Fenner & Co Ltd42 was made knowing that Hanak
v Green loosened the application of the test for equitable set-off and in the

37
See The Nanfri (n 27) 974–75. These formulations were used without expressed approval
or disapproval in International Energy Group Ltd v Zurich Insurance plc UK Branch
[2015] UKSC 33, [2016] AC 509 [90].
38
[1997] 1 WLR 938 (CA) 951, 953.
39
Sankey v The Helping Hands Group plc [2000] CP Rep 11 (CA). 40 Ibid.
41
Rory Derham, ‘Recent Issues in Relation to Set-off’ (1994) 68 ALJ 331, 334–37.
42
See n 35.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 473

belief that that is desirable, then his Lordship’s pronouncements illustrate

this category. British Anzani (Felixstowe) Ltd v International Marine
Management (UK) Ltd43 can be put in this category more confidently.
At least this many approaches are open to a judge. The differences
between each suggest that the reason that a matter as basic as the test for
equitable set-off remains confused is that rival formulations obscure
a leeway for judges to choose between tests embodying conflicting
value judgments. The choices essentially reduce to two questions.
First, should the test for equitable set-off be expressed with or without
the word impeachment? So expressed, the question seems arid and
trivial. But so many lawyers have held such firm views on the matter
that the question is undoubtedly important. It is important because there
is the sense that the proper formulation of the test for equitable set-off is
being hampered by unexpressed concerns about what the advocacy of
one test or another might entail. For instance, Lord Brandon and others
have thought ‘impeachment’ an antiquated term.44 It is conceivable that
those who reject impeachment formulations suspect dogmatic adherence
to impeachment formulations of masking antiquarianism, or a false
assumption that legal innovation never occurred in the past, or incon-
siderateness of people wishing to find their legal rights in today’s every-
day language. It is conceivable that those favouring impeachment
formulations suspect dogmatic rejection of impeachment formulations
of masking unthinking enthusiasm for legal change, as distinct from legal
improvement. One can only speculate as to what unexpressed concerns
there might actually be. Nevertheless, the preferences of different judges
for one formulation over another often appear to have been weighted by
what the judge fears or hopes a given formulation entails, rather than by
considering the merits of different formulations on their own terms.
In answering the question, whether the test for impeachment should be
expressed with or without the word impeachment, frank recognition of
the baggage weighing down the arguments either way will be needed.
And that will require analysis of the nuances of different formulations of
the ‘test’ applied in past decisions.
The other question to which the leeway for choice reduces is: should
equitable set-offs arise on wider grounds than those articulated by Lord
Cottenham LC in Rawson v Samuel and often applied thereafter?
The answer depends on how the mischief that equitable set-offs seek to
address is conceived, and on how far that mischief can sensibly be

43 44
See n 15. Bank of Boston (n 14) 1102; Bim Kemi (n 30) [36].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 474 p g t urn e r

addressed once allowance is made for competing interests, principles and

concerns. Most would agree that the inequity addressed by equitable set-
off is that of permitting a demand to be pressed and enforced in full when
it is undermined by a cross-demand held by another. Judicial opinions
then diverge. Some judges have thought that the threshold of inequity –
whether expressed as impeachment or otherwise – a difficult threshold to
cross. Other judges have crossed the threshold nimbly.
When considering how widely equitable set-offs should arise, appeals
to rhetoric45 ought to be declined. The question demands an objective,
measured answer. For all that a widening of equitable set-off will on
occasion benefit a commercial party, on occasion the same commercial
party could well be inconvenienced or harmed by another’s assertion of
a widened doctrine of equitable set-off.
The basic character of the doctrine ought to be kept in mind. Every
equitable set-off represents an incursion into the rights of the demand-
holder. Equitable set-offs prevent a person from enjoying the entitle-
ments which, as the holder of a legal demand, are formally conferred on
the person by law. In the equity jurisdiction, restraining the inequitable
exercise of a person’s strict legal rights is a classical technique. It is also
serious, and to be exercised carefully. As Lord Erskine LC once said:
‘[t]here is no branch of the jurisdiction of this Court [of Chancery] more
delicate than that, which goes to restrain the exercise of a legal right’.46
The types of demands and cross-demands that can be set off all arise as of
right, or virtually as of right. Equitable set-off constrains the exercise of
legally strong demands. The wider the domain of equitable set-off, the
more equitable set-offs will be found where there is no inequity sufficient
to justify restraining the demand-holder from enforcing a legally strong
demand in full.

