In brief - Court of Appeal stresses unconscionability factor in equitable setoff
The NSW Court of Appeal's decision in Hawes v Dean  NSWCA 380
shows that equitable set-off requires a connection between adverse parties' claims which would make it unconscionable for one party to insist on its legal right without first accommodating the other party's countervailing legal rights.
Did judge err in ordering equitable set-off between parties' liabilities?
In August 2014, in the case of Hawes v Dean, the NSW Court of Appeal was asked to look at (among other things) whether the primary judge erred when he ordered an equitable set-off between the liabilities of two parties.
From about 1988, Mr David Hawes and Mr Trevor Dean undertook a number of property development ventures together. Each used certain corporate vehicles which ensured that independence was maintained, except to the extent that specific contracts were entered into from time to time in relation to particular ventures or investments.
In 2005, Mr Hawes and Mr Dean began to unwind their investments. To that end, a number of separate contracts were entered into at different times over a period, each effecting separation in relation to a particular venture.
Judge finds equitable ground for protection against liability
Following determination of a dispute between Mr Hawes and Mr Dean, and their relevant companies, Justice Brereton held that:
- Mr Hawes and Glenside Group Pty Ltd were liable to Hawden Property Group Pty Ltd to the extent of $534,187.23
- Mr Hawes and Glenside were liable to Mr Dean to the extent of $357,188
- T & B Dean Investments Pty Ltd (TBD) was liable to Hawes Investments Pty Ltd to the extent of $321,386.01
His Honour, instead of entering judgment as outlined above, found that TBD's liability to Hawes Investments "was of such a character that, to the extent of $321,386.01, it provided Mr Dean with "some equitable ground for being protected against" his liability for $357,188 (as against Mr Hawes and Glenside)..." (at ). Accordingly, he entered one judgment for the difference between the two sums in favour of the party entitled to the larger sum.
Court of Appeal looks at whether cross-claim impeaches the claim
In reviewing Justice Brereton's decision, Justice Barrett (with whom Chief Justice Bathurst and Justice McColl agreed) observed that the primary judge had relied on the well-established "impeachment of title test." This test is based on the concept that equitable set-off does not depend on an unfettered discretionary assessment of what is fair. Rather, it is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim.
In considering this test, the court looked to an earlier decision that outlined three examples of situations where impeachment exists:
- A mortgage is granted to a solicitor as security for costs and the mortgagor client has a cross-claim against the solicitor for faulty work.
- A builder has a claim for money due under a building contract and there is an unliquidated claim against the builder for damages for breach of that contract.
- A lender fails to provide promised further advances for a development project and the borrower is unable to complete the development project and repay the advances actually made.
In relation to those examples, Justice Barrett noted that the "...two wrongs or defaults were so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right." His Honour concluded that: "It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim." (at ).
Legal right allowed after accommodating other's countervailing legal right
Applying that concept to the case before him, Justice Barrett found that the person entitled to receive $357,188 was not the person liable to pay $321,386.01 and the person entitled to receive $321,386.01 was not the person (or even one of the persons) liable to pay $357,188. Furthermore, His Honour found that the respective liabilities and entitlements arose from different transactions entered into at different times.
Accordingly, Justice Barrett found that Hawes Investments' rights, to the extent of $321,386.01 as against TBD, did not go to the root of, was not bound up with, and did not impeach Mr Dean's right to $357,188 as against Mr Hawes and Glenside, such that it was inequitable to allow Mr Dean to recover that $357,188 without giving credit for the $321,386.01 owed by TBD to Hawes Investments.
Equitable set-off principles of law
This decision is a timely reminder of the complex nature of equitable set-offs and some relevant principles of law:
- Equity will allow a set-off where it would be unconscionable to allow one party to insist on its legal right without first accommodating the other's countervailing legal right.
- Equity will sometimes allow set-off otherwise than between the same parties where there is a particularly compelling factor that makes reliance on separate rights unconscionable.
- Business structures cannot be ignored, nor can the insulation they are designed to achieve be overlooked when it comes to ascertaining assets and liabilities.
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