Rather than applying the English common law concept of set-off, some Jersey cases suggest that the local courts should instead apply an analogous Jersey concept of ‘compensation’ as referred to in the Privy Council case of Dyson and Another v Godfray 1884 9 App. Cases 726 and more recently in Guidon Investments Limited v de Carteret (1980) JJ 109.

The precise parameters of ‘compensation’ may be a little unclear as the concept originated in the island’s Norman French ancestry many centuries ago. Such illustrious authorities as Le Geyt, Houard, Basnage, Terrien and Pothier writing over the course of the last few centuries expounded upon the Jersey law of compensation permissible for liquid demands - that is, admitted debts or debts capable of being readily proved.

Nevertheless the difference between set-off and compensation appears to be largely terminological. More recent cases before the Royal Court such as Britannia Building Society v Milborn (2006) JRC 145 do not take issue with the use of the term set-off. The Jersey customary law rights have in any event been largely superseded by statutory developments and practice. Express contractual rights of set-off are inevitably preferred.

Contractual Rights

It is usual for contractual rights of set-off to be expressly included in agreements i.e. to expressly permit one contractual party to set-off amounts owed by that contractual party against amounts owed to it by the other party. Typically in loan and security documentation a set-off clause would allow a bank to set-off liabilities owed by it (such as deposits held in a customer’s bank account) against the liabilities owed by that customer to the bank (such as loan indebtedness). The precise terms of the right of set-off is a matter of negotiation and may affect the extent of the right and the time at which the right may be exercised.

Statutory Rights

Despite the paucity of local modern authority, the concept of set-off is recognised by Jersey statute. There is, for example, a specific saving provision referring to the right of set-off in Article 11(2) of the Security Interest (Jersey) Law 1983 (the "1983 Law").

More importantly perhaps, in the event of bankruptcy, the Bankruptcy (Désastre) (Jersey) Law 1990 (the "1990 Law") applies mandatory set-off rules under Article 34 as follows:

"where there have been mutual credits, mutual debts or other mutual dealings between the debtor and a creditor, an account shall be taken of what is due from the one party to the other as at the date of the declaration in respect of such mutual dealings, and the sum due from one party shall be set off against any sum due from the other party, and the balance of the account, and not more, shall be claimed or paid on either side respectively."

Under Article 166(1) of the Companies (Jersey) Law 1991 the same rules apply on a creditors winding up of an insolvent company in Jersey. The mandatory nature of these statutory set-off provisions previously led to doubts as to whether or not the parties could agree to vary or contract out of them. However, the Jersey law position was clarified by statute in 2005.

Statutory Clarification

The Bankruptcy (Netting, Contractual Subordination and Non-Petition Provisions) (Jersey) Law 2005 (the "2005 Law") provides under Article 2, that "despite any enactment or rule of law to the contrary: (a) a close-out netting provision of an agreement; (b) a set-off provision of an agreement; or (c) a contractual subordination provision of an agreement, is enforceable in accordance with its terms."

Under Article 2(2) of the 2005 Law any contractual set-off provision remains enforceable despite the bankruptcy of the party to the agreement (or of any other person) and despite the lack of any mutuality of obligation between a party to the agreement and any other person. Under Article 2(4) of the 2005 Law a set-off provision is specifically enforceable against any guarantor or any person providing security for a party to the agreement. Furthermore under Article 2(5) any authority or mandate to implement a set-off provision is not revoked by bankruptcy and certain other ancillary provisions (such as relevant calculations, valuations or rates of exchange) to facilitate the set-off are also preserved on bankruptcy under Article 4.

Set-off provisions can, however, still be challenged on the grounds of fraud and misrepresentation under Article 5 of the 2005 Law. Importantly, pursuant to Article 6 of the 2005 Law, where one party to a security agreement is a branch in Jersey of a body corporate established outside Jersey, the right of set-off is enforceable despite any other enactment or rule of law that may be applicable to the body corporate, including the law of the jurisdiction under which it is established. This could be useful to the many branches of international banks established in Jersey if it proves necessary to rely on set-off.

The 2005 Law remains untested by the Jersey courts but provides useful clarification of the interrelationship between contractual and statutory rights of set-off.

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.