OPTIONS CONSIDERED IN DP 40
4.1 In recommending the reintroduction of set-off under the Statutes of Set-off in New South Wales, the Commission has considered the options which were outlined in DP 40:
- insert a savings provision in the Imperial Acts Application Act 1969 (NSW);
- revive the Statutes of Set-off by proclamation;
- re-insert a provision in the rules of court;
- introduce a new limited statutory form of set-off; and
- restate the law established by the Statutes of Set-off.
Insert a savings provision in the Imperial Acts Application Act 1969
4.2 This option would involve framing a “Westbury Savings”1 clause which preserves the doctrines and principles of law established by the Statutes of Set-off and would involve a near complete revival of the type of set-off established by the former statutes, without the need for re-enactment. “Westbury Savings” clauses have been applied in England to preserve the effect of the Statutes of Set-off.2 For example, s 4(1)(b) of the Civil Procedure Repeal Act 1879 (Eng) provided:
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or privilege acquired, or duty or liability imposed or incurred, or compensation secured, by or under any enactment so repealed.
A similar provision has been enacted in Victoria3 and proposed by the Western Australian Law Reform Commission.4
4.3 In its 1967 report on the application of Imperial Acts, the New South Wales Law Reform Commission noted the wide-reaching effects of such a clause and recommended against the general enactment of one as part of the Imperial Acts Application Act 1969 (NSW) on a number of grounds, including that:
4.4 One suggestion put to the Commission was that a limited savings clause, confined to the law established by the Statutes of Set-off, could be drafted as follows:
The repeal of the Imperial Act 2 Geo II c 22 s 13 and 8 Geo II c 24 ss 4, 5. (The Statutes of Set-off 1729 and 1735) shall not affect and be deemed never to have affected any jurisdiction or principle or rule of law or equity established or confirmed.6
4.5 One submission rejected this proposal as undesirable, arguing that it would potentially change “the basis upon which people have been dealing with each other over the last 30 years” and “would throw considerable doubt upon existing financial and commercial arrangements”.7
4.6 The Commission considers that reintroducing the law relating to statutory set-off by means of a savings clause is not satisfactory, not least because Westbury Savings clauses were specifically rejected by the Commission in its 1967 report. Such clauses are, therefore, not so familiar to New South Wales practitioners in relation to Imperial Acts as they would be in, say, Victoria where a Westbury Savings clause was used to preserve the effects of certain Imperial enactments.
Revive the Statutes of Set-off by proclamation
4.7 Section 11 of the Imperial Acts Application Act 1969 (NSW) provides that the Governor may, by proclamation, declare that the whole or any part of a repealed Imperial enactment shall be revived.8 The proclamation is, however, subject, under certain conditions, to disallowance by resolution of either House of the New South Wales Parliament.9 Any provision revived in this way will have such effect as it had in New South Wales immediately before the commencement of the Imperial Acts Application Act 1969 (NSW).10 Counsel for the defendant at first instance in Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd had contemplated seeking an adjournment to make application for such a proclamation. This course was ultimately not taken because the proclamation would only have had prospective application and could not have assisted the client.11
4.8 The Commission in 1967 recommended the inclusion of a provision allowing revival by proclamation in place of a comprehensive Westbury Savings clause:
If, despite the attention which we have given to the problems, the repeals turn out to have gone too far, the position can be restored by proclamation under clause 11. This is better than reliance on the necessarily vague words of a saving clause.12
4.9 The Commission in DP 40 noted that if mere revival of the Statutes of Set-off was all that was required, then the procedure under s 11 of the Imperial Acts Application Act 1969 (NSW) had much to commend it, since it would not require legislative action to effect the change. However, one submission to the Commission expressed an in principle objection to law-making by proclamation or regulation, taking the view that such enactments would make it more difficult to ascertain the law.13
Re-insert a provision in the rules of court
4.10 The use of the former Pt 15 r 25 of the Supreme Court Rules 1970 (NSW) to establish a defence of set-off is supported by a decision of the New South Wales Court of Appeal, which saw this provision as a partial restoration of a statutory-based form of set-off.14 There are a number of reasons why the re-insertion of such a provision is undesirable.15
4.11 First, if the current interpretation is maintained, the defence may have too broad an effect. Derham has noted that the effect of the Court of Appeal’s position would be that:
any monetary cross-demand which was due and payable, whether it was liquidated or unliquidated and whether or not it was connected with the plaintiff’s claim, could be the subject of a set-off in an action at law. It was not necessary to show mutual debts, or, if one of the demands was unliquidated, that the cross-demands were sufficiently closely connected so as to give rise to an equitable set-off.16
This expansion of the defence could affect the rights of third parties, such as assignees of debts, undisclosed principals, subrogated insurers, and factors and other receivables financiers.17
4.12 The expansion of the defence of set-off established by the Supreme Court Rules could also have undesirable procedural effects. Delays may be caused in obtaining summary judgments if the defence is extended to unliquidated and unconnected cross-demands.18 Other outcomes might include: creating delay in more general terms; adding to the costs of litigation; encouraging the use of spurious defences; and the bringing together of unrelated claims.19
