I. MEANING OF SET-OFF
Order VIII Rule 6 deals with set-off. Set-off means a claim set up against another. It is a reciprocal adjustment of debts between two persons.
As per Order VIII Rule 6, where in a suit for recovery of money by the plaintiff, the defendant finds that he has also a claim of some amount against the plaintiff, he can claim a set-off in respect of the said amount. In other words, set-off in the written statement is a claim added by the defendant against the plaintiff.
II. PURPOSE OF SET-OFF
The purpose of set-off is to prevent the institution of a fresh suit in the court. It is to prevent multiple lawsuits between the plaintiff and the defendant, hence saves the valuable time of the court.
III. EFFECT OF SET-OFF
When a defendant pleads set-off, he is put in the position of a plaintiff as regards the amount claimed by him. There are two suits: one by the plaintiff against the defendant and the other by the defendant against the plaintiff, and they are tried together. A separate suit number, however, is not given to a set-off.
Set-off has the effect of extinguishing the plaintiff’s claim pro tanto, that is, to the extent of the amount adjusted.
Illustration:
A files a suit against B for ₹80,000. B claims a set-off of ₹30,000 against A. If B successfully establishes his claim, the amount of ₹30,000 will be adjusted against A’s claim of ₹80,000. Consequently, A will be entitled to recover only ₹50,000.
Where the plaintiff does not appear and his suit is dismissed for default, or he withdraws his suit, or he fails to substantiate his claim at the trial and his suit is dismissed, it does not affect the claim for a set-off by the defendant. A decree may be passed in favour of the defendant if he is able to prove his claim.
Illustration:
A files a suit against B for ₹60,000, and B claims a set-off of ₹25,000. If A fails to appear or withdraws his suit, B's claim for set-off does not automatically come to an end. If B is able to prove his claim, a decree may be passed in his favour.
IV. TYPES OF SET-OFF
Law recognises two types of set-off:
1. Legal set-off – Order VIII Rule 6.
2. Equitable set-off – Order XX Rule 19(3).
V. LEGAL SET-OFF
A legal set-off is governed by Order VIII Rule 6 of the Code of Civil Procedure. The following are the essential requirements of a legal set-off:
1. The original suit should be in the form of a money suit.
The plaintiff’s claim can be either for some liquidated amount of money or even an unliquidated amount of money. It can even be in the form of a claim for damages in a contract or tort.
2. The set-off claim shall be in the form of an ascertained amount of money.
The money claimed by the defendant must be a fixed amount. In other words, the amount claimed by way of legal set-off should be certain and capable of being ascertained.
3. The amount claimed in set-off should not be more than the pecuniary jurisdiction of the court.
The amount claimed by the defendant by way of set-off should fall within the pecuniary jurisdiction of the court in which the original suit is pending.
If a court is competent to entertain claims only up to a particular monetary limit, the defendant cannot use a claim for set-off to exceed that limit.
4. Both parties should fill the same character.
The legal capacity in which the parties are contesting the suit in the set-off claim should be the same as it was in the original suit in reference to the subject matter of the suit.
In other words, the parties must be acting in the same legal capacity in both claims. A files a suit against B in his personal capacity. B cannot claim a set-off in a different legal capacity if the requirement of the same character is not fulfilled.
5. Money claimed by the defendant in the written statement must be legally recoverable.
In a set-off, the examination has to be as if the claim of the defendant is an independent suit. Therefore, all the rules applicable to the examination of a plaint, including the bar of limitation, res judicata, Order II Rule 2, etc., have to be examined.
For example, if the defendant relinquishes a part of his claim in set-off, then a subsequent suit for the relinquished claim will be barred.
6. If there are more than one defendant, then a set-off claim should be recoverable by all the defendants from the plaintiff.
Similarly, if there are more than one plaintiff, then the set-off claim should be recoverable by the defendant from all the plaintiffs jointly.
Illustration:
A and B jointly file a suit against C. If C wants to claim a set-off against both A and B, the claim must be recoverable from all the plaintiffs jointly.
Similarly, where A files a suit against B and C, a set-off claimed by B and C must satisfy the requirement that the amount is recoverable by both defendants from A.
7. The set-off claim should be recoverable by the defendant on or before the date of filing of the suit by the plaintiff.
The defendant's claim must have become recoverable on or before the date on which the plaintiff instituted the suit.
8. In a set-off claim, the cause of action of the plaintiff and the defendant can arise in the same transaction or in different transactions.
For a legal set-off, it is not necessary that the claims of the plaintiff and the defendant should arise out of the same transaction. They may arise from different transactions, provided the other requirements of legal set-off are satisfied.
9. Set-off claim is considered to be a defensive claim.
A set-off is considered to be a defensive claim because the demand of the defendant is for an adjustment of his claim against the plaintiff’s claim.