20.4 Substantive Nature

Since Hanak v Green, it has become understood that equitable set-off
operates substantively, not as a pure matter of procedure. The implica-
tions continue to be worked out. Among other things, because equitable
set-off is substantive it can operate outside of legal proceedings.47 Court
45
E.g. Wood (n 1) [4–9] (‘What is really going on is a progressive liberalisation of transac-
tion set-off under the guise of equitable set-off and a shaking off of the shackles which
imprison independent set-off to judicial proceedings and to liquidated claims . . . ’).
46
Sanders v Pope (1806) 12 Ves Jr 282, 289, 33 ER 108, 110.
47
Cf Muscat v Smith [2003] EWCA Civ 962, [2003] 1 WLR 2853 [44].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 475

processes need not be engaged, nor need any curial relief be obtained,
before an equitable set-off can commence. However, where a set-off
occurs, there has been controversy regarding whether the set-off imme-
diately extinguishes the demand to the extent of the cross-demand.48
In Aries Tanker, the House of Lords decided that an equitable set-off
does not extinguish the demand to the extent of the cross-demand when
the set-off arises; extinguishment to the extent of the cross-demand only
occurs upon the entry of judgment, at which point the entirety of both the
demand and the cross-demand merge into the judgment.49 Contrary
opinions have been ventured, apparently without appreciating what
Aries Tanker decided. However, in Fearns v Anglo-Dutch Paint and
Chemical Co Ltd,50 the High Court recently dismissed those opinions
as contradicting the House of Lords’ decision.51
Though the rudiments of equitable set-off in a Judicature system
require this result, the treatment of principle in Fearns has been criticised
on (with respect) invalid grounds.52 The litigants in Fearns disagreed
over whether substantive equitable set-off immediately extinguishes the
impeached demand to the extent that it is impeached. Logically, the only
two available answers were that the set-off extinguished the demand to
the extent of the cross-demand at the moment the set-off arose, or it did
not; if the latter, then the demand would be extinguished to the extent of
the cross-demand only when judgment was entered. On the authority of
Aries Tanker, the court held the latter. Starting with the principle that an
equitable set-off ‘prevent[s] each party from enforcing or relying on its
claim to the extent of the other claim where the connection between the
claims would make this manifestly unjust’,53 the judge explained that ‘if,
after such a set-off has been validly asserted, one of the claims is later
satisfied from another source, or withdrawn, the other claim remains in
existence and can thereafter be enforced (in full)’.54 It followed that an

48
Among writers, the view that equitable set-off operates to extinguish the claim has been
supported by Wood (n 1) [1–43], [1–51]–[1–52], [4–1], [4–24], [4–48](a), [6–11],
[24–41], McCracken (n 1) 141–42 and Louise Gullifer (ed), Goode on Legal Problems of
Credit and Security (4th edn, Sweet & Maxwell 2008) [7–55] and criticised or rejected by
Derham (n 10) [4.29]–[4.34] and Gullifer (n 1) [7–54].
49
See n 34 188. 50 See n 5.
51
See also Equitas Ltd v Walsham Bros & Co Ltd [2013] EWHC 3264 (Comm), [2014]
Lloyd’s Rep IR 398, [173]–[185]; Stemcor UK Ltd v Global Steel Holdings Ltd [2015]
EWHC 363 (Comm), [2015] 1 Lloyds Rep 580 [34].
52
Pascal Pichonnaz and Louise Gullifer, Set-off in Arbitration and Commercial Transactions
(Oxford University Press 2014) [5.43].
53
Fearns (n 5) [26]. 54 Ibid.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 476 p g t urn e r

equitable set-off does not extinguish the impeached demand, for ‘if the
injustice is later removed by payment of the cross-demand from
another source, the main claim can be enforced’.55 The criticism that
this reasoning ‘rather assume[s] its conclusion, since if the set-off had
extinguished either demand, it could not be satisfied from another
source’ is not to the point.56 Not only was the judge aware that his
conclusion flowed whence he began; he wished to show as much.
Holding that a demand is extinguished to the extent of the cross-
demand at the time at which the set-off arises would presumably have
immunised the judge’s reasoning to criticism. However, that conclusion
would have contradicted Aries Tanker and the basis of equitable set-offs
in a Judicature system: that set-offs operate to restrain a person’s free-
dom to enforce an impeached demand to its full extent, without allow-
ing for the cross-demand. The conclusion that equitable set-offs do not
automatically extinguish the impeached demand to the extent of the
cross-demand was the only available answer that fitted within existing
case law and principles.
Fearns shows that the substantive nature of equitable set-off is
developing in a pattern familiar from the development of several
equitable doctrines: developments by which the prospect of obtaining
specific equitable relief founds substantive entitlements even where
specific equitable relief has not been sought.57 To say that a set-off
exists only so long as a relevant cross-demand impeaches the clai-
mant’s demand – and not once the cross-demand has been otherwise
satisfied or, say, discharged – is effectively to say that the defence of
equitable set-off is commensurate with the availability of an injunction
to restrain the enforcement of the demand to its full extent, even
though such an injunction has not been obtained or sought. To say
that the set-off continues once the cross-demand has been otherwise
satisfied or discharged would be to make the defence exceed its
rationale. It would overly favour the holder of the cross-demand,
since the defence would exist when no cross-demand disparaging the
claimant’s demand any longer exists. Set-offs would exist in circum-
stances in which the claimant should be free to exercise a demand to
its full extent. And set-offs could be abused where, in justice, the
occasion for the set-off has passed.
55
Pichonnaz and Gullifer (n 52) [5.43]. 56 Ibid [5.43].
57
E.g. Commissioner of Taxation v Bamford [2010] HCA 10, (2010) 240 CLR 481 [39];
PG Turner, ‘Understanding the Constructive Trust between Vendor and Purchaser’
(2012) 128 LQR 582, 589–92.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 477

