THE STATUTES OF SET-OFF
2.1 The provisions conventionally referred to as the Statutes of Set-off are contained in two statutes from the reign of George II. The first is s 13 of 2 Geo II c 22 (1729) which states:
And be it further enacted by the Authority aforesaid, That where there are mutual Debts between the Plaintiff and Defendant, or if either Party sue or be sued as Executor or Administrator, where there are mutual Debts between the Testator or Intestate and either Party, one Debt may be set against the other, and such Matter may be given in Evidence upon the General Issue, or pleading in Bar, as the Nature of the Case shall require, so as at the Time of his pleading the General Issue, where any such Debt of the Plaintiff, his Testator or Intestate, is intended to be insisted on in Evidence, Notice shall be given of the particular Sum or Debt so intended to be insisted on, and upon what Account it became due, or otherwise such Matter shall not be allowed in Evidence upon such General Issue.
2.2 This Act was, however, subject to a sunset clause contained in s 14. The section was amended and made perpetual by s 4 and 5 of 8 Geo II c 24 (1735) which state:
4. And whereas Provision for setting mutual Debts one against the other, is highly just and ‘reasonable at all Times;’ Be it therefore further enacted by the Authority aforesaid, That the said Clause in the said first recited Act, for setting mutual Debts one against the other, shall be and remain in full Force forever.
5. And be it further enacted and declared by the Authority aforesaid, That by virtue of the said Clause in the said first recited Act contained, and hereby made perpetual, mutual Debts may be set against each other, either by being pleaded in Bar, or given in Evidence on the General Issue, in the Manner therein mentioned, notwithstanding that such Debts are deemed in Law to be of a different Nature; unless in Cases where either of the said Debts shall accrue by reason of a Penalty contained in any Bond or Specialty; and in all Cases where either the Debt for which the Action hath been or shall be brought, or the Debt intended to be set against the same hath accrued, or shall accrue, by reason of any such Penalty, the Debt intended to be set off, shall be pleaded in Bar, in which Plea shall be shewn how much is truly and justly due on either Side; and in case the Plaintiff shall recover in any such Action or Suit, Judgment shall be entred for no more than shall appear to be truly and justly due to the Plaintiff, after one Debt being set against the other as aforesaid.
Reasons for their introduction
2.3 The traditional position at common law before the passing of the Statutes of Set-off was that set-off was not possible. This was noted by Lord Mansfield in 1759:
At common law, before these Acts, if the plaintiff was as much or even more indebted to the defendant than the defendant was indebted to him, yet the defendant had no method to strike a balance: he could only go into a Court of Equity, for doing what is most clearly just and right to be done.1
2.4 The precise reasons for the enactment of the Statutes is somewhat obscure, owing not least to the fact that publication of the debates of Parliament was, for most of the eighteenth century, considered to be a breach of privilege.2 The many attempts at determining the reasons for the enactment of the statutes can be said essentially to have arrived at two reasons which, stated broadly, are:3
- the idea that an injustice is done to the defendant in refusing the right to set-off; and
- the idea that unnecessary law suits are undesirable.
Injustice to defendants
2.5 Lord Mansfield, in 1768, observed that the refusal of the common law to allow set-off of mutual debts was shocking to the “natural sense of mankind”, and noted in particular in respect of pre-insolvency set-off:
This may, however, have been no more than an assumption based on the wording of s 13 of the Act of 1729.
2.6 A subcategory of the question of injustice to defendants arises as a result of the old practice of imprisoning debtors. The Act of 1729, which first introduced pre-insolvency set-off, was entitled:
An Act for the Relief of Debtors with respect to the Imprisonment of their Persons.
