Set-Off in Law: Meaning, Types, and Legal Context
Set-off is an essential legal concept in civil law that allows a defendant to balance mutual debts with the claimant. It helps in reducing litigation by enabling both parties to settle their dues within the same proceeding. This article explores the meaning, types, legal provisions, and implications of set-off under Indian law.
What is Set-Off in Law?
Set-off refers to a legal mechanism where a defendant claims that the plaintiff also owes him a debt or obligation, and he seeks to reduce or extinguish the plaintiff’s claim by asserting this counter-demand. Essentially, it is a defense plea used in a suit to nullify or lessen the liability of the defendant.
For example, if A files a suit against B for ₹1,00,000, and B proves A owes him ₹40,000, then B can claim a set-off for that amount, and A may only recover ₹60,000.
Legal Basis of Set-Off under the Code of Civil Procedure, 1908
The concept of set-off is codified in Order VIII Rule 6 of the Code of Civil Procedure (CPC), 1908. It allows a defendant to claim a set-off for any ascertained amount legally recoverable from the plaintiff.
Key conditions under CPC:
- The set-off must be for an ascertained sum of money.
- It must be legally recoverable.
- Both parties must have mutual dealings.
- The claim must be within the pecuniary jurisdiction of the court.
- It should arise out of the same transaction or a legally permissible one.
Types of Set-Off in Law
1. Legal Set-Off
Legal set-off is recognized by statutory law, especially under the CPC. It is allowed when both the plaintiff and defendant owe liquidated amounts to each other. The court adjusts the amounts accordingly.
Example: If the plaintiff sues for ₹80,000, and the defendant proves a due of ₹50,000, the court may allow a legal set-off, and the plaintiff can only claim ₹30,000.
2. Equitable Set-Off
Equitable set-off is based on principles of equity and fairness. It is allowed even when the claim is unascertained or arises from a different transaction, provided it is closely connected with the plaintiff’s claim.
This type of set-off is not covered under Order VIII Rule 6 but is enforced through equitable principles by the court.
Example: A tenant being sued for rent may claim an equitable set-off if the landlord has not carried out agreed repairs, leading to financial loss.
Difference Between Set-Off and Counter-Claim
While both are used by defendants to oppose a plaintiff’s claim, they differ as follows:
| Set-Off | Counter-Claim |
|---|---|
| Limited to money suits | Can be used in all types of claims |
| Must be for an ascertained sum | May include unliquidated damages |
| Only reduces plaintiff’s claim | May result in a separate decree |
| Governed by Order VIII Rule 6 CPC | Governed by Order VIII Rule 6A CPC |
When Set-Off is Not Permissible
A set-off is not allowed in the following circumstances:
- When the amount is not legally recoverable.
- If the suit is for non-monetary claims like injunction or specific performance.
- If the parties are not mutually liable (e.g., joint plaintiffs or defendants).
- If the claim exceeds the pecuniary jurisdiction of the court.
Judicial Interpretation of Set-Off
Indian courts have clarified the scope of set-off in several landmark cases:
- Union of India v. Karam Chand Thapar & Bros (1971): The Supreme Court emphasized that for a legal set-off, the debt must be mutual and legally enforceable.
- Jadavji Narayanji v. Commercial Bank of India (1876): The Bombay High Court explained the difference between legal and equitable set-off.
These rulings help reinforce the idea that set-off, though technical, promotes fairness and prevents multiplicity of suits.
Importance of Set-Off in Civil Litigation
The doctrine of set-off holds significant value in civil law due to the following reasons:
- Prevents multiple lawsuits by allowing claims and counterclaims in a single suit.
- Reduces court time and litigation cost.
- Encourages mutual settlement of claims between parties.
- Ensures judicial economy and fairness in proceedings.