20.5 Self-help
The recognition that equitable set-offs are not confined to operating in
legal proceedings has led to consideration of equitable set-off as a ‘self-
help remedy’, and thence to controversy. Learned writers have said that
equitable set-off is, or ought to be, a self-help remedy.58 Of course,
whether that is so turns on how ‘self-help remedy’ is defined. If defined
as a legally recognised measure to which parties may resort without
obtaining a court order, then equitable set-off is a self-help remedy.
What else the ‘self-help’ label imports is disputed.
Labelling set-off as a self-help remedy invites one to compare and
contrast equitable set-off with measures more commonly referred to as
self-help: measures including the forfeiture of interests and estates, the
levying of distress, and the exercise of contractual rights to rescind
a contract ab initio or to terminate it in futuro.59 Like equitable set-offs,
each of these operations has legal effect without the active party first
having obtained a favourable court order, or even having commenced
legal proceedings. Is equitable set-off any the less a self-help remedy
because it is equitable? Does the force of self-help remedies differ accord-
ing to whether they depend on doctrines of the common law or of equity?
Both questions, it is suggested, are properly answered ‘Yes’.
Rights to forfeit and to exercise contractual rights of rescission or
termination are rights recognised and enforceable at common law.
They typically involve bringing another party’s common law rights to
an end. Equitable set-offs do not operate in this fashion. When an
equitable set-off affects a common law debt, for example, none of the
creditor’s common law entitlements is extinguished. All of the creditor’s
legal entitlements as regards the debtor remain. It is merely that in equity
they are suspended: in equity, the creditor’s attempts to exercise its
common law rights are ineffective to the extent of the set-off.
The comparison with distress is different, but as straightforward in
principle. A right of distress has a suspensory effect. While the creditor
lawfully distrains against the debtor’s goods, the debtor’s entitlements to
possess and use the relevant goods are trumped. A suspensory effect is
therefore common to distress and equitable set-offs. But distress operates
by conferring an additional common law right (on the creditor).
Equitable set-off creates no new common law rights. It accordingly has
58
Especially Wood (n 1) [1–20], [1–25], [4–1], [4–4], [4–24], [4–86] [6–12], [24–41];
Pichonnaz and Gullifer (n 52) [5.48].
59
For other examples, see Gullifer (n 1) [7–36]–[7–38].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 478 p g t urn e r

less force than the self-help remedy of distress. Indeed, at common law an
equitable set-off has no force. By these measures, equitable set-off is less
a self-help remedy than are self-help remedies at common law.
To date this difference has been overlooked. Indeed, beginning with
Lord Denning’s judgment in The Nanfri, a consensus has formed that
equitable set-off can found a common law cause of action to recover
damages for breach of contract. The Court of Appeal in that case held a
ship owner liable to pay damages for wrongfully repudiating a charter-
party in response to the hirers’ refusal to pay the stipulated sum of hire
in full where the hirers had the benefit of equitable set-offs. Lord
Denning considered situations in which a contract ‘gives a creditor
a right to take the law into his own hands . . . if a sum is not paid’ and
said of a ship owner’s contractual right to withdraw a vessel for non-
payment of hire:
When the debtor has a true set-off it goes in reduction of the sums owing
to the creditor. If the creditor does not allow it to be deducted, he is in
peril. He will be liable in damages if he exercises his contractual right of
withdrawal wrongly.60

Authors have repeated or adopted Lord Denning’s analysis.61 Hence the

apparent consensus that the ship owner’s liability in damages stems from
a contractual cause of action based on the hirers’ equitable set-off.
Indeed, some writers go further, arguing that this set-off-based liability
creates dangers for the charterer – dangers that ought to be cut down by
depriving an equitable set-off of effect until it has been ‘asserted’ or
‘declared’ by the charterer.62 That is, Lord Denning’s treatment of set-
offs as self-help remedies is generally accepted but, for some, only if
qualified to weaken their self-help quality.
Ignoring for now the asserted dangers of equitable set-offs, it is very
difficult to see that an equitable set-off alone can confer a common law
cause of action for breach of contract on the party entitled to the set-off.
Indeed, the suggestion can fairly be called a fusion fallacy.63 It would
produce a result that could not have obtained through the application of
settled law before the Judicature system commenced. Before 1 November