This aspect has come to be emphasised by more recent commentators.5 McCracken, in her work on set-off, has also pointed to the fact that the first statute was enacted following reports to Parliament on the conditions in various (privately-run) debtors’ prisons. Particular attention was paid to the means of preventing gaolers from extorting their prisoners. McCracken acknowledges that none of the reports on imprisonment of debtors referred to set-off, but considers that the practical effect of the section on set-off was to keep a debtor out of gaol when it could be shown that a substantial amount was also owed the debtor by the creditor.6
Elimination of unnecessary law suits
2.7 The undesirability of unnecessary law suits has been the reason most often favoured by the courts. The earliest pronouncement was in 1741, just six years after the passing of the second statute, when Chief Justice Willes held:
The true reason is that this was only substituted in the room of an action, to prevent circuity or a bill in equity.7
He again noted, in 1744, that the aim of the Statutes of Set-off was to prevent “multiplicity of actions”.8 This reason has been taken up by the courts throughout the succeeding centuries.9
INTERPRETATION OF THE STATUTES OF SET-OFF
2.8 Set-off under the Statutes of Set-off has been interpreted as:
- requiring that there be mutuality between the parties, that is, that the demands must be between the same parties and that the debts not be due to the parties in different rights;10
- only being available where the debts are liquidated or where money demands could be ascertained “readily and without difficulty” at the time of pleading;11
- cannot operate to extinguish or reduce a claim until judgment is given;12 and
- only being available where both debts are due and payable when the plaintiff commences his or her action at law.13
NATURE OF THE RIGHT ESTABLISHED BY THE STATUTES OF SET-OFF
2.9 Traditionally set-off under the Statutes of Set-off has been characterised as procedural, whereas equitable set-off has been regarded as substantive. A classification as either substantive or procedural has, however, not been easy to make and some commentators have tended towards the view that set-off under the Statutes of Set-off is not purely procedural.14 The main reason for the characterisation as procedural has been that set-off under the Statutes of Set-off takes effect as at the date of judgment and separate and distinct debts remain until that time.15 Another reason has been seen as the early understanding of set-off as a means of avoiding circuity of court actions.16 The New South Wales Court of Appeal in 1980 came down in favour of a procedural classification.17 However, notwithstanding its characterisation as procedural, set-off under the Statutes of Set-off remains a defence, unlike counterclaim which is merely a procedural mechanism allowing separate actions to be tried together.18 A consequence of the characterisation as procedural is that legal proceedings are required to effect set-off under the Statutes of Set-off.
2.10 Set-off under the Statutes of Set-off does, however, have some substantive effect as a defence, for example, where an assignee of a debt takes subject to any defence available to the debtor.19 Derham has, therefore, noted that “any increase in the ambit of the defence of set-off will interfere with substantive rights, in the sense that it will have a substantive effect upon the rights of third parties such as assignees of debts, undisclosed principals and subrogated insurers.20
2.11 Another consequence of the characterisation as procedural can be felt in the area of conflict of laws. Set-off under the Statutes of Set-off has been said to be procedural for the purposes of conflicts of laws. Its operation is therefore governed by the lex fori that is, according to the law of the court in which the matter is tried.21 Wood has, however, noted that this characterisation was arrived at in the period before the “flowering of English private international law” and would prefer to characterise set-off under the Statutes of Set-off as substantive,22 noting, amongst other things, that there is little sense in applying the lex fori in a situation where both claims, for example, are governed by a foreign system of law.23
ISSUES ARISING UNDER THE STATUTES OF SET-OFF
Actions by and against the Crown
2.12 Under the former Statutes of Set-off, the Crown could plead set-off against the claim of a subject24 but a subject could not plead set-off against the Crown.25 However, the Crown Proceedings Act 1988 (NSW) now includes “set-off” in its definition of “civil proceedings” so that s 5(2) of the Act extends to allow set-off to be claimed against the Crown. This followed a recommendation by the New South Wales Law Reform Commission in 1975.26
Narrow coverage
2.13 The proliferation and separate development of the many different types of set-off has not prevented situations arising where a form of set-off is not available but where justice might expect it to be. This situation, particularly with regard to the availability of equitable set-off and set-off under the Statutes of Set-off, has recently been considered absurd by some Judges of the English Court of Appeal.27 Lord Justice Leggatt observed:
I would add ... the comment that the state of the law is unsatisfactory that allows a set-off at law of debts which are liquidated, even if unconnected, and in equity of debts which are connected, even if unliquidated, but not a set-off of debts which are both unliquidated and unconnected.28
This view has, however, been criticised by at least one commentator who suggests that the law is not wrong to refuse set-off where debts are both unliquidated and unconnected because there is no merit in making such a right available and in particular such a change in the law would:
- create delay, especially with respect to summary judgments;
- encourage the raising of spurious defences; and
- couple together unrelated claims.29
2.14 However, Lord Justice Staughton’s more limited criticism of the current arrangements concerning set-off has been better received. In his judgment, he stated that the historical development of set-off:
has led to results which appear to lack logic and sense. Legal set-off is available if both claims are for liquidated sums. Thus if a plaintiff has a claim for unliquidated damages, the defendant cannot at law seek to set-off a liquidated claim. I can see no sense in that today. This rule was mitigated by the Court of Chancery through the doctrine of equitable set-off which is available in broad terms if there is a sufficient degree of connection between the two transactions, whether or not either or both claims are unliquidated. But, as Leggatt LJ has pointed out, it is questionable whether the remedy is wholly effective as a cure for the disease.30
Requirement that both claims be due and payable
2.15 Where a debtor’s liquidated cross-claim becomes due and payable only after the commencement of the creditor’s proceedings, the cross claim cannot be set-off against the original claim. Wood has suggested that this situation is difficult to reconcile with current practice where, for example, rules of court can provide that a cross claim may be pleaded in respect of a cause of action that has arisen after the commencement of proceedings:
A party may plead any matter notwithstanding that the matter has arisen after the commencement of the proceedings.31
2.16 The problem can be seen by considering a situation where there has been an assignment of a creditor’s claim and the assignee then seeks enforcement of the claim. The debtor may have a cross claim against the original creditor, but to qualify for set-off the debtor’s cross claim must have become due and payable before the commencement of the assignee’s action. Set-off can, therefore, be precluded simply by the assignee taking action before the debtor’s cross claim becomes due and payable.32
Requirement that claims be liquidated
2.17 Set-off under the Statutes of Set-off differs from equitable and insolvency set-off in not allowing unliquidated claims to be pursued. It has been questioned whether this requirement that claims be liquidated or readily ascertainable is justified. The requirement is seen as arising from an unwillingness on the part of the courts to deal with two different claims in the one action so as to avoid delay. This is particularly so where a creditor’s claim is clear and undisputed.
