Set-off is an essential mechanism for resolving disputes and promoting fairness in legal proceedings. It allows for consolidating claims between parties, streamlining the litigation process, and avoiding the need for separate lawsuits.

What is Set-Off in CPC?

Set-Off is a legal concept that allows the defendant to reduce or eliminate their debt or claim by raising a counterclaim against the plaintiff. In other words, it enables the defendant to offset part of the original claim. When the plaintiff and defendant owe each additional money, one debt can be used to settle the other. The defendant can use set-off in CPC as a defence in a lawsuit brought by the plaintiff.

In the case of B. Seshaiah v. B. Veerabhadrayya, the Andhra High Court explained set-off as “cancelling debts between two individuals who owe each other money.” Similarly, under Order VIII Rule 6 of the Civil Procedure Code (CPC), the defendant can resolve reciprocal claims against the plaintiff without filing a separate lawsuit. This allows for the resolution of the plaintiff’s and defendant’s claims within the same legal case.

Definition of Set-Off under Order VIII Rule 6 of CPC

According to Order VIII Rule 6, the provision of set-off is outlined as follows:

In a lawsuit where the plaintiff is seeking to recover money, the defendant can assert a set-off if they have an established and legally recoverable sum of money owed to them by the plaintiff. This amount should not exceed the monetary limits of the court’s jurisdiction. 

Additionally, for the defendant to present a set-off, both parties must have the same roles in the lawsuit as they do in the plaintiff’s claim.

Essentials of Set-Off under CPC

To summarize, the conditions that need to be met for a defendant to invoke set-off against the plaintiff are as follows:

• The plaintiff’s lawsuit should be aimed at recovering a monetary amount.
• The sum of money to be recovered must be determinable.
• The defendant must have a legal right to recover the same amount from the plaintiff.
• The sum sought to be recovered should be within the court’s jurisdictional limits.
• The defendant and the plaintiff must have the same roles in the lawsuit.

Types of set-off under CPC

The law recognizes two types of set-offs: 

• legal set-off, which is explicitly provided under Order VIII Rule 6 of the Civil Procedure Code (CPC), and 
• equitable set-off, which is based on principles of fairness. 

Legal set-off

Legal set-off in CPC has specific requirements, as discussed earlier. It is limited to the scope of the original lawsuit and cannot introduce new elements. It allows the defendant to assert an independent cause of action, and the claims of both parties are adjusted in favour of the party with the higher amount.

If A files a lawsuit against B seeking compensation for trespass, and B holds a promissory note worth Rs. 1000 from A, B can claim a set-off by deducting that amount from any sum that A may recover in the lawsuit. 

This is possible because all the requirements for set-off under Order VIII Rule 6 are fulfilled. Both amounts become definite pecuniary demands once A recovers.

Equitable set-off

Equitable set-off in CPC is available when legal set-off is not applicable. It is based on the concept of fairness and can be used when the case does not meet the requirements of Order VIII Rule 6. 

In equitable set-off, the defendant can claim even an unascertained sum of money if the cross demands arise from the same transaction or are closely connected. This prevents the need for filing a separate lawsuit. 

However, it’s important to note that unlike legal set-off, which is the defendant’s right under the CPC, the application of equitable set-off is solely at the court’s discretion.

If A sues B to recover Rs. 50,000 based on a contract, B can claim a set-off for damages suffered due to A’s breach of the same contract. 

However, in this case, the damages claimed as a set-off are not fully covered by Rule 6 of Order VIII, as they are not an ascertained sum of money. Therefore, it is up to the court’s discretion to allow the set-off based on the case’s specific facts.

Difference between Legal Set-off and Equitable Set-off in CPC

Legal Set-Off: Clear and Determined Sum

Legal set-off must pertain to a determined sum of money, whereas equitable set-off can be applied even for an undetermined sum.

Right to Claim vs. Discretionary Consideration

Legal set-off is a right that a party can claim, and the court must consider and resolve it. In contrast, equitable set-off in CPC cannot be claimed as a right, and the court can refuse adjudication.

Transaction Requirement

Legal set-off does not necessitate that the cross-demands arise from the same transaction. On the other hand, equitable set-off can only be allowed when the cross-demands originate from the same transaction.

Legally Recoverable and Time-Barred Claims

The amount claimed must be legally recoverable and not time-barred for legal set-off. In contrast, a claim made through equitable set-off can still be considered even if it is time-barred, mainly when a fiduciary relationship exists between the parties.

Court Fees

Legal set-off in CPC requires the payment of court fees, while no court fees are necessary for equitable set-off.

Limitation

The set-off claim in CPC can be seen as a counter-lawsuit initiated by the defendant against the plaintiff. Set-off is considered a separate legal action subject to the law of limitation. 

In the case of Jitendra Nath Ray v. Jnanada Kanta Das Gupta, the Court clarified that the rules and regulations regarding filing a lawsuit also apply to set-off cases.

Court-fee

According to Article I, Schedule I of the Court Fees Act 1870, court fees apply to set-off cases. This is because set-off in CPC involves the defendant raising a claim against the plaintiff, which is considered a “plaint” and subject to the payment of court fees.

Effect of Set-Off under CPC

When a defendant asserts a set-off in CPC, they essentially take on the role of a plaintiff in relation to the amount they claim. Consequently, there are two separate lawsuits: one initiated by the plaintiff against the defendant and the other initiated by the defendant against the plaintiff. These two suits are consolidated and tried together.

If the plaintiff does not appear in Court, leading to the dismissal of their suit due to default, or if the plaintiff voluntarily withdraws their suit, or if the plaintiff fails to substantiate their claim during the trial resulting in the dismissal of their suit, it does not impact the defendant’s claim for set-off in CPC. 

The defendant can still pursue their claim, and if they can prove it, a decree may be issued in their favour.

Conclusion

Set-off is a vital concept within the Civil Procedure Code framework. It enables defendants to counterclaim against plaintiffs, leading to the reduction or discharge of debts. The CPC recognizes two types of set-off: legal set-off and equitable set-off. 

Legal set-off requires a determined sum of money, can be claimed as a right, and follows specific requirements. Equitable set-off offers flexibility when legal set-off conditions are not met, although its application depends on the Court’s discretion.