APPLICATION AND REPEAL IN NEW SOUTH WALES
3.1 The application of the Statutes of Set-off in New South Wales was confirmed by s 24 of the Australian Courts Act 1828 (Imp).1 In the review of the application of Imperial Acts by the New South Wales Law Reform Commission, the provisions of the Statutes of Set-off2 were labelled, in a list of Imperial Acts proposed for repeal, as “now unnecessary”. No further explanation was offered for this decision.3 The recommendation for their repeal was carried into effect by s 8 of the Imperial Acts Application Act 1969 (NSW). The savings clause in s 9(2)(c) of the Imperial Acts Application Act 1969 (NSW) does not, like other savings clauses,4 operate to preserve set-off or any other principles of law established by the repealed provisions.
3.2 It has been assumed that the Statutes of Set-off were then considered unnecessary because of the availability of Part 15 r 25 of the Supreme Court Rules 1970 (NSW). Part 15 r 25 was recommended by the Law Reform Commission as part of its draft Supreme Court Bill in 1969, but again, no specific mention was made regarding this provision in the explanatory references to the Bill.5 It should also be remembered that the Supreme Court Rules 1970 (NSW) commenced on 1 July 1972, eighteen months after the repeal of the Statutes of Set-off came into effect on 1 January 1971.6 Part 15 r 25 has since been omitted from the Supreme Court Rules 1970 (NSW).7
3.3 Opinion, where the repeal of the Statutes of Set-off in New South Wales is considered at all, is divided. Some have considered the repeal of the Statutes to be part of a natural progression of procedural reforms8 and that there had been no “blunder” in recommending their repeal.9 However, others have noted the repeal of the Statutes with some regret. Justice Young has considered that the repeal was “perhaps unintended”,10 while Meagher, Gummow and Lehane state that the Statutes may have been repealed “one suspects, unwittingly”.11 At first instance in Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd12 counsel for the defendant had contemplated applying for a proclamation to revive the Statutes of Set-off.13
STATUTES OF SET-OFF IN OTHER JURISDICTIONS
3.4 Different approaches to the Statutes of Set-off have been taken in other jurisdictions. Some have followed the New South Wales approach, others have taken no action to repeal the Statute, while others, in terminating the application of the Statutes of Set-off, have preserved the principles established by the Statutes of Set-off. Following are a representative sample of the various approaches to the Statutes of Set-off in other jurisdictions.
England
3.5 The doctrines and principles of law established by the Statutes of Set-off were preserved in England by what is known as a “Westbury savings” clause14 contained in s 4(1)(b) of the Civil Procedure Repeal Act 1879 (Eng) which applied to the then newly founded Supreme Court of Judicature:15
The repeal effected by this Act shall not affect ... Any jurisdiction or principle or rule of law or equity established or confirmed, or right or privilege acquired, or duty or liability imposed or incurred, or compensation secured, by or under any enactment so repealed.
Victoria
3.6 The Statutes of Set-off were repealed in Victoria by s 7 of the Imperial Acts Application Act 1922 (Vic), but the Act contained a savings clause, similar to that in England which has ensured the continued operation of set-off at common law. Their repeal was carried out, according to the explanatory paper to the Bill, with no more consideration than that they had been repealed in England.16
Queensland
3.7 It is now doubtful that a right to set off debts exists at common law in Queensland following the enactment of the Imperial Acts Application Act 1984 (Qld) which terminated the application of the Statutes of Set-off in that State. It would seem that the Queensland Act, in not containing a savings clause, has had a similar effect to the Imperial Acts Application Act 1969 (NSW).17
Australian Capital Territory
3.8 In 1986 the Australian Capital Territory enacted the Imperial Acts Application Ordinance 1986 (ACT) whereby the Statutes of Set-off, in accordance with s 5 of the Ordinance, were deemed to be amended “to the extent necessary” for them to be in force in the terms set out in Parts 15 and 16 of Schedule 3 to the Ordinance. The restated provisions are, in essential respects, the same as those contained in the Statutes of Set-off except that some of the unnecessary verbiage associated with an 18th century piece of legislation has been removed.
