The operation of transactional set-off

As seen above, transactional set-off is available only where the arbitration clause so allows. Transactional set-off nevertheless raises a conundrum where there is an attempt to invoke it in judicial proceedings in respect of a counterclaim under a contract containing an arbitration clause, as the effect is to deprive the defendant of his right to go to arbitration. This point was made by Tomlinson J in Prekons Insaat Sanayi AS v Rowlands Castle Contracting Group Ltd [2006] EWHC 1367 (Comm).

Prekons: the facts

In 2003 PI, a Turkish company, entered into two contracts with RCC under which RCC, a UK company, was to supply and erect prefabricated buildings to be used as temporary accommodation in Iraq. Each of the contracts was governed by the law of Turkey and neither contained an arbitration clause. RCC delegated performance to a Cypriot company, ESS. A dispute arose between PI and RCC. PI asserted that it was owed US$325,790 under the two contracts. RCC for its part argued that the outstanding sum had been overstated by US$5,000 and also that by reason of PI’s own breaches it had a cross-claim of US$100,364 under the two contracts. RCC further asserted that it was owed US$220,426 by PI under a third contract – the TAA – by which PI appointed RCC as its agent in designated territories. The TAA was governed by the law of Turkey, and contained an arbitration clause which covered the dispute (a claim for commission by RCC) under the TAA.