Set-off : Meaning, Essentials, Types and Distinctions

Set-off is an important topic for LLB and BA LLB examinations. Question related to Set-off is often asked in CPC as well as in Drafting and Pleading papers as given below.

 

Civil Procedure Code

What is set-off? Explain the difference between legal set-off and equitable set-off. (2019, 20 marks)
Distinction between Legal set-off and Equitable Set-off. (2018, 4 marks)
Distinguish between counterclaim and set-off. (2016, 10 marks, 2017, 20 marks)

Drafting and Pleading
Define set-off (2019, 4 marks)
Counter claim and set-off (2017, 10 marks)

Distinction between Legal set-off and Equitable Set-off. (2018, 4 marks)

Meaning of Set-off: The doctrine of set-off is defined in Order 8 Rule 6(1) of the CPC. As per this rule, in a suit of recovery of money, if the defendant finds that they have their own claim against the plaintiff, then they can plead to set off or deduct any amount which the plaintiff owes them from the claim of the original suit. So, simply said, Set-Off refers to a cross-claim of money or reciprocal acquittal of debts between two persons. Both the Plaintiff and the defendant are debtors and creditors to each other.  Set-Off is considered an important tool of defense for the defendant.

Example: A sues B for recovery of Rs. 5000 against a bill of exchange.  

On the other hand B holds a judgement against A for Rs. 8000. Both the claims being definite and certain, the amount of Rs. 5000 can be set-off against each other.

Essentials of Set-off:

1. The suit must be for recovery of money

2. The amount of money must be definite

3. The amount should be legally recoverable

4. It must be recoverable by the defendant from the plaintiff

5. The set-off amount will not exceed the pecuniary limits of the court

Types of Set-off

The Civil Procedure Code defines two types of set-offs, Legal Set-off and Equitable Set-off. Rule 6 of Order 8 deals with Legal set-off. The concept of equitable set-off comes from the broad principles of justice, equity and good conscience. 

Legal Set-off: Legal set-off cab be claimed by a defendant if he or she finds that the plaintiff owes them debt too and decides to deduct that sum of money to lessen their own debt. As per rule 6 the following conditions are applicable for legal set-off

1. The suit brought by the plaintiff is for recovery of debt only. 

2. The amount of money must be ascertained or fixed.

3. The money can be legally recoverable.

4. The original claim and the set-off must be in the same character.

5. The set-off shouldn’t exceed the pecuniary jurisdiction of the court.

Equitable Set-off 

Equitable set-off refers to a claim of set-off where the amount of money is unascertained. an unascertained sum of money where both the plaintiff and the defendant’s claim arise out of the same transaction or are connected in nature and circumstance. 

In India, the courts are not bound to entertain equitable set-off. They have the discretionary power to entertain it. The courts can also refuse an equitable set off if they find that an usual investigation is necessary to determine the unascertained sum of money which will be a hassle for the court. Though courts generally allow the defendant claim as it will be inequitable to drive the defendant to file another suit.

Distinction between Legal Set-off and Equitable Set-off

Legal Set-off	Equitable Set-off
The sum of money of the claim should be ascertained	Claim is allowed even if the amount of money is unascertained
Legal set-off is a right. The courts are obliged to adjudicate upon such claim	This is not a right. Courts have discretionary power to entertain it
It is not necessary that the cross-demands arise out of same transaction	In equitable set-off it is mandatory that the cross-demands should arise out of same transaction
In a legal set-off, the amount claimed must be legally recoverable and not time-barred.	In Equitable set-off even if the claim is barred by time and there is a fiduciary relationship between the parties then the court can entertain it.
Court fee is required	Court fee is not required

Distinction between Counter-claim and Set-off

Set-off	Counter Claim
Set-off is a statutory Defence against plaintiff's action	Counter claim is a cross-action
Set-off must be for an ascertained sum or must arise out of the same transaction as the plaintiff’s claim.	A counter-claim may arise out of different transactions.
Set-off is a statutory ground of defence	Counter claim is not a statutory defence
An equitable set-off is a claim by the defendant in defence, which generally cannot exceed the plaintiff’s claim.	In a counter-claim the defendant may, however, exceed the plaintiff’s claim, this being a cross action.