New Zealand
3.9 The Imperial Laws Application Act 1988 (NZ) recognises a number of Imperial statutes as part of the law of New Zealand, including the Statutes of Set-off. The preservation of the Statutes of Set-off was included in legislation proposed by the New Zealand Law Commission in its 1987 report on Imperial legislation,18 but without explanation. The preservation of the Statutes of Set-off had previously been proposed in the Imperial Laws Application Bill 1986 (NZ)19 which was not enacted.
Saskatchewan
3.10 In Saskatchewan a defendant’s claim to set-off is governed by rule 104 of the Rules of Court, being in essence a restatement of set-off under the Statutes of Set-off. The Law Reform Commission of Saskatchewan, in its report on the status of English law, considered that the Statutes of Set-off could be “safely ignored in Saskatchewan”.20
DIFFICULTIES ARISING FROM THE REPEAL OF THE STATUTES OF SET-OFF
Matters involving original parties to a transaction
Procedural practicality
3.11 The procedural practicality of set-off as a plea in bar being a defence in whole or in part to a claim has been lost, cross-claim being merely an independent action by the defendant and not a defence to a plaintiff’s claim.21 For example, set-off can be used, where available, by a defendant to avoid entry of a summary judgment in favour of the plaintiff, a result which could not be achieved by the defendant raising a mere counterclaim.
Costs
3.12 The non-availability of set-off as provided for by the Statutes of Set-off has meant that in situations where defendants now only have counterclaim available to them, each party will be liable to costs depending on the outcome of their individual claims. So that, where a plaintiff is successful, that plaintiff is entitled to costs in his or her claim and if the defendant is successful in his or her counterclaim, the defendant is entitled to costs in the counterclaim. That is, where the defendant is successful, in effect, in defeating the plaintiff’s claim by counterclaim, he or she is only entitled to additional costs incurred by reason of the cross-claim. However, when set-off is successfully pleaded as a defence, normally the defendant will be awarded costs.22
Matters involving third parties to an original transaction
Joinder of principal debtors by guarantors
3.13 In situations not involving insolvency set-off,23 where a creditor took action against a guarantor under a contract of guarantee and the Statutes of Set-Off allowed for set-off between the creditor and principal debtor, it appears to have been the case that the guarantor could rely on the availability of set-off to reduce his or her liability to the creditor without the need to join the principal debtor to the proceedings.24 The availability of set-off to the guarantor extended only to instances where the debts existing between the parties were liquidated. Set-off was, therefore, not available for a guarantor to exercise against the creditor where the debts between the creditor and principal debtor were unliquidated.25
3.14 With the repeal of the Statutes of Set-Off in New South Wales, the availability, albeit limited, of so simple a remedy to a guarantor has been removed. Justice Handley has suggested that the need now to join the principal debtor to proceedings between a creditor and guarantor is one of the unfortunate side effects of the repeal of the Statutes of Set-Off.26 This is particularly so where the guarantor is resisting an application for summary judgment by the creditor.27
3.15 Chief Justice Stawell in 1867 considered it desirable to allow a guarantor to rely on a right to set-off between a creditor and principal debtor:
If there is a sum which may be set-off in reduction, it must be set-off; for if the setting-off were to depend on the option of either the creditor or the principal debtor, the surety might be compelled to pay the creditor more of the original debt, than the creditor himself could have recovered from the principal debtor.28
3.16 Derham has suggested that the preferred approach is for the guarantor to be able to defend him or herself “on the basis of any defence of set-off available to the debtor”.29 Others, however, have argued that the availability of the right of a guarantor to plead a set-off existing between the creditor and principal debtor is not desirable on a number of grounds. Some have suggested that it is unreasonable, as a matter of policy:
for the guarantor to be able to reduce her or his clear liability on the guarantee by reason of a debt owed by the creditor to the debtor which might be quite unrelated to the principal transaction. Without an assignment of such a claim by the principal debtor to the guarantor, it is difficult to find any justification for allowing the guarantor to invoke the claim against the creditor by way of defence.30