4.13 Finally, the Court of Appeal’s interpretation of the Supreme Court Rules is contrary to those in other jurisdictions with respect to the ability of rules of court to set up a defence.20 Use of the rules of court would not be a sound basis on which to rest the re-introduction of statutory set-off.21
New limited statutory form of set-off
4.14 A new limited statutory form of set-off has been proposed by McCracken, essentially to give statutory recognition to contractual rights analogous to set-off. The proposed statutory provision would be in addition to existing rights to set-off and would imply the statutory right into particular specified contracts in absence of an agreement to the contrary.22 This would be similar to, and probably a broader expression of, netting transactions which are already the subject of Commonwealth legislation.23
4.15 Is there a demonstrated need for this? The Netting Sub-committee of the Companies and Securities Advisory Committee, while observing that there was no basis for doubting the effectiveness of netting arrangements, stated that it was “very desirable that the legal position be clarified beyond doubt”:
This is because of the high value of many of the transactions which are subject to netting arrangements, and the potentially disastrous consequences of adverse rulings by the courts.24
Such arguments may not, however, apply to many areas in which New South Wales is competent to legislate, given that insolvency, banking, corporate law and insurance lie in the realm of the Commonwealth’s legislative power. However, a new statutory form of set-off could be useful in the areas of personal finance and non-bank financial institutions. The Netting Sub-committee favoured limiting their proposed legislation to financial contracts or transactions because the effect of a more broadly expressed law was uncertain.25
4.16 The Australian Law Reform Commission gave some brief consideration to set-off in part of its Report on legal risk in international transactions.26 In a section dealing with netting and set-off as part of finance law reform,27 although dealing largely with issues relating to companies and securities law and remedies in cross border banking, the Commission expressed its agreement with a submission that suggested a review of the law of set-off in Australia with a view to creating a “new limited statutory right to set off pre-insolvency.”28 It was noted that:
This would make the law on set off simpler and more certain and would extend the benefits of set off to firms which had not considered including it in their contracts.29
The Commission has decided not to proceed down this path.
Restatement
4.17 The Commission’s preferred option in DP 40 was that there be a restatement of the law established by the Statutes of Set-off in plain English. The reasons given for this preference were that the Statutes themselves (enacted in 1729 and 1735) are relatively obscure and their restatement would ensure easy access to the law by practitioners.
4.18 It was suggested that the restatement could cover at least the following points:30
- 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;31
- that set-off be available only where the debts are liquidated or where money demands could be ascertained “readily and without difficulty” at the time of pleading;32
- that it cannot operate to extinguish or reduce a claim until judgment is given;33 and
- that it can only be available where both debts are due and payable when the plaintiff commences his or her action at law.34
4.19 The restatement proposal was supported by two submissions.35 Others, however, expressed some caution.36
Some cautions
4.20 Availability where both debts are due and payable. Traditionally, set-off under the Statutes of Set-off has been held to be available where both debts are due and payable when the plaintiff commences his or her action at law.37 It was suggested in DP 40 that this characteristic could be included in the restatement.38 However, there is now some doubt about the traditional position. This is discussed more fully in the next chapter.39
4.21 Definition of mutuality. The Statutes of Set-off require that there be mutuality between the parties for set-off to be available. This has been interpreted as requiring that the demands must be between the same parties and that the debts not be due to the parties in different rights.40 It has been put to the Commission that any attempt to render the concept of mutuality in plain English should be resisted:
The meaning of mutuality in various situations has attracted a vast amount of case law, and we suspect that an attempt to provide an all-encompassing definition of it would lead to uncertainty, and ultimately litigation.41
4.22 The magnitude of the task of rendering the Statutes of Set-off into plain English may well have been the reason for the only slightly altered restatement (involving the removal of some minor pieces of 18th century verbiage) contained in the Australian Capital Territory’s Imperial Acts Application Ordinance 1986 (ACT).42
THE COMMISSION’S CONCLUSION
4.23 The Commission remains of the view that a restatement of the law established by the Statutes of Set-off is to be preferred. We consider that it would be undesirable to multiply the provisions to which practitioners must refer to determine the current law with respect to statutory set-off – which would be the case with both a “Westbury Savings” clause and a proclamation under the Imperial Acts Application Act 1969 (NSW). Ease of access by practitioners was, presumably, one of the reasons for a tentative proposal by the Australian Capital Territory’s Attorney General’s Department that the Statutes of Set-off be repealed and “the substantive provisions incorporated into ACT debt law”.43
4.24 We are also of the view that the task of restating the law relating to statutory set-off will not be so difficult as suggested by some. The case law attaching to mutuality should be preserved by the retention of the phrase “mutual debts” in the restated provision. A bill to implement the restatement, incorporating the amendments discussed in the next chapter, is reproduced at Appendix A to this Report.
FOOTNOTES
1. “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.
