The recent NSW Supreme Court decision of Smith v Acquire
Asia Pacific Philippines (Case) examined set
off rights in a contractual context. A set off right creates a
defence, reducing a claim to the extent of the available set off.
Set off rights can be complex, particularly in equity. We will
highlight a few of the basic set off principles.
The NSW Civil Procedure Act 2005 (Act)
in section 21 creates a statutory right of set off for mutual debts
("debts" are defined as liquidated claims) but not
unliquidated claims. A claim for a breach of warranty is an
unliquidated claim. This right can be excluded by contract: see
subsection (3). Parties can also create set off rights in their
contract. The Sale of Goods Act (NSW) allows a buyer to
set off a breach of warranty claim against the price: section
Equitable set off is a less well defined defence, which is still
available in NSW due to section 21(4) of the Act. It can involve
unliquidated claims and can also be excluded by contract.
The Case issue, simplified, was whether alleged breaches of
warranties of the seller of shares, could delay the release to the
seller of escrowed purchase monies, apparently held to meet other
post completion adjustments. The buyer did not want those funds
released. The contract did not expressly exclude a right of set off
by plain words (which it could have done).
In the Case, McDougall J. stated when an equitable set off may
be available, namely:
The set off claim must be more than a cross claim. It
"must be of a nature that it impeaches the ground of the
plaintiff's claim": McDougall J. at .
It arises "because it would be unconscionable to
permit the adversary to enforce its claim without taking into
account the cross claimant's opposing claim":
McDougall J. at .
McDougall J. found that, based on his construction of the
contract, the alleged warranty claims could not be set off against
the escrow sum held in relation to the sale of shares and an
equitable set off had been excluded. Equitable set off was also
unavailable, as no unconscionable conduct of the seller had been
Drafting the contract to better deal with set off rights could
have avoided the Case dispute.
A counter claim is different from a set off. It is an
independent claim one party can raise against either another party
suing them in the same proceeding, or third parties having claims
connected with the plaintiff's claims: section 22 of the Act.
Section 90(2) of the Act allows a judgment to be given for the
balance of claims and cross claims. This discretionary power may
practically achieve a set off, but only at the time of a
A limited statutory right of set off for dealing with proofs of
debt exists in the Bankruptcy Act and Corporations Act. These
cannot be excluded by contract. Set off is probably unavailable to
a creditor to meet an unfair preference claim. Set off may be
available to a director however, such as for a loan account, to
meet all or part of an insolvent trading claim. We have utilised
set offs effectively in one insolvent trading matter for a director
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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