SET-OFF & COUNTER CLAIM
SET-OFF: RULE 6 – ORDER 8
6. PARTICULARS OF SET-OFF TO BE GIVEN IN WRITTEN STATEMENT —
1. 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 afterwards unless permitted by the Court, present a written statement containing the particulars of the debt sought to be set-off.
2. EFFECT OF SET-OFF —
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 cost’s payable to him under the decree.
3. The rules relating to a written statement by a defendant apply to a written statement in answer to a claim of set-off.
MEANING of SET OFF
Set off is plea of defence, available to the defendant, whereby he puts his claim against the claim of the plaintiff for mutual adjustment and if allowed by the court, either wipes out or reduces the plaintiff's claim. "Set-off" is like a cross-claim pleaded by the defendant which partly offsets the original claim.
A plea of set-off is "a plea whereby a defendant acknowledges the justice of the plaintiff's demand, but sets up another demand of his own, to counter balance that of the plaintiff; either in whole or in part". Thus, it is a "reciprocal acquittal of debts between two persons".
It is set up in cases where two persons are reciprocally debtors and creditors to one another. Where there are mutual debts between the plaintiff and the defendant, one debt may be settled against the other.
Order VIII rule 6 recognises plea of Set Off. According to 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.
It obviates the necessity of filing a fresh suit by the defendant.
ILLUSTRATIONS
(a) A bequeaths (given by will after death) Rs 2000 to B and appoints C his executor and residuary legatee. B dies and D takes out administration to B's effects. C pays Rs 1000 as surety for D; then D sues C for the legacy. C cannot set-off the debt of Rs 1000 against the legacy, for neither C nor D fills the same character with respect to the legacy as they fill with respect to the payment of Rs 1000.
(b) A dies intestate and in debt to B. C takes out administration to A's effects and B buys part of the effects from C. In a suit for the purchase-money by C against B, the latter cannot set-off the debt against the price, for C fills two different characters, one as the vendor to B, in which he sues B, and the other as representative to A.
(c) (d) (e) – illustrations on “ascertained sum of money”
(c) A sues B on a bill of exchange. B alleges that A has wrongfully neglected to ensure B's goods and is liable to him in compensation which he claims to set-off. The amount not being ascertained cannot be set-off.
(d) A sues B on a bill of exchange for Rs 500. B holds a judgment against A for Rs 1000. The two claims being both definite, pecuniary demands may be set-off.
(e) A sues B for compensation on account of trespass. B holds a promissory note for Rs 1000 from A and claims to set-off that amount against any sum that A may recover in the suit. B may do so, for, as soon as A recovers, both sums are definite pecuniary demands.
(f) A and B sue C for Rs 1000. C cannot set-off a debt due to him by A alone. It must be recoverable by the defendant, or by all the defendants
(g) A sues B and C for Rs 1000. B cannot set-off a debt due to him alone by A.
(h) A owes the partnership firm of B and C Rs 1000. B dies, leaving C surviving. A sues C for a debt of Rs 1500 due in his separate character. C may set-off the debt of Rs 1000.
(i) A sues B for Rs 20,000. B cannot set-off the claim for damages for breach of contract for specific performance.
(j) A sues B for Rs 10,000. B cannot set-off any amount due to him on a promissory note executed by A before five years.
(k) A sues B for Rs 10,000. B cannot claim set-off of any amount due to him towards salary for performing illegal or immoral activities of A.
(l) A sues B for Rs 15,000. B cannot set-off an amount of Rs 30,000 if the court in which the suit filed by A has pecuniary jurisdiction up to Rs 20,000 only.
CONDITIONS NECESSARY FOR SET-OFF
In order to entitle a defendant to claim a set-off under this rule, the following three conditions must be present:
1. The suit must be one for the recovery of money, e.g., a suit on a negotiable instrument. But a suit merely for dissolution of a partnership or for accounts is not a suit for money. If, however, there is also a prayer for the payment of such balance as might be found due to the plaintiff, the suit would be one for the payment of money.
2. As regards the amount claimed to be set-off, —
a. It must be an ascertained sum of money. (See illustrations (c), (d) and (e) above.)
b. Such sum must be legally recoverable. A sum cannot be said to be ‘legally recoverable’ where the plaintiff is not bound by law to pay it, or where the claim is barred by res judicata, or by the law of limitation, or is based upon a decree which is incapable of execution or upon document not receivable in evidence.
c. It must be recoverable by the defendant, or by all the defendants if more than one. [III. (g)]
d. It must be recoverable by the defendant from the plaintiff or all the plaintiffs, if more than one. [Ill.(f)]
e. It must not exceed the pecuniary limits of the jurisdiction of the Court in which the suit is brought.