60
See The Nanfri (n 27) 974 (italics added).
61
Wood (n 1) [2–57] (repeating); Derham (n 10) [4.46] (adopting); Gullifer (n 1) [7–56]
(adopting).
62
Wood (n 1), discussed in Derham (n 10) [4.37].
63
RP Meagher, WMC Gummow and JRF Lehane, Equity: Doctrines and Remedies
(Butterworths 1975) [220]–[222].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 479

1875, in principle the charterer could have restrained the owner from
withdrawing the ship, and could perhaps have obtained a declaration that
a purported withdrawal was void in equity.64 After 1858, it is doubtful
that the charterer could have obtained damages under Lord Cairns’ Act
in lieu of, or in addition to, an injunction65 if the owner had already
withdrawn the ship since the framers of Lord Cairns’ Act evidently
intended it to apply only to claims for relief in respect of common law
rights;66 equitable set-offs operate only in equity.
Since Judicature, the result should be, and in principle is, the same –
except that since common injunctions were abolished, the test for equi-
table set-offs depends on the notional availability of injunctive relief.
So much was indicated in Hanak v Green67 and by the House of Lords
in Bank of Boston.68 As a common injunction was a negative restraint, the
enforcement of an equitable set-off was and is purely negative. The holder
of a demand was restrained, and is now notionally restrained, from
enforcing the demand to the extent of the cross-demand founding the
set-off. That explains why substantive equitable set-offs operate as
defences in a Judicature system. They can be relied upon to commence
proceedings in equitable jurisdiction. Because of equitable set-offs, mea-
sures based on asserting the impeached legal rights are, in equity, invalid.
However, equitable set-offs do not confer novel rights of action, espe-
cially rights to sue at common law.69 In that sense, substantive equitable
set-offs operate as shields, not as swords. It is true that, during the
twentieth century, English courts assumed power to award damages
under Lord Cairns’ Act in claims to protect and fulfil purely equitable
entitlements. However, that dubious change does not confer an action for
breach of contract on a party who asserts an equitable set-off. Moreover,
unlike an award of damages for breach of contract, damages under Lord
Cairns’ Act were – and, under its modern statutory successor, are –
discretionary.70

64
Heydon, Leeming and Turner (n 33) [19–005]–[19–025]. 65 21 & 22 Vict c 27, s 2.
66
Chancery Commissioners, Third Report of Her Majesty’s Commissioners Appointed to
Inquire into the Process, Practice, and System of Pleading in the Court of Chancery (Eyre
and Spottiswoode 1856) 1–4.
67
Above n 9. 68 See Banks of Boston (n 14) 1101.
69
SL Sethia Liners Ltd v Naviagro Maritime Corp [1981] 1 Lloyd’s Rep 18 (QB) 26;
Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR
462 (CA) 481; Derham (n 10) [4.30] (equitable set-off operates ‘in equity as a complete
or partial defeasance of the plaintiff’s claim’); Gullifer (n 1) [7–16] (‘purely defensive’),
[7–54]–[7–55].
70
Heydon, Leeming and Turner (n 33) [24–125]–[25–140].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 480 p g tur n e r

If Lord Denning’s position and the one described here conflict, they
conflict because the accounts of Lord Denning and others adopting or
repeating his view make too little allowance for the fact that equitable set-
offs operate merely as restraints on the exercise and enforcement of the
entitlements making up a person’s claim. Consider this development of
Lord Denning’s charter example:
A charterer possessed of the right, and who pays less than the sum
stipulated in the contract, is not considered to be in breach of contract.
Therefore, when the time charter contains the usual provision whereby
the owner can withdraw the vessel in the event of non-payment of hire . . .
the charterer can tender a reduced amount in consequence of the cross-
demand without bringing into existence the right of withdrawal. If the
owner does not accept the tender, it acts at its peril. It will be liable in
damages if it withdraws the vessel. If, on the other hand, the defence [of
substantive equitable set-off] were procedural rather than substantive, the
owner would have been entitled to withdraw the vessel because, until
there had been a judgment for a set-off, the charterer would be regarded as
having defaulted in payment.71

