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Set-off and Counter-Claim: An analysis

This article is related to the set-off and Counter-claim doctrines provided under the Code of Civil Procedure (hereinafter referred to as CPC). Order VIII, Rule 6 of CPC provides for the set-off and Rule 6A provides for the counterclaim. These two rules were inserted in the CPC, to provide the defendant with a mechanism to present his side of the claim in the same suit brought up by the plaintiff.

In a civil suit, the plaintiff is considered as the main aggrieved and he is provided many opportunities to plead his grievances before the court, but the defendants were not available of this sort of remedy in earlier periods and the defendants had to bring a different suit for his claim. But with the coming of the concept of 'equity' and due to change in the judicial system over the period of time, the defendants were allowed to plead their claim in the plaintiff's suit as set-off and counterclaim.

History of Set-off

In the development of English and Roman Procedure, both the systems developed a common-sense view that a man should not be compelled to pay one moment what he will be entitled to recover back to next. 'Compensatio' was the name given by Roman law to the cancelling of cross demand.[1] Similarly, in English common law, Set-off, in the sense of cancelling mutual independent cross-demands was apparently regarded as out of question at law, when in 1677, it was said in Sir William Darcy's Case.[2]

It was through bankruptcy proceedings that set-off first obtained a foothold in English law. The temporary bankruptcy act of 4 Anne, c. 17, sec. 11, provided that where there had been "mutual credit" given between the bankrupt and any person who was his debtor, the latter should not be compelled to pay more than the balance that appeared due on an adjustment of the account. This statute was followed by others making various improvements in the law which are now embodied in the English bankruptcy act of I898. But equitable jurisdiction over set-offs in cases of bankruptcy was exercised by the Court of Chancery long prior to the introduction of the provision into the statute.[3] In India, the concept was introduced in the Code of Civil Procedure.

Set-off [Rule 6 of Order 8]

Meaning and definition of set-off
In simple, set-off is a reciprocal acquittal of debts. The meaning and definition set-off is not provided under the Code and can be deciphered from the judicial interpretation.

The claim of set-off is a claim set up against another. It is a cross-claim that partly offsets the original claim. It is the extinction of debts of which two persons are reciprocally debtors to one another by the credits of which they are reciprocally creditors to one another. Where there are mutual debts between the plaintiff and the defendant, one debt may be settled against the other. It is a plea in defence, available to the defendant. By adjustment, set-off either wipes out or reduces the plaintiff's claim in a suit for recovery of money.

In B. Seshaiah v. B. Veerabhadrayya[4], the Andhra High Court expressed the concept as:
The extinction of debts of which two persons are reciprocally debtors to one another by the credits of which they are reciprocally creditors to one another.

The doctrine provides that where in a suit for recovery of money by the plaintiff, the defendant finds that he has also a claim of some amount against the plaintiff; he can claim a set-off in respect of the said amount. A plea of set-off is "a plea whereby a defendant acknowledges the justice of the plaintiff's demand, but sets up another demand of his own to counterbalance that of the plaintiff; either in whole or in part". Thus, it is a reciprocal acquittal of debts between two persons. The right of a defendant to claim set-off has been recognized under Rule 6. It obviates the necessity of filing a fresh suit by the defendant.[5]

The term "set-off' denotes mutual discharge of debt. It is reciprocal satisfaction of the claim of the plaintiff and the defendant against each other. In simple words, "set-off' means that the amount claimed by the plaintiff from the defendant is to be satisfied against the amount that the plaintiff owes to the defendant.

For instance, where 'X' files a suit against 'Y' for recovery of Rs. 15,000/- but 'Y' already holds a decree of Rs. 20,000/- against 'X', the defendant 'Y' may plead for the set-off of the claim of plaintiff 'X'.

Effect of Set-off

When a defendant pleads set-off, he is put in the position of a plaintiff as regards the amount claimed by him. There are two suits, one by the plaintiff against the defendant and the other by the defendant against the plaintiff; and they are tried together. A separate suit number is not given to a set-off. Where the plaintiff does not appear and his suit is dismissed for default, or he withdraws his suit, or he fails to substantiate his claim at the trial and his suit is dismissed, it does not affect the claim for set-off by the defendant and a decree may be passed in favour of the defendant if he is able to prove his claim.