3.17 It has also been argued that there is some difficulty in finding the necessary mutuality, for the purposes of the Statutes of Set-off, between the creditor and guarantor when the mutual debts are in fact between the creditor and principal debtor.31
3.18 The above discussion should, however, be considered in light of the policy of the law to protect guarantors by ensuring that, subject to the right of the creditor to be paid, the burden of relief should fall on those primarily liable, namely the principal debtors.32
Limitation of actions
3.19 Originally, there was a distinction between set-off and counterclaim for the purposes of limitation of actions so that, in the case of counterclaim, the period of limitation was calculated back from the date of the counterclaim and not from the date of the commencement of the principal action, as would be the case with the defence of set-off.33 This situation was altered by the passing of s 74 of the Limitation Act 1969 (NSW) which has made it so that, for the purposes of limitation of actions, defendants claiming by way of either set-off or counterclaim, are taken to have made the claim on the date on which they became parties to the principal action, usually at its commencement. However, Justice Handley has suggested this has left guarantors in a worse position since the repeal of the Statutes of Set-off, because they can no longer plead a set-off which is available to the principal debtor as a set-off.
Set-off against an assignee
3.20 It is a general rule that an assignee of a chose in action takes subject to all the equities, including such rights of set-off and other defences which may have been available against the assignor. A debtor can, therefore, plead set-off against an assignee of a debt up until such time as the debtor receives notice of the assignment.34 The mutuality necessary for set-off under the Statutes of Set-off is not, in such circumstances, destroyed.35 Counterclaim, on the other hand, is not available to a debtor against an assignee of a creditor’s claim because while a debtor usually has a cross claim against the creditor he or she generally does not have one against the assignee. Set-off under the Statutes of Set-off may, therefore, be the only remedy available to debtors in such a situation,36 although equitable set-off and other analogous rights may be available in some cases.37 Wood considers this to be the most important reason for the existence of set-off:
In practice, the non-availability of counterclaims against an intervener is by far the most important distinguishing characteristic between set-off and counterclaim: otherwise there is often little difference in the actual result if both claims are for the payment of money.
3.21 In Canada, however, it has been held that any assignment destroys the necessary mutuality so that the assignment of a debt prevents a debtor from raising set-off against an assignee.38
FOOTNOTES
1. 9 Geo IV c 83. Early New South Wales cases in which set-off under the Statutes of Set-off was referred to include: R v Mackaness (NSW Supreme Court, Full Court, January 1829: Dowling J, Select Cases: Volume 2 (NSW AO 2/3462) 123) at 127; and Belcher v Dences (NSW Supreme Court, Full Court, 29 December 1829: Dowling J, Select Cases: Volume 2 (NSW AO 2/3462) 264 at 266. The early decisions of the Supreme Court of New South Wales are being made available on the internet by Associate Professor Bruce Kercher of Macquarie University at http://www.austlii.edu.au/au/special/1824/.
2. 2 Geo II c 22 (1729) and 8 Geo II c 24 (1735).
3. New South Wales Law Reform Commission, Application of Imperial Acts (Report 4, 1967) at 107 and 108.
4. See para 3.5 on “Westbury savings” clauses.
5. New South Wales Law Reform Commission, Supreme Court Procedure (Report 7, 1969) at 21-22.
6. Cf S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 137.
7. Supreme Court Rules (Amendment No 154) 1984 (NSW).
8. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980]2 NSWLR 514 at 522-524 per Glass JA.
9. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980]2 NSWLR 514 at 520 per Hutley JA.
10. Wentworth v Wentworth (NSW, Supreme Court, ED 3748/89, Young J, 12 December 1994, unreported).
11. R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992 at para 3704.
12. [1979] 1 NSWLR 692.
13. Under s 11 of the Imperial Acts Application Act 1969 (NSW). The option was not pursued because the re-introduction of the Statutes may have only had a future effect.