Unless it is appreciated that this describes the position only in equity, and
not at common law, this account will mislead. At common law, the
opposite of each point in the passage holds true. A charterer who pays
less than the stipulated hire is considered to be in breach of contract.
The charterer cannot tender a reduced amount in consequence of the
cross-demand without bringing into existence a right of withdrawal.
Without more, for withdrawing the vessel the owner faces no peril –
and particularly no liability in damages. At common law, the charterer in
those circumstances would be regarded as in default of payment, regard-
less of the fact that equitable set-off is substantive. The charterer’s equi-
table set-off has a restraining effect merely in equity. By tendering less
than the stipulated sum of hire, the charter will not be considered to be in
breach of the contract in equity.72 If necessary, equitable relief will issue
to restrain the ship owner from relying on its strict legal right to treat the
hirer as being in breach of contract.73 Otherwise, the effect of equitable
set-off would not be to affect the exercise of common law contractual
rights: it would affect their very existence.
A further aspect of set-offs as self-help measures concerns whether
equitable set-offs give rise to a peril that ought to be controlled as

71
Derham (n 10) [4.46] (footnote omitted); see also [4.46]–[4.47].
72
See Roadshow Entertainment (n 69) 481E.
73
Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297, (2011) 15 BPR 29,545 [53].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 481

foreshadowed above. Ought a set-off to gain force only once it has been
asserted or declared by the party for whose benefit the set-off would
operate?74 The argument that the law already requires this has been said
to be strong – as have the merits of the asserted requirement.
This is because it would be very unfair on the claimant if, after he had
[purported to exercise a contractual right of termination], a cross-claim
were asserted which had the effect that the claimant’s action was invalid
or, even worse, held to be in breach of contract, rendering the claimant
liable for damages for wrongful repudiation. Further, the uncertainty
engendered would have a chilling effect on the exercise of self-help
remedies, since a claimant would be unwilling to take the risk that a cross-
claim might be asserted at a later date. A cross-claim does not have to be
definitively quantified to be asserted, as long as the assertion is made
reasonably and in good faith.75

The urgency of the argument weakens if the analysis so far is correct, for
the worse of these perils – a potential liability for damages in contract
arising from an equitable set-off – is not real. The only liability in
‘damages’ to which an equitable set-off can give rise in English law is
an award of damages in lieu of or in addition to an injunction to enforce
the set-off. In Australia, even that award is highly doubtful owing to the
properly narrow local construction of Lord Cairns’ Act.
Residual unfairness might nevertheless be thought to occur.
The potential for this arises, again, from differences in the operation of
set-offs before and since 1 November 1875. Before Judicature, a party had
to assert the set-off before it could take effect. Equitable set-offs against
common law demands took force through a common injunction
restraining proceedings on, or execution of a judgment for, the entire
demand at law. Asserting the set-off was necessary in that the party
desiring the set-off had to obtain a common injunction, and to obtain
a common injunction the plaintiff had to bring a bill asserting the
plaintiff’s entitlement to a set-off. The injunction restrained the defen-
dant’s future action, not past acts. No case has been found in which
a court of equity declared a defendant’s reliance on self-help measures
invalid where the reliance predated the injunction. However, now that
equitable set-offs can operate where injunctive relief has been neither
sought nor obtained – the set-off operating because the party asserting it
could obtain relief restraining the holder of the impeached demand from

74
The origin of the suggestion appears to be Wood (n 1).
75
Pichonnaz and Gullifer (n 52) [5.48]; see also [2.52] and Gullifer (n 1) [7–56].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 482 p g t urn e r

asserting the demand in full76 – an equitable set-off can operate earlier

than it would have operated on the same facts before Judicature. The set-
off can operate before the party asserting it has done any act asserting or
declaring that its cross-demand impeaches the other party’s demand.
The holder of the impeached demand could rely on contractual provi-
sions for self-help ignorant of the fact that an equitable set-off invalidates
his or her actions not at law, but in equity.77
Against this party, the holder of the impeached demand may be
protected in several ways. Where party B (who desires the set-off) has
deceived party A (the holder of the impeached demand) into thinking
that no set-off exists or will be relied on, the fraud will ground
a complaint in fraud by party A. Where the party B represents to party
A that there is no set-off, an estoppel by representation may protect the
demand-holder. Similarly, a promise by party B not to enforce a set-off
against party A in the future may found a promissory estoppel. Reliance
of a relevant kind would need to be shown in order for each kind of
estoppel to arise.78
For the holder of the impeached demand, the problems will be acute
where the party desiring the set-off has taken no positive action amount-
ing to fraud or founding an estoppel. However, remoulding the law to
require a set-off to be declared or asserted before it can take effect would
be problematic. Earlier in this chapter, it was seen that the test for an
equitable set-off is indeterminate. Greater uncertainty would follow if the
law were changed to require a set-off to be declared or asserted before it
could take effect, for none of the tests for equitable set-off currently open
to a court would be a test: any of them could be satisfied and yet the set-off
would lack effect unless and until the set-off should be asserted against
the holder of the demand.
Placing this degree of control over the operation of set-offs in the
hands of the party holding the impeaching cross-demand could open the
way to abuse. If a rule required party A to have notice of party B’s
intention to assert a cross-demand by way of set-off before the set-off
could operate, then party A would nonetheless be vulnerable to the
defendant’s caprice. It would be party B’s choice when to assert the cross-
demand; whether and when party B might do so would be a matter of
speculation. Although it is said that allowing set-offs to arise without first