Legal requirements of Rule 6 of Order VIII

A defendant may claim a set-off if the following conditions are satisfied:
  1. The suit must be for the recovery of money;
  2. The sum of money must be ascertained;
  3. The sum of money must be legally recoverable;
  4. It must be recoverable by the defendant or by all the defendants if more than one;
  5. It must be recoverable from the plaintiff or from the plaintiffs if more than one;
  6. It must not exceed the pecuniary jurisdiction of the court in which the suit is brought;
  7. Both the parties must fill, in the defendant's claim to set-off, the same character as they fill in the plaintiff's suit.
E.g.: A bequeaths Rs. 2000 to B and appoints C his executor and residuary legatee. B dies and D takes out administration to B's effects. C pays Rs 1000 as surety for D; then D sues C for the legacy. C cannot set-off the debt of Rs 1000 against the legacy, for neither C nor D fills the same character with respect to the legacy as they fill with respect to the payment of Rs 1000.

Types of Set-off

The law recognizes two types of set-off, namely:
  1. Legal set-off, and
  2. Equitable set-off.
Order 8 Rule 6 deals with legal set-off, but the said provision is not exhaustive and does not take away the power of the court to allow such adjustment independent of Rule 6 of Order 8. The other adjustment may be called an "equitable set-off".

Rule 6 deals with legal set-off only. An equitable set-off was allowed by the courts of Common law in England. Legal set-off can only be entertained in respect of only ascertained money. The rule 6 is not exhaustive and there can a set-off be granted in respect of an unascertained sum of money.

The concept of equitable set-off comes from "equity, justice, good conscience". The equitable set-off is not provided in the Code of Civil Procedure, 1908. The equitable set-off is given at the discretion of the court. The plea raised by the defendant is not a matter of the right of the defendant but is a matter of discretion of the court.

While differentiated between the two, the Supreme Court in the case of Jitendra Kumar Khan & Ors v. The Peerless General Finance & Investment Company Limited and ors,[6] held that the legal set-off and equitable set-off is that legal set-off is a legal right whereas the equitable set-off is granted on the discretion of the court.

Counterclaim (Rules 6-A-6-G)

Background
Before the Amendment Act of 1976, there was no specific provision for counterclaim in the code. By the Amendment Act of 1976, a specific provision has been made for counterclaim by inserting Rules 6-A to 6-G. But before this amendment, in the year 1964, the Supreme Court in the case of Laxmidas v. Nanabhai,[7]held the right to make the counterclaim a statutory. It was held that the court has the power to treat the counterclaim as a cross-suit and hear the original suit and counterclaim together if the counterclaim is properly stamped.

Doctrine Explained

Under sub-rule (i) of Rule 6-A, the defendant may set up by way of counterclaim against the claim of the plaintiff any right or claim in respect of action accruing to the defendant against the plaintiff either before or after filing of the suit but before the time fixed for the delivery of his defence has expired.

A Counterclaim is one of the pleas open to a defendant to defeat the relief sought by the plaintiff against him. According to the Black's Judicial Dictionary,[8] "Counterclaim" may be defined as "a claim made by the defendant in a suit against the plaintiff." Therefore, a defendant in a suit may, in addition to his right to plead a set-off, set up a counterclaim.[9] It is a claim independent of and separable from the plaintiff's claim which can be enforced by a cross-action. It is a cause of action in favour of the defendant against the plaintiff. Thus, a counterclaim is properly a cross-action and the court can pronounce a final judgment both on the original claim and counter-claim.

In the case of Ramesh Chand v. Anil Panjwani,[10] the Supreme Court set out the modes of pleading for the counterclaim. There are three modes of pleading or setting up a counterclaim in a civil suit:
  1. In the written statement filed under Order 8 Rule 1;
  2. By amending written statement with the leave of the court and setting up counterclaim; and
  3. In a subsequent pleading under Order 8 Rule 9.

A defendant can file a counter-claim in respect of a cause of action which is independent of the cause of action averred by the plaintiff. It need not confine to money claim or to cause of action of the same nature as of the plaintiff or be related to or be connected with the original cause of action or matter pleaded by the plaintiff.

For instance, in a suit for injunction, a counterclaim for an injunction in respect of the same or different property can be made under Order VIII, Rule 6-C. The plaintiff may object to disposal of the claim by way of counter-claim by pleading for its disposal by an independent suit and he may, at any time before issues are settled in relation to the counter-claim apply to the Court for an order that such counter-claim may be excluded. And the Court may, on the hearing of such application, make such order as it thinks fit.[11]

Purpose of the Doctrine
The purpose of the provision enabling filing of a counter-claim is to avoid multiplicity of judicial proceedings and save upon the Court's time and as also to exclude the inconvenience to the parties by enabling claims and counter-claims, that is, all disputes between the same parties being decided in the course of the same proceedings.

If the consequence of permitting a counter-claim either by way of amendment or by way of subsequent pleading would be prolonging of the trial, complicating the otherwise smooth flow of proceedings or causing a delay in the progress of the suit by forcing a retreat on the steps already taken by the Court, the Court would be justified in exercising its discretion not in favour of permitting a belated counter-claim.