14. “Westbury Savings” clauses are so named after Lord Westbury, the sponsor of the first Act to contain such a proviso: Statute Law Revision Act 1863 (Eng) s 1. On Westbury Savings clauses generally see New South Wales Law Reform Commission, Application of Imperial Acts (Report 4, 1967) at 33-34; and P M McDermott, “Statute Law Revision Statutes-Westbury Savings” [1988] Statute Law Review 139.
15. See also Statute Law Revision and Civil Procedure Act 1883 (Eng) s 4 which applied to courts other than the Supreme Court of Judicature.
16. Victoria, The Imperial Acts Application Act 1922 passed in the thirteenth year of the reign of his Majesty King George the Fifth being the second session of the twenty-seventh Parliament of the State of Victoria together with an explanatory paper on the bill, the report from the joint select committee of the Legislative Council and the Legislative Assembly, and a general index of subject-matters in the Act and the explanatory paper (Government Printer, Melbourne, 1923) at 88.
17. Walker v Department of Social Security (1995) 56 FCR 354 at 374-375 per Cooper J; See also Cockerill v Westpac Banking Corporation (Australia, Federal Court, NG29/1991, 20 December 1996, Cooper J, unreported) at 93; and S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 136-137. The Statutes of Set-off had been held to apply in Queensland before the passage of the Imperial Acts Application Act 1984 (Qld): Phillips v Mineral Resources Developments Pty Ltd [1983] 2 QdR 138 (FC) at 147 and 148.
18. New Zealand, Law Commission, Imperial Legislation in Force in New Zealand (Report 1, 1987).
19. New Zealand, Law Commission, Imperial Legislation in Force in New Zealand (Report 1, 1987) at 138-161.
20. Law Reform Commission of Saskatchewan, The Status of English Statute Law in Saskatchewan (1990) at 221-223.
21. See Hutley JA in Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 519.
22. The effect of set-off on costs was noted by Morris LJ in Hanak v Green [1958] 2 QB 9 at 16. See also P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 6-42.
23. The availability of insolvency set-off would mean that the guaranteed debt is extinguished to the extent of the set-off which occurs automatically on the date of liquidation: S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 641. See also Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14 at 19.
24. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 551 suggest that Bechervaise v Lewis (1872) LR 7 CP 372 especially at 377 and Murphy v Glass (1869) LR 2 PC 408 provide some support for this proposition. But see S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 649-652.
25. Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561. The position in England may be different: see National Westminster Bank plc v Skelton [1993] 1 All ER 242 at 250-251.
26. K R Handley, Letter to the Chairman of the NSW Law Reform Commission (28 February 1994) at 5 (attachment). Justice Handley has also suggested that, although no authority exists on this point, where there has been a voluntary release of a liquidated claim by the principal debtor, a guarantor could, before the repeal of the Statutes of Set-off, have relied upon set-off of that claim.
27. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 549.
28. Murphy v Glass (1867) 4 WW & a’B (L) 199 at 203. The case was affirmed on appeal to the Privy Council which considered the set-off point immaterial: Murphy v Glass (1869) LR 2 PC 408 at 418.
29. S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 642.
30. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 552.
31. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 552.
32. See S Rowlatt, Rowlatt on the Law of Principal and Surety (4th edition, Sweet & Maxwell, London, 1982) at 131; J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 533-534.
33. See McDonnell & East Ltd v McGregor (1936) 56 CLR 50 at 57 per Dixon J (McTiernan J agreeing).
34. Roxburge v Cox (1881) 17 ChD 520 at 526 per James LJ; Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367 at 375 per Joyce J. See also R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992) at [699]. For a discussion of a number of English cases involving set-off by a debtor after an assignment of a debt see Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578 at 583-585.
35. The requirements to maintain set-off are summarised by P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 16-38.
36. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at paras 6-35 and 14-83.
37. S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 573.
38. Holt v Telford (1987) 41 DLR (4th) 385 at 394. See also P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 14-29.