76
See n 57 and accompanying text. 77 Gullifer (n 1) [7–56].
78
See generally Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCA Civ 1908, [2016] 1
Lloyd’s Rep 517 [34]–[53].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 483

being asserted will engender uncertainty that ‘would have a chilling effect
on the exercise of self-help remedies’,79 at least as much uncertainty
could arise from the requirement that a set-off be asserted or
declared.80 The holder of the demand would not know whether to plan
on the basis that the cross-demand will or will not be asserted or declared.
Requiring that the set-off be asserted in good faith, before it can
operate, could salvage party A’s position. Perhaps for this reason, it has
been said a set-off can only be asserted in good faith.81 As an equitable
doctrine, good faith has some bearing on set-off. At the least it could
engage a court’s discretion not to give effect to a set-off where it would be
contrary to recognised equitable principles to do so. Under that discre-
tion, a Judicature court would be free to refuse to enforce a set-off if the
party asserting it, say, had unclean hands. However, there is no require-
ment that a set-off be asserted reasonably and in good faith before it can
take effect.82 There is merely a requirement that, where the cross-demand
is unliquidated, the party relying thereon to support a set-off must have
quantified the cross-demand reasonably and in good faith.
On present indications, the law might develop to permit courts to
refuse to enforce equitable set-offs in these situations either on the
ground that (a) courts possess discretion – be it a general discretion or
several narrower specific discretions; or (b) on specific non-discretionary
grounds, such as that enforcing the set-off would give the party desiring
the set-off the benefit of fraud, accident, mistake or surprise.
The alternative ways of protecting party A’s position would be less
coherent with the substantive nature of the modern doctrine of equitable
set-off, or would be unattractive in other ways. A good faith requirement
could be imprecise: if it applied only to the assertion of the set-off, then
any unconscientiousness in thereafter continuing to press the set-off
would not be caught. And to require the party desiring the set-off to
have behaved in good faith throughout would be more exacting of that
party than the conventional equitable defence of unclean hands, and
other equitable doctrines founded on conscience. Basing rules for the
protection of party A, in these situations, on doctrines of retrospectivity83
would introduce unneeded complexity. The difficulties of a rule requiring

79
Pichonnaz and Gullifer (n 52) [5.48].
80
This is implicitly recognised in Gullifer (n 1) [7–56].
81
Fearns (n 5) [30], [50] (obiter dicta); Pichonnaz and Gullifer (n 52) [5.44], [5.46].
82
Santiren Shipping Ltd v Unimarine SA [1981] 1 All ER 340 (QB) 346.
83
Wood (n 1) [4–26], [6–12]; Gullifer (n 48) [7–54]–[7–55].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 484 p g t urn e r

that the set-off be asserted or declared before it can take effect have
already been stated.
On balance, it is submitted that the authorities support the following
propositions. Substantive equitable set-off is a self-help defence in only
a narrow sense. Other matters being equal, equity will recognise that a set-
off operates whether or not the party asserting it asserts it in legal proceed-
ings or otherwise. If equitable relief is later granted, it will be granted on the
basis that the set-off took effect at the time at which the cross-demand first
impeached the demand. In order for a substantive equitable set-off to arise,
it is enough that the holder of a relevant cross-demand can assert that the
cross-demand impeaches the demand so as to give rise to a set-off defence.
It is not necessary that the holder of the cross demand should have made
that assertion. This flows from the basic nature of substantive equitable set-
off as a negative doctrine restraining the unconscientious exercise of the
strict right conferred by the impeached demand.

20.6 Insolvency
The relationship between substantive equitable set-off and set-off under
bankruptcy and insolvency legislation is unsettled. Where at least one of
the parties is insolvent, legislation provides for a mandatory automatic set-
off of mutual liabilities between the parties.84 Insolvency set-off thus differs
from equitable set-off. By stipulation, parties can exclude equitable set-offs
but not set-offs under insolvency legislation. Further, whereas an equitable
set-off extinguishes the relevant liabilities only upon the entry of judgment,
insolvency set-offs extinguish the liabilities immediately upon a declara-
tion of bankruptcy or the placing of a company into liquidation.
These, presumably, are the features of insolvency set-off beneath the
submission85 that equitable set-off does not operate in insolvency.
However, they do not support it. The submission assumes that the
provisions for insolvency set-off pre-empt equitable set-off by extending
farther than the terms of the insolvency legislation. No doubt the provi-
sions on insolvency set-off operate beyond their literal terms, even if only
to fulfil the purpose of the provisions. Thus, in Smith v Bridgend County
Borough Council,86 Lord Hoffmann explained that the mere existence of
84
Insolvency Act 1986, s 323; Insolvency Rules 1986, r 4.90: ‘mutual credits, mutual debts or
other mutual dealings between the company and any creditor’.
85
Re Bank of Credit and Commerce International SA (No 8) [1996] Ch 245 (CA) 269;
Roy Goode, Principles of Corporate Insolvency Law (4th edn, Sweet & Maxwell 2011) [9–13].
86
[2001] UKHL 58, [2001] 1 AC 336.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 485