2. Civil Procedure Repeal Act 1879 (Eng) s 4(1)(b) and Statute Law Revision and Civil Procedure Act 1883 (Eng) s 4.
3. Imperial Acts Application Act 1922 (Vic) s 7. See also Imperial Acts Application Act 1980 (Vic) s 5. But see discussion of the effect of r 13.14 of the Supreme Court Rules 1986 (Vic) (now the Supreme Court (General Civil Procedure) Rules 1996 (Vic)) by S R Derham, “Set-off in Victoria” (1999) 73 Australian Law Journal 754 at 756-759.
4. Law Reform Commission of Western Australia, Report on United Kingdom Statutes in Force in Western Australia (Project 75, 1994) at 63. The Western Australian proposals have not yet been implemented although they were being actively considered by the Western Australian government: Law Reform Commission of Western Australia, Annual Report, 1 July 1996 - 30 June 1997 at 19.
5. New South Wales Law Reform Commission, Application of Imperial Acts (Report 4, 1967) at 34.
6. Attachment (by K R Handley) to J W Shaw, Letter to the Chairman of the New South Wales Law Reform Commission (26 September 1997).
7. M Wormell, Submission at 3.
8. Imperial Acts listed in Schedule 1 to the Act are excluded from the operation of s 11.
9. See Imperial Acts Application Act 1969 (NSW) s 11(4) and (5).
10. Imperial Acts Application Act 1969 (NSW) s 11(2).
11. Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd [1979] 1 NSWLR 692 at 700.
12. New South Wales Law Reform Commission, Application of Imperial Acts (Report 4, 1967) at 34.
13. W V Windeyer, Submission at 1.
14. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514. This is contrary to the interpretation of the English equivalent of this provision (Rules of the Supreme Court 1965 (Eng) O 18 r 17): Hanak v Green [1958] 2 QB 9 at 26 (Morris LJ) which dealt with the earlier O 19 r 3 of the Rules of the Supreme Court 1883 (Eng). See also West Street Properties Pty Ltd v Jamison [1974] 2 NSWLR 435 at 438.
15. See also S R Derham, “Set-off in Victoria” (1999) 73 Australian Law Journal 754 at 756-759.
16. S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 133.
17. S R Derham, “Recent Issues in Relation to Set-off” (1994) 68 Australian Law Journal 331 at 342; and S R Derham and Victorian Bar Council, Submission at 2.
18. S R Derham and Victorian Bar Council, Submission at 2; and N H Andrews, “The Proper Limits of Set-off” (1992) 51 Cambridge Law Journal 239 at 240.
19. N H Andrews, “The Proper Limits of Set-off” (1992) 51 Cambridge Law Journal 239 at 240; and Law Society of NSW, Submission 1 at 2.
20. Hanak v Green [1958] 2 QB 9 at 26. See also West Street Properties Pty Ltd v Jamison [1974] 2 NSWLR 435 at 437-438.
21. The Law Society also particularly opposed this approach: Law Society of NSW, Submission 1 at 2.
22. The ability to contract out of set-off is dealt with at para 5.15 below.
23. See above at para 1.8-1.9.
24. Australia, Netting Sub-committee of the Companies and Securities Advisory Committee, Netting in Financial Markets Transactions (Final Report, 1997) at para 3.1. See also Australia, Corporate Law Economic Reform Program, Electronic Commerce: Cutting Cybertape – Building Business (Proposals for Reform: Paper No 5, 1997) at 37-40.
25. Australia, Netting Sub-committee of the Companies and Securities Advisory Committee, Netting in Financial Markets Transactions (Background Paper, 1996) at 24.
26. Australian Law Reform Commission, Legal Risk in International Transactions (Report 80, 1996).
27. Australian Law Reform Commission, Legal Risk in International Transactions (Report 80, 1996) at para 5.40-5.45.
28. Australian Law Reform Commission, Legal Risk in International Transactions (Report 80, 1996) at para 5.45.
29. Australian Law Reform Commission, Legal Risk in International Transactions (Report 80, 1996) at para 5.45. See also the proposals of McCracken at para 4.14 above.
30. DP 40 para 2.8.
31. See S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 319.
32. 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.
33. 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.
34. See P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 2-131 - 2-185.
35. Law Society of NSW, Submission 1; and W V Windeyer, Submission.
36. M Wormell, Submission; and S R Derham and Victorian Bar Council, Submission.
37. Richard v James (1848) 2 Ex 471 at 473-474; 154 ER 577 at 578; Bennett v White [1910] 2 KB 643 at 648; and P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 2-131 - 2-185.
38. DP 40 at para 4.14 and 2.8.
39. At para 5.5-5.9.
40. S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 319.
41. S R Derham and Victorian Bar Council, Submission at 5.
42. Sch 3 Pt 15 and 16.
43. Australian Capital Territory, Attorney General’s Department, Law Review Program: Audit of ACT and NSW Law Reform Initiatives (1993) at para 338 and 341.
