Amidst the summer excitement generated last year by the World Cup, concerns about access to justice as a result of the Employment Tribunal fees regime and the anticipation of more holiday pay decisions, the Employment Appeal Tribunal gave a judgment that stated for the first time at appellate level that an employer can rely upon a defence of set-off to an employee's contract claim under the Employment Tribunals Extension of Jurisdiction (England and Wales) Order 194 ('1994 Order'), as of right.
In Ridge v HM Land Registry UKEAT/0485/12/DM, the Employment Tribunal found that Mr Ridge had a valid claim for breach of contract because HM Land Registry had not paid him the net sum of £1170.29 in respect of loss of pension rights during his notice period (which was compensated by pay in lieu of notice). HM Land Registry raised a counterclaim in its amended ET3 in respect of overpaid wages that exceeded the £1170.29 sought by the claim. However, the counterclaim was not presented in time, and the Employment Tribunal declined to exercise discretion to extend time. Nevertheless, the Employment Tribunal permitted HM Land Registry to set off the overpayment of wages against the £1170.29 claimed in relation to his notice period, with the result that Mr Ridge made no recovery in respect of his claim.
Mr Ridge's appeal was allowed due to the insufficiency of evidence before the Employment Tribunal as to the extent of the overpayment (which underpinned the set off), but his challenge to the jurisdiction of the Employment Tribunal to entertain a claim of set-off failed.
It failed principally because the jurisdiction conferred on the Employment Tribunal to hear breach of contract claims (derived from s 3 of the Employment Tribunals Act 1996 and the 1994 Order) was a concurrent jurisdiction to that exercised by the Civil Courts. Thus, Parliament intended the law of contract to work in the same way as it does before the Civil Courts. There was nothing in the 1994 Order or in the Employment Tribunal Rules of Procedure that limited the grounds of defence to a contract claim that would otherwise be available to a litigant in the Civil Courts.
The limits of set-off in the Employment Tribunal
In order to appreciate the effect of this judgment, it is worth pausing to consider the nature of a set-off in the context of contractual claims. A set-off is a defence. If an employer would wish to obtain more by its cross-claim than the employee would seek to gain by his contractual claim under Regulation 3 of the 1994 Order it is necessary for the employer to bring a counterclaim under Regulation 4 of the 1994 Order.
However, just because an employer has a cross-claim, it does not necessarily follow that it can be set-off against the claim. As with the position in the Civil Courts under Part 16.6 of the Civil Procedure Rules, it has to be capable in law or equity of being set-off against the claim.
Following the case of Hanak v Green  2 QB 9 at 23, the categories of case in which a party can set-off a claim were firmly established as:
(a) Mutual debts. This arises where there is an arguable cross-claim the amount of which is known or can be readily ascertained, even if the employer's right to payment of the sum sought by the cross-claim is disputed.
(b) In certain cases, a setting up of matters of complaint which if established, reduce or extinguish the claim. Typically this arises in sale of goods and construction cases and is known as abatement or legal set-off. The nature of the defence depends on establishing how much less the subject matter of the action was worth by reason of the breach. It is unlikely to apply in an employment context.
(c) Equitable set-off. A cross-claim can be set-off in equity if it is so closely connected with the claim that it would be plainly unjust for the claim to be allowed without taking into account the cross-claim. This species of set-off is quite wide in scope.
In addition to this, there may be categories of case where there is a right to set-off arising by express provision in the contract of employment.
In Ridge, the EAT considered that the claim for damages in respect of the value of the loss of pension rights during Mr Ridge's notice period was closely connected to the amount of overpaid wages cross-claimed by his employer, since both claim and cross-claim arose out of Mr Ridge's employment. Referring to this cross-claim as a 'debt', the EAT held that it 'has long been the law that a debt may be raised by way of set-off if it is sufficiently closely connected with the claim so that it would be unjust to requite the defendant to pay the claim without deduction'.
This formulation of the right of set-off in this case is significant because it straddles both the first and third categories set out above in Hanak. The ability to set-off mutual debts arises as of right, yet the formulation in Ridge invokes the concept of injustice, which points clearly towards the third category of Hanak, namely equitable set-off.
Employment Tribunal practitioners will be familiar with the concept of 'equity' as it is a frequent incident of the statutes that underpin the Employment Tribunal's jurisdiction. See for instance s 98(4) of the Employment Rights Act 1996 or the discretionary extension of time under s 123(1)(b) of the Equality Act 2010. However, equitable set-off arises in Equity (ie that varies with the length of the Chancellor's foot) not from statute (other than by reference per the Judicature Acts).
Equity? Surely not, after all the Employment Tribunal is a creature of statute. But this thesis is reinforced by the EAT's rationale for rebuffing Mr Ridge's jurisdictional challenge to the right of HM Land Registry to set-off. After all, on the EAT's analysis, the jurisdiction conferred on the Employment Tribunal to hear breach of contract claims was a concurrent jurisdiction to that exercised by the Civil Courts, and there was nothing in the legislation that could be construed as limiting the defences available to a party facing a breach of contract claim in the Employment Tribunal. By this token, all relevant species of set-off must be available.
Therefore in any breach of contract claim in the Employment Tribunal, an employer could conceivably (either in conjunction with a counterclaim or on its own as a defence) set-off:
- any sum that it can claim under the contract of employment;
- damages arising out of the breach by the employee of an express or implied term of the contract of employment;
- damages arising out the breach of a tortious duty owed by the employee (where the employer itself is not guilty of negligence, such as per Lister v Romford Ice and Cold Storage Co Ltd  AC 555);
- damages arising (in appropriate cases) in other cases, such as where there has been a breach of a fiduciary duty, or other equitable obligation (not otherwise barred by Regulation 5 of the 1994 Order.
Further a set-off could also be brought in an appropriate case by the employee in response to their employer's contract claim on the same basis as the instances suggested above.
The benefits of asserting a set-off are that the party asserting it has the benefit of not:
- having to be concerned about time limits in relation to raising it;
- paying an issue fee in relation to it (£160)
- (conceivably) not having to meet the other side's Tribunal fees under Rule 76(4) which might otherwise be the case if claim and cross-claim were asserted without set-off;
- (conceivably, in certain circumstances) being barred by res judicata or asserting a claim elsewhere in respect of the same subject matter as per the case of Hopper v Titman 1 WLR 841.
The judgment in relation to set-off in Ridge is a significant development in Employment Tribunal jurisprudence and practitioners should be aware of the advantages that asserting equitable set-off can bring to their litigation position. Further, it potentially can lead to other equitable defences to contractual claims being utilised successfully in the Employment Tribunal, such as estoppel, waiver and misrepresentation, leading to rescission.