mutual liabilities, within the literal meaning of the insolvency set-off

provisions, does not allow a creditor who converted the debtor’s goods
by retaining possession thereof without permission to set off the cred-
itor’s liability in tort against the debt, under the insolvency set-off
provisions.87 The purpose of the provisions does not include allowing
a creditor to improve its position in a debtor’s insolvency by converting
the debtor’s property. But the submission that the insolvency set-off
provisions pre-empt equitable set-offs goes beyond purposive construc-
tion. It assumes that the provisions have a wider purpose which somehow
displaces equitable set-off altogether.
The arguments against this doctrine are more persuasive than the
arguments in favour.88 While the insolvency legislation clearly enough
establishes a policy against a distribution of assets among creditors other
than pari passu, even without directly saying so, it is untenable to read the
insolvency legislation or the insolvency set-off provisions in particular as
establishing a public policy or an implication against the operation of
equitable set-offs. The types of demands subject to insolvency set-off and
equitable set-off are different; equitable set-off does not have a strict
requirement of mutuality; nor need the demands both be liquidated in
equity, as they must be for insolvency set-off. And the fact that one
obligor may be declared bankrupt or placed into liquidation is insuffi-
cient to effect or destroy the impeachment of one party’s demand by the
other party’s cross-demand. Put simply, there is no inconsistency
between the terms, purpose and policy of the insolvency set-off provi-
sions and the factors upon which equitable set-offs depend and the
manner in which they operate. In the absence of support for such
a policy or implication, it ought not to be assumed that the entitlements
of commercial (or other) parties have been abridged.
Indeed, the provisions of the insolvency legislation positively suggest
that equitable set-offs ought to operate in insolvency, all else being equal.
For instance, trustees in bankruptcy take their title to their debtors’ assets
subject to the claims, titles and interests of others, and to the flaws to
which their debtors’ assets may otherwise be subject. Equitable interests
and estates are among these. So must be equitable set-offs: the title of
a bankruptcy trustee to a demand must be subject to impeachment by
a cross-demand – all else being equal – even if the cross-demand only
begins impeaching the demand after the debtor enters bankruptcy.
The clearest illustration is where a debtor enters bankruptcy after having

87 88
Ibid [35]–[36]. See Gullifer (n 1) [7–84]. Derham (n 10) [6.25]–[6.32].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 486 p g t urn e r

assigned a chose in action, and the debtor later becomes entitled to

enforce an equitable set-off against the assignee on the basis that the
assignee took his or her assignment subject to the equities.89 Similar
points can be elaborated for corporate insolvency.
The simplicity of the proposition that equitable set-offs are precluded
by the advent of insolvency does not answer these points, which support
the contrary proposition.

20.7 Discretion
Once English courts began to entertain new formulations of the test for
substantive equitable set-off, it was inevitable that they should consider
how far equitable set-offs are discretionary. That enquiry would in any
case have been pertinent since, apart from equitable discretionary con-
siderations of universal application – such as the defence of unclean
hands – narrower discretions peculiar to individual equitable doctrines
often apply. For example, the scope of the discretion applicable to the
grant and refusal of equitable relief from forfeiture differs from the scope
of the discretion applicable to the grant and refusal of injunctive relief.
The manner in which the discretion applies to each of those remedies also
differs: general discretionary doctrines aside, peculiar discretionary con-
siderations apply to relief from forfeiture and injunctive relief.
The same might be thought true of equitable set-offs. However, pro-
voked by the language of some Court of Appeal decisions, the courts have
entertained the idea that the very application of an equitable set-off is
a matter of discretion. Focusing on Lord Denning’s formulation that an
equitable set-off arises where the demands are sufficiently closely con-
nected that it would be unjust to permit the demand to be asserted
without allowing for the cross-demand, they have occasionally supposed
that a set-off only exists if a court, exercising a wide discretion, so
decides.90 A major difficulty for this theory is that many authoritative
statements of the law contradict it. Whatever criticisms might be made of
certain recent Court of Appeal decisions – especially Muscat v Smith91
and Bim Kemi92 – their rejection of a discretionary test for equitable set-
off is, with respect, justified.93

89
Ibid [6.26]; Look Chan Ho, ‘Equity and Insolvency’, in PG Turner (ed), Equity and
Administration (Cambridge University Press 2016) ch 6.
90
Above nn 38–39. 91 Above n 47. 92 See n 30.
93
See also Bibby Factors (n 78) [47]–[48].