2. Both parties must fill in the defendant’s claim to set-off the same character as they fill in the plaintiff’s suit. [Ills, (a), (b) and (h)]
SCOPE OF THE RULE:
Scope of the Rule 6 of Order VIII dealing with Set-Off is limited. Firstly, it deals with legal, as distinguished from equitable, set-off. Secondly it must be for an ascertained sum of money. Thirdly, the amount of set-off cannot exceed the pecuniary jurisdiction of the Court in which the plaintiff’s suit is brought. Further, the nature of the set-off must also be within the cognizance of the Court; a Court cannot entertain a set-off, if its nature is such that if it is made the subject-matter of a separate suit, it will not come within its jurisdiction: (Lassoo and Sons v. Krishna, (1932) 34 Bom. LR 1401.)
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.
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 and a decree may be passed in favour of the defendant if he is able to prove his claim. [Or. 20 R. 19(1)]
TYPES OF SET-OFF:
There are two kinds of set off under the law: -
1. Legal Set-Off
2. Equitable Set-Off
EQUITABLE SET-OFF
Equitable set-off means a set-off for an unascertained sum of money arising out of cross—demands arising out of the same transaction. The claim for equitable set-off must be within limitation on the date when the written statement is presented. The court has a discretion to make an enquiry into the equitable set-off and in case of delay the court may refuse to go into question of equitable set-off. It does not require any additional court-fee.
Equity in England introduced this concept in cases when cross demands arose out of the same transaction, though for an unascertained sum of money.
In England, the Courts of Equity had taken the view that if there is some connection between the plaintiffs claim and the defendant’s claim for set-off (as for instance, when they arise out of the same transaction), it would be inequitable to drive the defendant to a separate suit, which would only result in multiplicity of legal proceedings and therefore introduced the concept of equitable set off.
In India, Order 20 Rule 19(3) of the Code recognises an equitable set-off. It deals with cases in which the defendant may be allowed a set-off in respect of an unascertained sum of money as distinguished from ascertained sum of money.
Legal set-off is always in respect of an ascertained sum of money. Whereas equitable set-off, may be claimed by the defendant in respect of even an unascertained sum of money, provided that both the cross-demands arise out of one and the same transaction or are so connected, in the nature and circumstances, that they can be looked upon as parts of one transaction. The provisions of this O. 20. R 19(3) rule shall apply whether the set-off is admissible under rule 6 of Order VIII or otherwise.]
Thus, where A sues B to recover Rs 50,000 under a contract, B can claim set-off towards damages sustained by him due to breach of the same contract by A. [Harischandra Dwarkadas Cloth Market v. Firm Murlidhar Chironjilal, AIR 1957 MB 53.]
Likewise, in a suit by a servant against his master for salary, the latter can claim set-off for loss sustained by him because of negligence or misconduct by the former since such claim arises out of the same relationship. [Chishtom v. Gopal Chander, (1889) 16 Cal 711.]
Again, in a suit by a washerman for his wages, the defendant-employer may set-off the price of the clothes lost by the plaintiff. [Maiden v. Bhondu, (1910) 7 IC 1006.]
DECREE WHEN SET-OFF OR COUNTER-CLAIMS IS ALLOWED —
1. Where the defendant has been allowed a set-off or counter-claim against the claim of the plaintiff, the decree shall state what amount is due to the plaintiff and what amount is due to the defendant, and shall be for the recovery of any sum which appears to be due to either party.
2. Appeal from decree relating to set-off or counter-claim— Any decree passed in a suit in which a set-off or counter-claim is claimed shall be subject to the same provisions in respect of appeal to which it would have been subject if no set-off or counter-claim had been claimed. The provisions of this rule shall apply whether the set-off is admissible under rule 6 of Order VIII or OTHERWISE.
LEGAL AND EQUITABLE SET-OFF: DISTINCTION
1. Nature of claim-- 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. Discretion of the court-- Legal set-off can be claimed of as right and the court is bound to entertain and adjudicate upon it. Equitable set-off, on the other hand, cannot be claimed as of right and the court has discretion to refuse to adjudicate upon it.
3. Same transaction-- In a 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.
4. Time barred claim-- In a legal set-off, it is necessary that the amount claimed as setoff 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. Thus, a trustee in possession of the trust estate may by way of equitable set-off claim to be indemnified out of the trust estate when called upon to account even though such claim of indemnity is time-barred. It must, however, be noted that even in case of equitable set-off, if at the date of the written statement, the defendant's claim is time-barred, though not barred at the date of the suit, it will be allowed only to the extent of the plaintiff's claim, but a decree will not be passed in his favour for the balance found due to him.
5. Requirement of court fee— A legal set-off requires a court fee, but no court fee is required in the case of an equitable set-off.
COUNTER CLAIM: RULES 6-A - 6-G
MEANING
"Counter claim" is "a claim made by the defendant against the plaintiff in a suit filed against him ". Counter claim is independent of, and separable from, the plaintiff's claim. It can be enforced by a cross-action. Counter claim is one of the pleas available to a defendant to defeat the relief sought by the plaintiff against him. A defendant in a suit filed against him may plead defence against the case of plaintiff, may plead a set-off, and in addition set up a counterclaim. However counter claim may be set up only in respect of a claim for which the defendant can file a separate suit. Thus, a counterclaim is substantially a cross-action.
