Code of Civil Procedure, 1908 (CPC)
Legal Set-Off and Equitable Set-Off Distinguished
Order VIII Rule 6 of the Code of Civil Procedure, 1908 provides for one kind of set-off, and it is a narrow one: the sum must be ascertained. That leaves an obvious injustice. Where two claims arise from the same transaction and the defendant's is not yet quantified, he would have to pay in full and sue separately for what is owed to him out of the same dealing. Courts have therefore recognised an equitable set-off, outside the rule, resting on the connection between the claims. These notes compare the two.
Which conditions each kind of set-off requires
1. Legal Set-Off
§ What it is The set-off expressly provided for by Order VIII Rule 6, available in a suit for the recovery of money where the defendant claims an ascertained sum legally recoverable from the plaintiff, within the court's pecuniary limits, both parties filling the same character. It may be claimed as of right. Where the conditions are satisfied, the defendant is entitled to plead it, and the court does not weigh whether it would be fair to allow it. The claims need not be connected. A legal set-off may be pleaded although the defendant's claim arises from a wholly different transaction, provided it is an ascertained sum legally recoverable. The written statement has the effect of a plaint in a cross-suit, so the court pronounces a final judgment on both the claim and the set-off. |
2. Equitable Set-Off
§ What it is, and where it comes from It is not in the Code. The words legal set-off and equitable set-off appear nowhere in Order VIII; the distinction is one the courts have drawn, applying equitable principles that came to the Indian courts through the practice of the courts of equity. Its central requirement is connection. The defendant's claim must arise out of the same transaction as the plaintiff's, so that it would be inequitable to allow the plaintiff to recover without taking account of what he owes out of the same dealing. It does not require an ascertained sum. That is the point of it. A claim for unliquidated damages arising from the same contract may be set off, though it could not be under Rule 6. It is discretionary. The court considers whether, on the facts, it would be inequitable to require the defendant to pay without account being taken of his cross-claim. |
3. The Conditions Compared
Condition | Legal set-off | Equitable set-off |
|---|---|---|
Provided for in the Code | Yes, Order VIII Rule 6 | No; it rests on equitable principles applied by the courts |
The sum must be ascertained | Required | Not required: unliquidated damages may be set off |
The claims must arise from the same transaction | Not required | Required, and this is its defining feature |
Within the pecuniary limits of the court | Required | Not treated as an absolute requirement |
Both parties in the same character | Required | Required |
The claim must be legally recoverable | Required, so a time-barred claim cannot be set off | A relevant factor rather than an absolute bar, given the connection between the claims |
Whether the court must allow it | Claimed as of right where the conditions are met | In the discretion of the court, on the equities |
Court fee | Payable on the amount claimed by way of set-off | Ordinarily payable, and the court may direct it as a condition of allowing the plea |
4. The Worked Example
§ Why the distinction matters in practice A sues B for the price of goods sold under a contract, say two lakh rupees. B says the goods were defective and claims damages for the loss he suffered on resale, which have not been quantified. A legal set-off fails. B's claim is for unliquidated damages, not an ascertained sum, so it falls outside Order VIII Rule 6. An equitable set-off may be allowed. The two claims arise out of the same transaction, the sale under the same contract, and it would be inequitable to require B to pay the whole price and sue separately for the loss caused by the very goods he paid for. The contrast. If B's claim had arisen from an unrelated loan he made to A, an equitable set-off would fail for want of connection, but a legal set-off would succeed if the loan was an ascertained and recoverable sum. |
5. Equitable Set-Off and Counterclaim
Basis | Equitable set-off | Counterclaim, Order VIII Rule 6A |
|---|---|---|
Source | Judicial recognition on equitable principles | Expressly provided by the Code |
Connection with the plaintiff's claim | Must arise from the SAME transaction | May arise from a wholly different cause of action |
Amount | Operates as a defence, and does not ordinarily exceed the claim | May exceed the plaintiff's claim |
Independence | Pleaded against the claim, and falls with it | Rule 6D: survives the stay, discontinuance or dismissal of the suit |
Nature of relief | Reduces or extinguishes the plaintiff's claim | A cross-suit, on which a separate decree may be passed |
Where both are available | A defendant with a connected unliquidated claim may plead either, and a counterclaim is ordinarily the stronger course because of Rule 6D |
6. Landmark Points
- Order VIII Rule 6 provides only for legal set-off, requiring an ascertained sum legally recoverable in a money suit, within pecuniary limits, with the same character in both parties.
- Equitable set-off is not in the Code, and is recognised by the courts on equitable principles.
- Its defining requirement is that the claims arise from the SAME TRANSACTION.
- It does not require an ascertained sum, so unliquidated damages may be set off.
- A legal set-off is claimed as of right; an equitable set-off is in the discretion of the court.
- Order VIII Rule 6F applies to both, so where a balance is found due to the defendant the court may give judgment for it.
7. Frequently Asked Questions
What is the difference between legal and equitable set-off?
A legal set-off is provided for by Order VIII Rule 6 and requires an ascertained sum legally recoverable, but the claims need not be connected. An equitable set-off is not in the Code, requires the claims to arise from the same transaction, and does not require the sum to be ascertained.
Can unliquidated damages be set off?
Not by way of legal set-off, since Order VIII Rule 6 requires an ascertained sum. They may be set off equitably where they arise from the same transaction as the plaintiff's claim, and the court considers it inequitable to require payment without taking account of them.
Is an equitable set-off allowed as of right?
No. It is in the discretion of the court, which asks whether on the facts it would be inequitable to allow the plaintiff to recover without account being taken of the defendant's connected claim. A legal set-off, by contrast, may be claimed as of right where its conditions are met.
Must the claims be connected for a legal set-off?
No. A legal set-off may be pleaded although the defendant's claim arises from an entirely different transaction, provided it is an ascertained sum legally recoverable from the plaintiff and the other conditions of Rule 6 are satisfied.
Can a time-barred claim be set off?
Not by way of legal set-off: Rule 6 requires the sum to be legally recoverable, and a time-barred claim is not. In an equitable set-off the position is less absolute, since the claims arise from the same transaction, but limitation remains a material consideration.
Should a defendant plead an equitable set-off or a counterclaim?
Where both are open, a counterclaim is ordinarily the stronger course, because under Order VIII Rule 6D it survives the stay, discontinuance or dismissal of the plaintiff's suit, whereas a set-off is pleaded against the claim and falls with it.
8. Related Topics in This CPC Series
- Set-Off and Counterclaim Distinguished
- Order VIII: The Written Statement, Set-off and Counterclaim
- Plaint and Written Statement Distinguished
- Order XX: Judgment and Decree