2.18 One result is that, where a claim is unliquidated, the defendant will need to raise a counterclaim and, if the claim is unrelated, he or she may be forced to institute separate proceedings. This means that a defendant may be subject to the whole of the judgment in the first proceedings before the defendant’s own claim against the plaintiff has been adjudicated.
FOOTNOTES
1. Collins v Collins (1759) 2 Burr 820 at 826; 97 ER 579 at 582-583. See also Sir William Darcy’s Case (1677) 2 Freeman 28; 22 ER 1037.
2. M F Bond, Guide to the Records of Parliament (HMSO, London, 1971) at 36.
3. See W H Loyd, “The Development of Set-off” (1916) 64 University of Pennsylvania Law Review 541 at 562.
4. Green v Farmer (1768) 4 Burr 2214 at 2221; 98 ER 154 at 158.
5. See S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 9.
6. S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 55.
7. Hutchinson v Sturges (1741) Willes 261 at 262; 125 ER 1163 at 1163.
8. Pilgrim v Kinder (1744) 7 Mod 463 at 467; 87 ER 1357 at 1360.
9. See, for eg, Forster v Wilson (1843) 12 M&W 191 at 203-204; 152 ER 1165 at 1171; Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1981) 34 ALR 595 at 637; Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 518 per Hutley JA; and Gye v Davies (1995) 37 NSWLR 421 at 425-427.
10. See S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 319.
11. Stooke v Taylor (1880) 5 QBD 569 at 575 per Cockburn CJ. See also Hanak v Green [1958] 2 QB 9 at 17 and 23; and P R Wood, English and International Set-off (Sweet and Maxwell, London, 1989) at paras 2.68 - 2-130.
12. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR at 518 per Hutley JA. See also Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 at 238 per Hutley JA; and Re John Dillon Ltd (In Liq); ex parte Jefferies [1960] WAR 30.
13. See P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at paras 2-131 - 2-185.
14. See especially S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 136; S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 133.
15. S R Derham, “Recent Issues in Relation to Set-off” (1994) 68 Australian Law Journal 331 at 339; S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 115.
16. See para 2.7. See also S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 117-121.
17. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514. See above at para 1.17.
18. S R Derham, “Recent Issues in Relation to Set-off” Australian Law Journal 331 at 339.
19. See para 3.20 below.
20. S R Derham, “Recent Issues in Relation to Set-off” Australian Law Journal 331 at 342.
21. Myer v Dresser (1864) 16 CB (NS) 646 at 665; 143 ER 1280 at 1288 per Willes J; and 16 CB (NS) 646 at 666; 143 ER 1280 at 1288 per Byles J.
22. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at paras 23-2 and 23-3.
23. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 23-9.
24. De Lancey v R (1871) LR 6 Ex 286.
25. Attorney-General v Guy Motors Ltd [1928] 2 KB 78.
26. New South Wales Law Reform Commission, Proceedings by and against the Crown (Report 24, 1975) paras 5.2 and 5.4. See also New South Wales, Parliamentary Debates (Hansard) Legislative Assembly, 18 October 1988 at 2418, second reading speech, Hon J R A Dowd, Attorney General. But see R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992) at para 3705 who were apparently not aware of this fact.
27. Axel Johnson Petroleum AB v M G Mineral Group AG [1992] 1 WLR 270.
28. Axel Johnson Petroleum AB v M G Mineral Group AG [1992] 1 WLR 270 at 274 per Leggatt LJ.
29. N H Andrews, “The Proper Limits of Set-off” (1992) 51 Cambridge Law Journal 239 at 240.
30. Axel Johnson Petroleum AB v M G Mineral Group AG [1992] 1 WLR 270 at 275-276 per Staughton LJ.
31. Supreme Court Rules 1970 (NSW) Part 5 r 16.
32. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at paras 6-30 - 6-31. For the position where equitable set-off is available see Roadshow Entertainment Pty Ltd v (CAN 053 006 269) Pty Ltd (New South Wales, Court of Appeal, CA 40550/95, 10 October 1997, unreported) at 36-38.