The suit number for the original suit as well as the set-off claim will be the same, and both claims will be decided by the same judgment. The decree will be passed with respect to both claims and, after adjusting the set-off claim, the final decree will be passed in favour of that party whose amount is greater. This is provided in Order XX Rule 19.
Illustration:
A files a suit against B for ₹1,00,000, and B claims a set-off of ₹40,000. If both claims are established, the court will adjust B's claim against A's claim. A will be entitled to recover the balance amount of ₹60,000.
However, if B establishes a claim of ₹1,20,000 against A, while A establishes a claim of ₹1,00,000 against B, the final decree may be passed in favour of B for the balance amount of ₹20,000.
10. In set-off, the defendant will have to file the entire court fees upon the amount claimed in the set-off and not upon the balance amount remaining after setting-off.
The defendant is required to pay court fees on the entire amount claimed by way of set-off and not merely on the balance amount remaining after adjusting the plaintiff's claim.
Illustration:
A files a suit against B for ₹1,00,000. B claims a set-off of ₹40,000. For the purpose of court fees on the set-off claim, B will be required to pay court fees on ₹40,000 and not merely on the balance amount of ₹60,000.
11. The claim for set-off should be made either at or before the first hearing of the suit.
The defendant should ordinarily claim set-off at or before the first hearing of the suit. If it is claimed thereafter, the permission of the court will be required.
Illustration:
A files a suit against B for the recovery of money. If B wishes to claim a legal set-off, he should raise the claim at or before the first hearing. If B seeks to raise it at a later stage, he will require the court's permission.
VI. EQUITABLE SET-OFF
Order VIII Rule 6 provides only for legal set-off, whereas the concept of equitable set-off has been taken from the English Equity Courts.
The Privy Council in Clarke v. Ratnavaloo Chetti (1865 PC) and the Supreme Court in Maharaja Bhupinder Narain Singha v. Maharaja Bahadur Singh (1952 SC) have held that even if the rigid requirements of legal set-off are not fulfilled, set-off of claims can nevertheless be allowed on the grounds of equity.
Order XX Rule 19(3) uses the word ‘otherwise’ than the set-off under Order VIII Rule 6. It is here that the reference to equitable set-off can be found impliedly under the Code.
The Apex Court in Union of India v. Karam Chand Thapar & Brothers (2009) held that the following are the essential requirements for equitable set-off:
(a) The original suit should be a money suit.
As in the case of legal set-off, the original suit should be in the form of a suit for the recovery of money.
(b) Unlike a legal set-off, in equitable set-off, the set-off claim can be for both an ascertained or an unascertained sum of money.
In equitable set-off, the amount claimed by the defendant need not necessarily be a fixed or ascertained amount. It may also be an unascertained sum of money.
(c) The most important requirement for equitable set-off is that the mutual debits or credits or cross-demands must arise out of the same transaction.
For equitable set-off, the set-off claim should have arisen in the same transaction in which the cause of action for the main suit had arisen, or the two should be so connected, in their nature and circumstances, that they can be looked upon as parts of one transaction.
This is unlike legal set-off, where the same transaction is not essential.
(d) The pecuniary jurisdiction of the court should not be violated by the equitable set-off claim.
The claim made by the defendant by way of equitable set-off should not exceed the pecuniary jurisdiction of the court.
(e) The equitable set-off claim should be legally recoverable from the plaintiff.
However, if the parties were in a fiduciary relationship, equitable set-off may be permitted even if the period of limitation has lapsed.
(f) For equitable set-off, court fee is not essential.
Unlike legal set-off, equitable set-off does not require the payment of court fees as an essential condition for claiming such set-off.
(g) Equitable set-off cannot be claimed as a matter of right.
It is the discretion of the court whether to allow such a set-off or not. This discretion has to be exercised on the principles of justice, equity and good conscience.
VII. DISTINCTION BETWEEN LEGAL SET-OFF AND EQUITABLE SET-OFF
1. Amount claimed
Legal set-off must be for an ascertained sum of money. Equitable set-off may be allowed even for an unascertained sum of money.
2. Connection between transactions
In legal set-off, it is not necessary that the cross-demands arise out of the same transaction. Equitable set-off can be allowed only when the cross-demands arise out of the same transaction or are so closely connected that they can be treated as parts of one transaction.
However, if B claims damages arising out of the same contract under which A has filed the suit, equitable set-off may be considered because the claims are closely connected.
3. Right to claim set-off
Legal set-off can be claimed as a matter of right, and the court is bound to entertain and adjudicate upon it if the prescribed requirements are satisfied. On the other hand, equitable set-off cannot be claimed as a matter of right, and the court has discretion to refuse to adjudicate upon it.
4. Limitation
In a legal set-off, it is necessary that the amount claimed as set-off must be legally recoverable and must not be time-barred. A claim by way of equitable set-off may be allowed even if it is time-barred when there is a fiduciary relationship between the parties.