Starting time of the right to file Counter-claim

A pleading by way of counter-claim runs with the right of filing a written statement and that such right to set up a counter-claim is in addition to the right of pleading a set-off conferred by Rule 6. A set-off has to be pleaded in the written statement The counter-claim must necessarily find its place in the written statement.

Once the right of the defendant to file a written statement has been lost or the time-limited for delivery of the defence has expired, then neither the written statement can be filed as of right nor a counter-claim can be allowed to be raised, for the counter-claim under Rule 6-A must find its place in the written statement.

Effect of Counter-claim

The effect of the counterclaim is that even if the suit of the plaintiff is stayed, discontinued, dismissed or withdrawn, the counterclaim will be decided on merits and the defendant will have a right to get a decree for a counterclaim as claimed in the written statement. If the plaintiff does not file any reply to the counterclaim made by the defendant, the court may pronounce the ex parte judgment against the plaintiff in relation to the counterclaim made against him or make such order in relation to the counterclaim as it thinks fit.[12] According to Rule 6-A(4), the counterclaim shall be treated as a plaint and will be governed by the rules applicable to the plaints. Similarly, according to Rule 6-G, a reply filed in answer to a counterclaim shall be treated as a written statement and governed by rules applicable to written statements.

In the leading case of Laxmidas v. Nanabhai,[13] the Supreme Court observed,
"The question has to be considered on principle as to whether there is anything in law—statutory or otherwise—which precludes a court from treating a counterclaim as a plaint in a cross-suit. It is difficult to see any. No doubt, the Code of Civil Procedure prescribes the contents of a plaint and it might very well be that a counterclaim which is to be treated as a cross-suit might not conform to all these requirements but this by itself is not sufficient to deny to the court the power and the jurisdiction to read and construe the pleadings in a reasonable manner.

If, for instance, what is really a plaint in a cross-suit is made part of a written statement either by being made an annexure to it or as part and parcel thereof, though described as a counterclaim, there could be no legal objection to the counter treating the same as a plaint and granting such relief to the defendant as would have been open if the pleading had taken relief of a plaint. To hold otherwise would be to erect what in substance is a mere defect in a form of pleading into an instrument for denying what justice manifestly demands."

Set-off and Counter-claim: Distinction

The distinction between the two is very important as they look similar in nature, but it is not so and the difference between the two is very important and must be carefully considered:
  •  Set-off is a statutory defence to a plaintiff's action, whereas a counterclaim is substantially 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 need not arise out of the same transaction.

Set-off is a statutory ground of defence and has to be pleaded in the written statement. It can be sued as a shield and not as a sword. Counter-claim, on the other hand, does not afford any defence to the plaintiff's claim. It is a weapon of offence that enables the defendant to enforce his claim against the plaintiff as effectually as in an independent action. It is a sort of cross-action. [14]

An equitable set-off is a claim by the defendant in defence, which generally cannot exceed the plaintiff's claim. A counter-claim the defendant may, however, exceed the plaintiff's claim, being in nature of the cross action. Under the provision rule 6-F of Order 6, if in any suit a set-off or counterclaim is established as a defence against the plaintiffs claim and any balance is found due to the defendant as the case may be the court may give judgment to the party entitled to such balance.

However, in both the cases of set-off and counter-claim, the defendant's claims must not exceed the pecuniary limits of the jurisdiction of the Court.

End-Notes:
  1. The Development of set-off, by William H. Loyd, available at: https://www.jstor.org/stable/pdf/3313138.pdf
  2. 2 Freeman 28 (1677)
  3. Supra at 1
  4. AIR 1972 AP 134
  5. Taken from Civil Procedure by C.K. Takwani Eighth Edition, 2019.
  6. Civil Appeal Nos.6784 OF 2013
  7. AIR 1964 SC 11.
  8. Ed. 1999 at p. 348.
  9. Rule 6-A (1) of Order VIII of the Code of Civil Procedure
  10. (2003) 7 SCC 350 at p. 367
  11. Order VIII, Rule 6-C
  12. Rule 6-E of Order 8.
  13. AIR 1964 SC 11
  14. Ibid; see also, A.Z. Mohd. Farroq v. State Govt., AIR 1984 Ker 126 (FB).

Suggested Articles:
  1. Set-off and counterclaim as given under Code of Civil Procedure 1908
  2. Plaint, Written Statement, Set Off And Counter Claim Under Civil Procedure Code 1908
  3. Producing Additional Document At The Stage Of Cross-Examination

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