In 1991 Mr Fuller sold the freehold of his shop to Happy Shopper Markets, which in return granted him a lease.

In January 1994 the shop suffered severe storm damage to its flat roof and water penetration rendered parts of the property unfit for use.

Happy Shopper Markets had insured against storm damage but delayed informing the insurers, leaving the roof unrepaired until August 1996.Mr Fuller claimed his rent should be suspended under the terms of the lease and stopped paying it in December 1995.

The landlords then levied a distress.

Mr Fuller issued a claim based on overpayment and Happy Shopper Markets counterclaimed for possession based on arrears of rent.

The issue arose as to whether a tenant can set off overpayments against any unpaid rent.Legal set-offsUntil the 18th century there was no right of set-off in an action.

A de btor who had a mutual debt and was owed money by the creditor risked imprisonment.The Insolvent Debtors Relief Act 1729 and the Debtors Relief (Amendment) Act 1735 afforded some relief by permitting a set-off if both the money owed to the debtor and the sums owed to the creditor were liquidated provided the money was owed by the creditor in the same right.

This last limitation was recently illustrated by Hurst v Bennett (2000) The Times, 15 March.

The Court of Appeal held that a former partner in a firm of solicitors could not off-set claims for money allegedly due on the taking of accounts on the dissolution of the partnership against expenses the other partners had incurred as the firm's trustees of the lease of the offices.

A further limitation is that a liquidated debt cannot be set off against an unliquidated claim.Equitable set-offsThe Chancery Court adopted a wider approach and would relieve a debtor against a common law liability when he had a cross-claim 'so directly connected with [the claim] that it would be manifestly unjust to allow the claimant to recover without taking into account the cross-claim' (Compania Sud Americana de Vapores v Shipmair BV (1977) 2 Lloyds Rep 289).

As the law developed, unliquidated damages were permitted to be set off against both liquidated and unliquidated claims (Hanak v Green [1958] 2 QB 9).

However, the circumstances in which the set-off could be used were uncertain.Does the cross-claim have to arise out of the same transaction as the claim or is it sufficient that it was closely connected with it? If so, how close a connection is needed? Inevitably, courts phrased the test in different ways.

'It is only cross-claims that arise out of the same transaction or are closely connected with it.

And it is only cross-claims which go directly to impeach the claimants' demands, that is so closely connected with his demand that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim' (Federal Commerce and Navigation Co Ltd v Molena Alpha Inc ('The Nanfri') [1978] 1 QB 927 per Lord Denning).

By way of variation, the claim should be one 'flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim' (Bank of Boston Connecticut v European Grain and Shipping [1989] 1 AC 1056 per Lord Brandon).

The Court of Appeal in Bim Kemi v Blackburn Chemicals Ltd [2001] All ER (D) 13 has recently held that the preferred formulation is 'a close and inseparable connection'.

Therefore, the defendant company was allowed to set off a counter-claim for unliquidated damages for breach of a technology and trademark licensing agreement against a claim for unliquidated damages in respect of a breach of a later exclusive distribution agreement even though the two agreements dealt with different products.

In the words of Lord Justice Potter: 'It seems to me that the two agreements are inseparably connected within the continuum of the parties' trading relationship for the sale of Blackburn's anti-foaming agents, within which both contemplated a continuing expansion and exploitation of the market for [products to be distributed by Bim Kemi], the 1994 agreement supplementing rather than replacing the 1984 agreement.Both continued in parallel over the period prior to termination so that conduct such as that alleged by Blackburn in relation to Bim Kemi's promotion of Tensidef products at the expense of the Dispelair range was a breach of obligations contained in both agreements.'Equitable set-offEquity always all owed a tenant to set off a genuine claim for unliquidated damages in relation of a breach of a repairing covenant against a claim brought by his landlord based on non-payment of rent.

In Eller v Grovecrest Investments Ltd [1995] QB 272 the Court of Appeal extended this to allow a tenant to obtain an injunction restraining the landlords from proceeding with distraint on the ground that he owed no rent because he was entitled to set off his claim for damages for nuisance and breach of covenant.

Lord Justice Neill said: 'The cross-claim by the tenant arises out of the same contract as the claim for rent and is directly connected with it.

In my judgment it would be manifestly unjust to allow the landlords to recover without taking into account the cross-claim which, it is clear, is capable of existing as an equitable set-off.' A builder can set off a counterclaim for damages arising out of the same contract as the building owner's claim for unliquidated damages in respect of defective work (Hanak v Green above).

Costs orders made in the same proceedings can be mutually set off (Izzo v Philip Ross & Co [2001] All ER (D) 464 (Jul)).Exclusion of the set-offThere are categories of cases where the courts have taken a strict view of a claimant to be paid a liquidated sum free of any set-off.Examples include claims for freight and sums due under bills of exchange.

In Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938 the Court of Appeal decided that payments by direct debit could fall into these protected categories.

The defendant occupied two service stations under a licence agreement with the claimants by which he agreed to buy all his petrol from them and to pay by direct debit arrangements.

After a disagreement he cancelled the arrangements and the claimant sued for the price of petrol which had been delivered.The court held that he could not set-off unliquidated damages for an alleged breach of the agreement.

'This essentially is a matter of policy .

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Modern commercial practice is to treat direct debit in the same way as a payment by cheque and, as such, as the equivalent of cash,' said Sir John Balcombe.And Mr Fuller?In Fuller v Happy Shopper Market Ltd (2001) The Times, 6 March Mr Justice Lightman held that there could be no legal set-off in relation to the distress because it was only available in judicial proceedings and could not be a defence against a self-help remedy.However, Mr Fuller was entitled to an equitable set-off.

The claim for unpaid rent and for repayment of overpaid rent arose from the same lease and were so clearly related that it would be unconscionable for Happy Shopper Markets to claim the unpaid rent without giving credit for any overpayment.

Mr Justice Lightman pointed out that the broader scope for equitable set-offs meant they should be considered before legal set-offs.

He added that a landlord should take the greatest care before levying distress that there are no available claims on the part of the tenant by way of equitable set-off.

In any ordinary case he would be well advised to give the tenant notice of his intention and invite the tenant to agree what was owing and to inform him of any cross-claims.

Mr Justice Lightman said: 'The ancient (and perhaps an anachronistic) self help remedy of distress involves a serious interference with the right of a tenant under article 8 of the European Convention on Human Rights for respect of his privacy and home and under article 1 of the First Protocol to the peaceful enjoyment of his possessions.

The human implications of levying distress must be in the forefront of the mind of the landlord before he takes this step and he must fully satisfy himself that taking the action is in accordance with the law.'