set-off

A set-off in English law is used by a litigant who wishes to diminish the overall liability of a claim against them by another person in the litigation. For instance, where A claims that B owes them £100, B may have a set-off of £20, which diminishes the overall liability of B to A to £80.

There are three types of set-off. Each of them have a similar effect. In the words of Lord Hanworth MR in Re a Bankruptcy Notice (1934) Ch 431, a set-off is “something which provides a defence because the nature and quality of the sum so relied upon are such that it is a sum which is proper to be dealt with as diminishing the claim which is made, and against which the sum so demanded may be set-off”.

Forms of Set-Off

The three forms of set-off are:

1. Set-off at law or legal set-off: This type exists where both sides in a set of legal proceedings have liquidated debts or money demands (liquidated: claims that may be quantified or ascertained with certainty in the form of a monetary sum);
2. A diminution in value: Where an action is brought for an agreed price of a particular asset or chattel or work which was to be performed according to a contract – the defendant claims a reduction in the value of the asset or chattel by a failure to comply with a warranty or work performed in accordance with the contract has diminished in value.
3. Equitable set-off: These are claims considered by a Court of Equity that regard the cross-claims of the defendant protect the defendant to some extent against the claimant’s claims. These is particularly the case where the cross-claim relates to the particular subject matter of the claim.

The typical circumstances for set-offs are:

1. Mutual debts: where the defendant owes a sum to the claimant, and the claimant owes money to the defendant, the defendant may set-off the debt of the claimant to him, to diminish the total sum of the claim.
2. Sales of Goods: where the defendant has received defective goods (not of a satisfactory quality, fitness of purpose or meeting a description), they may set a sum (determined by the court) off against the claim.
3. Provision of services: the defendant may diminish the sum owed by the value of defective work owing to poor workmanship.

Basis

Set-offs do not rely on finding any express or implied contract between the parties. Essentially the claimant must give credit to the defendant for the ascertained sum in his action against the defendant – when the debtor has a true set-off it goes to the reduction of the sums owing to the creditor.

For example, suppose a person entered into a contract for the supply of goods with a supplier. The person agreed that they would pay £1,000. The supplier delivers the goods. Suppose that the goods are defective. The person says that the defects caused him to expend £200 rectifying the defects. The supplier is owed £1,000. The person claims a set-off of £200, on account of the defects in the goods. The person then claims that he owes £800 rather than £200 - £200 is the quantum of the set-off.

Differences with Counterclaims

A counterclaim differs from a set-off. In litigation, a set-off is pleaded in a Defence and merely diminishes the overall liability (perhaps down to zero). A counterclaim is an independent claim of the defendant against the claimant which may relate tot he claim or may not. So, a set-off will simply relieve the defendant from paying a sum to the extent of the set-off, it will not entitle the defendant to obtain an award of that sum. A counterclaim will. Both are usually pleaded in court cases.