Before the Amendment Act of 1976, there was no specific provision for counterclaim in the Code. Before the Amendment Act of 1976, no counterclaim or set-off could be claimed except in money suits. However, in the leading case of Laxmidas v. Nanabhai [AIR 1964 SC 11: (1964) 2 SCR 567.] the Supreme Court observed that a court can treat a counterclaim as a plaint in a cross-suit and held the right to make a counterclaim statutory.
The Law Commission of India, vide its 27th report, however, recommended to avoid multiplicity of proceedings, right to the defendant to raise a plea of set-off in addition to a counterclaim in the same suit. By the Amendment Act of 1976, a specific provision has been made for counterclaims by inserting Rules 6-A to 6-G.
According to sub-rule (1) of Rule 6-A, the defendant may set up by way of counterclaim against the claim of the plaintiff any right or claim in respect of action accruing to the defendant against the plaintiff either before or after the filing of the suit but before the defendant has delivered his defence or before the time fixed for delivery of his defence has expired.
Such counterclaim, however, should not exceed the pecuniary limits of the jurisdiction of the court. In other words, by laying the counterclaim, pecuniary jurisdiction of the court cannot be ousted and the power to try the suit already entertained cannot be taken away by accepting the counterclaim beyond its pecuniary jurisdiction.
RAMESH CHAND V. ANIL PANJWANI, (2003) 7 SCC 350 AT P. 367: AIR 2003 SC 2508.]
The counter claim can be pleaded in any of the following three modes.
a. In the written statement filed under Order 8 Rule 1;
b. By amending written statement with the leave of the court and setting up counterclaim; and
c. In a subsequent pleading under Order 8 Rule 9.
WHETHER COUNTER CLAIM CAN BE FILED AGAINST CODEFENDANTS?
ROHIT SINGH V. STATE OF BIHAR, (2006) 12 SCC 734 AT P. 744: AIR 2007 SC 10.
Generally, it is the defendant who may file a counterclaim against the plaintiff. But incidentally and along with the plaintiff, the defendant may also claim relief against the co-defendants in the suit. But a counterclaim solely against co-defendants is not maintainable.
COUNTER CLAIM IN RESPECT OF CAUSE OF ACTION ACCRUING AFTER FILING OF THE SUIT
MAHENDM KUMAR V. STATE OF M.R, (1987) 3 SCC 265: AIR 1987 SC 1395
A counterclaim may be set up by a defendant against a plaintiff in respect of cause of action accruing either before or after filing of the suit, provided such claim is not barred by limitation.
COUNTERCLAIM HAS THE EFFECT OF A CROSS-SUIT
Such counterclaim has the effect of a cross-suit and the court can pronounce a final judgment both on the original claim and the counterclaim [R. 6-A (2).]. Even if the suit of the plaintiff is stayed, discontinued, dismissed or withdrawn, the counterclaim will be decided on merits, [R. 6-D.] and the defendant will have a right to get a decree for a counterclaim as claimed in the written statement [R.6-F.]. If the plaintiff does not file any reply to the counterclaim made by the defendant, the court may pronounce the judgment against the plaintiff in relation to the counterclaim made against him or make such order in relation to the counterclaim as it thinks fit. [R. 6-E.]
The counterclaim of the defendant will be treated as a plaint and will be governed by the rules applicable to plaints. [R. 6-A (4).] and the plaintiff has a right to file a written statement in answer to the counterclaim of the defendant. [R. 6-A (3).] and a reply filed in answer to a counterclaim shall be treated as a written statement and governed by rules applicable to written statements. [R. 6-G.]
SET-OFF AND COUNTERCLAIM: DISTINCTION
Difference between Set off and Counter claim was explained in case Munshi Ram v. Radha Kishan, AIR 1975 Punj 112 and Amichand Pyarelal v. Union of India, (1977) 79 Bom LR 1.
1. Set-off is a statutory defence to a plaintiff's action, whereas a counterclaim is substantially a cross-action.
2. Set-off must be for an ascertained sum or it must arise out of the same transaction; a counterclaim need not arise out of the same transaction.
3. Set-off is a ground of defence to the plaintiff's action. In other words, the former is a ground of defence, a shield, which if established, would afford an answer to the plaintiff's claim in toto (as a whole) or pro tanto (in proportion); the latter is a weapon of offence, a sword, which enables the defendant to enforce the claim against the plaintiff effectually as an independent action.
4. In the case of a legal set-off, the amount must be recoverable at the date of the suit, while in the case of a counterclaim the amount must be recoverable at the date of the written statement.
When the defendant demands in a plaintiff's suit an amount below or up to the suit claim, it is a set-off stricto sensu, but when it is for a larger amount, the claim for excess amount is really a counterclaim.
