HISTORY
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.
This allowed set-off in two circumstances:
1. Where there are mutual debts between an ordinary plaintiff and ordinary defendant; and
2. Where either the plaintiff or defendant is the executor or administrator of a deceased person with whom the other party has a mutual debt.
2.2 The provision dealing with actions by or against executors or administrators was necessary to cover situations in the administration of deceased estates where mutual debts could not be set off because all the assets of the estate had been applied to other debts of higher priority.1 This was clearly to the disadvantage of the creditors of such deceased estates, in the same way that it was to creditors of insolvent estates before the statute of 17052 remedied matters in respect of insolvency.
2.3 However, s 13 of the 1729 Act was interpreted by the courts as not allowing a debt to be set off against another debt deemed at law to be of a different nature. So, in the period immediately following 1729, it was held that a simple contract debt could not be set off against a specialty debt,3 a debt upon bond,4 or a debt for rent upon a parol lease.5 Section 13 of the 1729 Act was also subject to a sunset clause.6
2.4 These two deficiencies were resolved by the second set of provisions contained in 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.
Section 4 made the provisions relating to set-off in the 1729 Act perpetual and s 5 allowed a debt to be set off against another debt even though it was of a different nature.
Reasons for their introduction
2.5 Before the passing of the Statutes of Set-off the common law did not allow set-off. 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.7
2.6 The precise reasons for the enactment of the Statutes are 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.8 Those who have attempted to ascertain the reasons for the enactment of the statutes have essentially arrived at two reasons which, stated broadly, are:9
- 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
2.7 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:
the injustice of not setting off, (especially after the death of either party) was so glaring that Parliament interposed ...10
This may, however, have been no more than an assumption based on the wording of s 13 of the Act of 1729.
2.8 One particular aspect of the question of injustice to defendants related to 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.11 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.12 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.13
Elimination of unnecessary law suits
2.9 The undesirability of unnecessary law suits has been the reason most often referred to by the courts as the rationale for statutory set-off. 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.14
He again noted, in 1744, that the aim of the Statutes of Set-off was to prevent “multiplicity of actions”.15 This reason has been taken up by the courts throughout the succeeding centuries.16
INTERPRETATION OF THE STATUTES OF SET-OFF
2.10 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;17
- only being available where the debts are liquidated or where money demands could be ascertained “readily and without difficulty” at the time of pleading;18
- not operating to extinguish or reduce a claim until judgment is given;19 and
- only being available where both debts are due and payable when the plaintiff commences his or her action at law.20
NATURE OF THE RIGHT ESTABLISHED BY THE STATUTES OF SET-OFF
2.11 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.21 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.22 Another reason has been seen as the early understanding of set-off as a means of avoiding circuity of court actions.23 The New South Wales Court of Appeal in 1980 came down in favour of a procedural classification.24 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.25 A consequence of the characterisation as procedural is that proceedings in court are required to effect set-off under the Statutes of Set-off.
2.12 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.26 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”.27
2.13 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 the place where the matter is tried.28 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,29 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.30
APPLICATION AND REPEAL IN NEW SOUTH WALES
2.14 The application of the Statutes of Set-off in New South Wales was confirmed by s 24 of the Australian Courts Act 1828 (Imp).31 In the review of the application of Imperial Acts by the New South Wales Law Reform Commission, the provisions of the Statutes of Set-off32 were labelled, in a list of Imperial Acts proposed for repeal, as “now unnecessary”. No further explanation was offered for this decision.33 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,34 operate to preserve set-off or any other principles of law established by the repealed provisions.
2.15 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.35 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 1971.36 In any case Part 15 r 25 has since been omitted from the Supreme Court Rules 1970 (NSW).37 The consequence of this omission is that in New South Wales there is now no statutory set-off available except that provided for by the Bankruptcy Act 1966 (Cth).
