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Q. What do you understand by Set Off and Counter Claim? Distinguish between Legal and Equitable set off.

A set-off is a kind of counter-claim that operates as a defence to a claim. The doctrine of Set Off allows the defendant to put his own claim against the plaintiff before the court under certain circumstances.Technically, a set off can be defined as a discharge of reciprocal objligations to the extent of the smaller obligation. For example, A files a suit against B claiming 5000/- . B may take a defence that A owes 3000/- to B as well. Thus, B is basically asking to set off 3000/- of A's claim and pay only 2000/-.

In Jayanti Lal vs Abdul Aziz AIR 1956, SC defined Set Off a 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.

By claiming set off, the defendant is spared from filing a separate suit against the plaintiff. Thus, it reduces the number of suits before the court.

Provisions of Set off are specified in CPC under Order VIII Rule 6

6. Particulars of set-off to be given in written statement -
(1) Where in a suit for the recovery of money the defendant claims to set-off against the plaintiff's demand any ascertained sum of money legally recoverable by him from the plaintiff, not exceeding the pecuniary limits of the jurisdiction of the Court, and both parties fill the same character as they fill in the plaintiff's suit, the defendant may, at the first hearing of the suit, but not afterwards unless permitted by the Court, presents a written statement containing the particulars of the debt sought to be set-off.
(2) Effect of set-off—The written statement shall have the same effect as a plaint in a cross-suit so as to enable the Court to pronounce a final judgment in respect both of the original claim and of the set-off : but this shall not affect the lien, upon the amount decreed, of any pleader in respect of the costs payable to him under the decree.
(3) The rules relating to a written statement by a defendant apply to a written statement in answer to a claim of set-off.

(a) A bequeaths Rs. 2,000 to B and appoints C his executor and residuary legatee. B dies and D takes out administration to B's effect, C pays Rs. 1,000 as surety for D: then D sues C for the legacy. C cannot set-off the debt of Rs. 1,000 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. 1,000.
(b) A dies intestate and in debt to B. C takes out administration to A's effects and B buys part of the effects from C. In a suit for the purchase-money by C against B, the latter cannot set-off the debt against the price, for C fills two different characters, one as the vendor to B, in which he sues B, and the other as representative to A.
(c) A sues B on a bill of exchange. B alleges that A has wrongfully neglected to insure B's goods and is liable to him in compensation which he claims to set-off. The amount not being ascertained cannot be set-off.
(d) A sues B on a bill of exchange for Rs. 500. B holds a judgment against A for Rs. 1,000. The two claims being both definite, pecuniary demands may be set-off.
(e) A sues B for compensation on account of trespass. B holds a promissory note for Rs. 1,000 from A and claims to set-off that amount against any sum that A may recover in the suit. B may do so, for as soon as A recovers, both sums are definite pecuniary demands.
(f) A and B sue C for Rs. 1,000 C cannot set-off a debt due to him by A alone.
(g) A sues B and C for Rs. 1000. B cannot set-off a debt due to him alone by A.
(h) A owes the partnership firm of B and C Rs. 1,000 B dies, leaving C surviving. A sues C for a debt of Rs. 1,500 due in his separate character. C may set-off the debt of Rs. 1,000.

Essential Conditions for Set Off -

  1. The suit must be of recovery of money. Example -  A sues B for 20,000/-. B cannot set off the claim for damages for breach of contract for specific performance.
  2. The sum of money must be ascertained. See Illustration c, d, e.
  3. The sum claimed must be legally recoverable. For example, winnings in a wager cannot be claimed in a set off.
  4. The sum claimed must be recoverable by all the defendants against the plaintiff if there are more than one defendants.
  5. The sum claimed must be recoverable from all the plaintiffs by the defendant if there are more than one plaintiffs.
  6. In the defendant's claim for set off, both the parties must fill in the same character as they fill in the plaintiff's suit. See illustrations a, b, h.

Equitable Set off
The provisions of Rule 6 given above are for Legal Set off. However, these provisions are not exhaustive. This means that a set off is still possible in certain situations even when some of the above conditions are not satisfied. For example, in a transaction where by goods are exchanged for services as well as payment, the defendant may be allowed to claim a set off for an uncertain amount for damaged goods. In a suit by a washerman for his wages, the defendant employer should be able to set off the price of the clothes lost by the plaintiff. In such a case, driving the plaintiff to file another suit would be unfair. A set off in such situations is called an Equitable Set off.

SC illustrated equitable set off in the case of Harishchandra vs Murlidhar AIR 1957 as follows - Where A sues B to recover 50,000/- under a contract, B can claim set off towards damages sustained by him due to the breach of the same contract by A.

However, there is still one condition that must be satisfied for equitable set off - the set off claim must originate from the same transaction.

Legal Set Off Equitable Set Off
Sum must be ascertained. Sum need not be ascertained.
Claim need not originate from the same transaction. Claim must origination from the same transaction.
Legal set off can be claimed as a right by the defendant and the court is bound to adjudicate upon the claim. Equitable set off cannot be claimed as a right but by court's discretion.
Court fee must be paid on set off amount. No court fee is required.
The amount must not be time barred. The amount may be time barred. However, if the defendant's claim is time barred,  he can claim only as much amount  as is given in the plaintiff's claim.

6A. Counter-claim by defendant -
(1) A defendant in a suit may, in addition to his right of pleading a set-off under rule 6, set up, by way of counter-claim against the claim of the plaintiff, any right or claim in respect of a cause of action accruing to the defendant against the plaintiff either before or after the filing of the suit but before the defendant has delivered his defence or before the time limited for delivering his defence has expired whether such counter-claim is in the nature of a claim for damages or not :
Provided that such counter-claim shall not exceed the pecuniary limits of the jurisdiction of the Court.
(2) Such counter-claim shall have the same effect as a cross-suit so as to enable the Court to pronounce a final judgment in the same suit, both on the original claim and on the counter-claim.
(3) The plaintiff shall be at liberty to file a written statement in answer to the counter-claim of the defendant within such period as may be fixed by the Court.
(4) The counter-claim shall be treated as a plaint and governed by the rules applicable to plaints.

6B. Counter-claim to be stated - Where any defendant seeks to rely upon any ground as supporting a right of counter-claim, he shall, in his written statement, state specifically that he does so by way of counter-claim.

6C. Exclusion of counter-claim -  Where a defendant sets up a counter-claim and the plaintiff contends that the claim thereby raised ought not to be disposed of by way of counter-claim but in an independent suit, the plaintiff 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.