The law has laid down many rights and defenses with respect to protect the interests of citizens so that no injustice can occur. In view of this, the Doctrine of Set-Off was incorporated in the Civil Procedure Code.
DOCTRINE OF SET-OFF
The Doctrine of set-off is mentioned in Order 8 Rule 6(1) which states that “Where in a suit for the recovery of money the defendant claims to set-off against the plaintiff’s demand any ascertained sum of money legally recoverable by him from the plaintiff, not exceeding the pecuniary limits of the jurisdiction of the Court, and both parties fill the same character as they fill in the plaintiff’s suit, the defendant may, at the first hearing of the suit, but not afterward unless permitted by the Court, presents a written statement containing the particulars of the debt sought to be set-off.
In a suit of recovery of money, if the defendant finds that they have their own claim against the plaintiff, then they have a right to use that claim as a defense, can plead to set off or deduct any amount which the plaintiff owes them from the claim of the original suit.
So, in other words, Set-Off refers t1o a claim against another claim of money or reciprocal acquittal of debts between two persons. It is a cross-claim between the parties of a money suit. Both the Plaintiff and the defendant are debtors and creditors to one another. Set-Off is considered an important tool of defense for the defendant.
If a defendant wishes to bring forth a claim of a set-off, then he has to plead for it along with the written statement. If he or she foregoes the claim, then he/she will be barred from pleading it again as per Order II, Rule 2.
As per Section 3(2) (b) (i) of the Limitation Act, 1963, any claim of set-off has to proceed as a separate suit and be deemed to be instituted on the same date as the original suit.
CONDITIONS OF SET-OFF
Order 8 Rule 6 prescribes some conditions which have to be fulfilled to bring on a valid set-off. Those are:
- The suit must be for the recovery of money: The doctrine of set-off is only available in the case of money.
- Both the parties, when the defendant is claiming any setoff, must hold the same character as they held in the suit of the plaintiff.
- It must be recoverable by the defendant or by all the defendants if more than one.
- The amount claimed by the defendant in the set-off must be legally recoverable.*
- The amount must be an ascertained amount or fixed amount.
- The claimed amount must not exceed the pecuniary jurisdiction of the court.
- Every claim of set-off shall be asked only at the first hearing and with the leave of the court.
*If obligations arising between the defendant and plaintiff are created by fraud, coercion, undue influence, mistake, misrepresentation, then that is not legally recoverable.
EFFECT OF SET-OFF
As per clause (2) of Order 8 Rule 6, “The written statement shall have the same effect as a plaint in a cross-suit so as to enable the court to pronounce a final judgment in respect both of the original claim and of the set-off: but this shall not affect the lien, upon the amount decreed, of any pleader in respect of the costs payable to him under the decree.”
In other words, the Set-off is bound to be treated as a cross-claim. It is a defense, but for the passing of judgment, it shall be treated as a claim by the defendant against the plaintiff.
If the claim of the defendant is against several plaintiffs and only one person has instituted the suit, then the claim cannot be set – off against that plaintiff only.
Even if the suit gets dismissed or the plaintiff withdraws the suit, the set-off can still prevail independently. The court will have to pass a judgment separately or distinctively on the claims of the plaintiff who was the defendant of the original suit.
- C and B sue D for Rs 10,000. Though D founds that B owes him Rs.2000, he cannot set off the debt by B only.
- H files a suit against N for Rs 20,000. N cannot set-off the claim for damages for breach of contract for specific performance.
- J dies intestate and in debt to R. L takes out administration to J’s effects and R buys part of the effects from L. In a suit for the purchase money by L against R, the latter cannot set off the debt against the price, for L fills two different characters, one as the vendor to B, in which he sues R, and the other as representative to J.
TYPES OF SET-OFF
In law, Set-Off is generally understood as of two types i.e. Legal Set-Off and Equitable Set-Off. Rule 6 of order 8 provides solely for legal set-off. While rule 6 deals solely with the legal set-off, the provision provided is, however, not entirely exhaustive. The courts have the discretion to proceed or downright refuse to entertain the set off if they found that the claim can cause a delay in providing justice.
1. LEGAL SET-OFF
A defendant can plead for a legal set-off if he or she finds that the plaintiff owes them debt too and decides to deduct that sum of money to lessen their own debt. As rule 6 only deals with legal set off, these following conditions apply for the same,
- When the suit brought by the plaintiff is for recovery of debt only.
- The amount of money must be ascertained or fixed.
- The money can be legally recoverable.
- The original claim and the set-off must be in the same character.
- The set-off shouldn’t exceed the pecuniary jurisdiction of the court.
2. EQUITABLE SET-OFF
Equitable set-off refers to a claim of set-off of an unascertained sum of money where both the plaintiff’s and the defendant’s claim arise out of the same transaction or are connected in nature and circumstance.
The Doctrine of equitable set-off is wholly allowed in the courts governed by the English Law. While in India, the courts aren’t bound to entertain it. They have the discretionary power to entertain it or not. The courts can also refuse an equitable set-off if they find that a usual investigation is necessary to determine the unascertained sum of money which will be a hassle for the court. Though courts generally allow the defendant’s claim as it will be inequitable to drive the defendant to file another suit.
For example, suppose a contract is formed between two parties. And after some days, one party files a suit against the other in order to recover a sum of money. The other party may claim to set off the damages sustained by him due to the breach of the contract.
In another case of Maharashtra State Farming Corporation Ltd Vs. Belapur Sugar and Allied Industries Ltd, the court observed that to avail the doctrine of equitable setoff, the claim has to arise out of the same transaction and isn’t barred by time.
Likewise, if a servant files case against his master for salary, the master can also claim to set-off for all loss sustained due to the negligence of the servant.
It is to be noted that the doctrine of equitable set-off is vaguely mentioned under order 20 rule 19(3) which states” The provisions of this rule shall apply whether the set-off is admissible under rule 6 of Order VIII or otherwise.”
DISTINCTION BETWEEN LEGAL AND EQUITABLE SET-OFF
1) In a Legal set-off, the amount must be for an ascertained sum of money. While in an Equitable set-off, the claim is allowed even in regard to an unascertained sum of money.
2) In a Legal set-off, the defendant can claim set-off as a right and the court is obligated to entertain and adjudicate upon the claim. Whereas, in Equitable set-off, the court has the right or discretion on whether to allow the claim of set-off to proceed or just refuse ab initio. The defendant cannot claim it as a right.
3) In a Legal set-off, it is not mandatory that the cross-demands arise out of the same transaction, but in an Equitable set-off, it is mandatory that the cross-demands arise out of the same transaction.
4) In a legal set-off, the amount claimed must be legally recoverable and not time-barred, but in Equitable set-off even if the claim is barred by time and there is a fiduciary relationship between the parties then the court can entertain it.
5) In a legal set-off, the court fees are required because a separate suit could have been filed but due to the convenience of the defendant and the court, it was merged with the claim of the plaintiff. However, court fees aren’t required in case of equitable set-off.
Set off was introduced so that a defendant can use it as a plea of defense suit. It is a cause of action against the plaintiff’s claim. Legal set-off and Equitable set-off both serve as a path to protect the interest of the defendant. Though, a defendant can also seek relief through a counterclaim too, which was incorporated by the Amendment Act of 1976. It is a cross-suit as in a plaint against the plaintiff. We can say, a set-off is a shield of defense, Counter-claim is a strong weapon of offence for the defendant.
This article is authored by Shruti Sudha Samantaray, 3rd Year, BA.LLB(Hons) at University Law College, Utkal University, Bhubaneswar.