FOOTNOTES
1. See the report of Hutchenson v Sturges (Trin 14 & 15 Geo 2 in CB) in C Viner, A General Abridgement of Law and Equity (2nd edition, London, 1791) at 561 (notes to para 30) which states: “Now in the case of an executor, if he sues a common person upon a bond given to the testator, he must recover; whereas if the defendant was to sue him upon a simple contract of the testator, he might possibly not recover, upon account of superior debts.” This is a more detailed version of the judgment of Willes LCJ which is also reported as Hutchinson v Sturges (1741) Willes 261 at 262; 125 ER 1163.
2. 4 & 5 Anne c 17 (1705). See para 1.10 above.
3. Kemys v Betson (Trin 6 Geo 2) in C Viner, A General Abridgement of Law and Equity (2nd edition, London, 1791) Vol 8 at 561 (para 30).
4. Stephens v Loftyn (Mich 6 Geo 2 CB) in C Viner, A General Abridgement of Law and Equity (2nd edition, London, 1791) Vol 8 at 562 (para 31).
5. Brown v Holyoak (7 Geo 2) in C Viner, A General Abridgement of Law and Equity (2nd edition, London, 1791) at 562 (para 32).
6. 2 Geo II c 22 (1729) s 14.
7. 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.
8. M F Bond, Guide to the Records of Parliament (HMSO, London, 1971) at 36.
9. See W H Loyd, “The Development of Set-off” (1916) 64 University of Pennsylvania Law Review 541 at 562.
10. Green v Farmer (1768) 4 Burr 2214 at 2221; 98 ER 154 at 158.
11. See S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 9.
12. A problem which continued into the 19th century: See, for example, C J H Dickens, Little Dorrit (1857); C J H Dickens, David Copperfield (1850); and C J H Dickens, The Posthumous Papers of the Pickwick Club (1837).
13. S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 55. In the month immediately following the assent to the 1729 Act (London Gazette (13 May 1729-17 May 1729) at 1-2) many hundreds of imprisoned debtors gave notice of an intention to apply for relief under the Act: See especially the issues starting with London Gazette (20 May 1729-24 May 1729) at 3-8.
14. Hutchinson v Sturges (1741) Willes 261 at 262; 125 ER 1163 at 1163.
15. Pilgrim v Kinder (1744) 7 Mod 463 at 467; 87 ER 1357 at 1360.
16. 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 (Hutley JA); and Gye v Davies (1995) 37 NSWLR 421 at 425-427.
17. See S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 319.
18. Stooke v Taylor (1880) 5 QBD 569 at 575 (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 & Maxwell, London, 1989) at para 2-68 - 2-130.
19. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 518 (Hutley JA). See also Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237 at 238 (Hutley JA); and Re John Dillon Ltd (In Liq); ex parte Jefferies [1960] WAR 30.
20. See P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 2-131 - 2-185.
21. See especially S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 136; and S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 133.
22. S R Derham, “Recent Issues in Relation to Set-off” (1994) 68 Australian Law Journal 331 at 339; and S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 115.
23. See para 2.9 above. See also S McCracken, The Banker’s Remedy of Set-off (Butterworths, London, 1993) at 117-121.
24. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514.
25. S R Derham, “Recent Issues in Relation to Set-off” (1994) 68 Australian Law Journal 331 at 339.
26. See para 3.12 below.
27. S R Derham, “Recent Issues in Relation to Set-off” (1994) 68 Australian Law Journal 331 at 342.
28. Myer v Dresser (1864) 16 CB (NS) 646 at 665; 143 ER 1280 at 1288 (Willes J); and 16 CB (NS) 646 at 666; 143 ER 1280 at 1288 (Byles J).
29. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 23-2 and 23-3.
30. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 23-9.
31. 9 Geo IV c 83 (Imp). 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 «www.law.mq.edu.au/scnsw».
32. 2 Geo II c 22 (1729) and 8 Geo II c 24 (1735).
33. New South Wales Law Reform Commission, Application of Imperial Acts (Report 4, 1967) at 107 and 108.
34. See para 4.2 on “Westbury savings” clauses.
35. New South Wales Law Reform Commission, Supreme Court Procedure (Report 7, 1969) at 21-22.
36. Cf S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 137.
37. Supreme Court Rules (Amendment No 154) 1984 (NSW).