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 equitable set-off 487

Once that role for discretion in the law of equitable set-off is rejected,
what role for discretion remains? Because the substantive qualities of
equitable set-off are still developing, the role of discretion in equitable
set-offs remains debatable. Though there is scant authority, it should be
accepted that general equitable defences including the defence of unclean
hands apply to equitable set-offs as they apply to equitable doctrines and
remedies generally.94
Similarly, a party relying on an equitable set-off should in appropriate
cases be offered relief only upon terms that would do reciprocal justice to
the other party to the set-off, or to relevant third parties. That, too, is a
general requirement of those seeking equitable relief. Can the reliance on
an equitable set-off be subject to conditions where no equitable relief is
claimed consequent upon the set-off? Such a claim amounts to a claim for
a bare declaration. Though conditional entitlements to relief can be
declared, English courts have no power to impose conditions on the
making of declarations.95 And can relief be offered on terms if common
law or statutory relief is claimed consequent on the set-off? Presumably
not. Common law relief is not subject to a requirement that the party
seeking it do equity; unless the relief available under a statute adopts
equitable principles, the grant of statutory relief would presumably also
be free of a requirement to do equity.
Relief on terms aside, it is unknown how far there is discretion peculiar
to equitable set-off. There is support for the existence of equitable
discretion to deny an equitable set-off where: one party’s conduct is
a substantial cause of the liability of the other party against which the
first party seeks to set off its demand;96 the quantum of the cross-claim is
highly speculative; quantifying the cross-claim would require the taking
of a long and complicated account; or quantifying the cross-claim would
considerably delay matters, leading to prejudice unable to be undone by
imposing conditions on relief.97
Given that substantive equitable set-offs deny a claimant’s strict enti-
tlement to enforce a demand to the extent of the cross-demand,
94
Cf Pichonnaz and Gullifer (n 52) [8.46] (stating a wider doctrine). In principle, doctrines
of estoppel and waiver may also defeat the operation of an equitable set-off: Derham
(n 10) [4.49].
95
Heydon, Leeming and Turner (n 33) [19–275], [19–315].
96
See the explanation of Bluestorm Ltd v Portvale Holdings Ltd [2004] 2 EGLR 38 (CA) in
Derham (n 10) [4.59].
97
Derham, ibid [4.58]–[4.69], [4.61]. See also [2.102], [2.134], [4.03], [4.65], [4.68];
Tomlinson v Cut Price Deli Pty Ltd (1992) 38 FCR 490, 496–98 (Fed Ct); Roadshow
Entertainment (n 69) 489.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020
 488 p g t urn e r

principles on when a court may, in its discretion, refuse to enforce a set-

off could be developed through analogies with the discretion applicable
to other equitable doctrines that prevent a party from relying on its strict
legal rights. As noted above, the courts may come to rely on the heads of
fraud, accident, mistake and surprise to establish non-discretionary
grounds on which to refuse to enforce an equitable set-off. Apart from
that potential development, the notions of fraud, accident, mistake and
surprise could be weighty considerations in the exercise of a discretion to
refuse to enforce an equitable set-off. The words ‘fraud, accident, mistake
and surprise’ may be antique. However, they capture varieties of conduct
which still animate equitable doctrines and sustain claims for equitable
relief, especially where one party wishes to assert a strict right against
another. They could help to identify situations in which the assertion of
an equitable entitlement to a set-off would be against conscience.

20.8 Conclusion
The controversies surrounding equitable set-off concern the basic attri-
butes of the doctrine in its modern form. Concentration on the rudiments
of the modern doctrine is required if the current controversies – and
others that will inevitably arise – are to be solved to general satisfaction.
Substantive or true equitable set-off today continues the features of equi-
table set-off prior to the introduction of Judicature courts, in operating
purely as a negative restraint on the unconscientious assertion of all the
rights comprised in the ownership or holding of a demand in circum-
stances where the demand is impeached by another’s cross-demand.
The proper formulation of a test for equitable set-off draws attention to
the seriousness, in law of restraining a person who lawfully holds a demand
from enforcing and enjoying all the elements of that demand. And yet it
is the nature of equitable set-offs to do so. Widening the availability of
equitable set-offs is not an unalloyed good. Though the procedural context
in which equitable set-offs can be pressed in litigation changed upon the
advent of Judicature, this chapter has suggested that the procedural idea
at the root of equitable set-offs – that they operate as purely negative
restraints – is the idea from which solutions to the controversies discussed
can be derived.

Downloaded from https://www.cambridge.org/core. University of Hong Kong Libraries, on 29 Mar 2021 at 17:54:29, subject to the Cambridge
Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316759905.020