Set-off and Counterclaim
Chapter Eleven
Syllabus topic 1.2, "Concepts: Res-sub judice, Res judicata, set off, counterclaim"
Pages 61 to 65 of 365
In one line
A defendant who is himself owed money by the plaintiff does not have to start his own case to get it: he can raise it inside the plaintiff's suit, either as a set-off, which reduces the claim, or as a counterclaim, which is a suit of his own fought inside the same file.
Why the Code allows this
Suppose Anil sues Bhavna for Rs. 80,000 on an unpaid invoice, and Bhavna is separately owed Rs. 50,000 by Anil. Without these rules Bhavna must defend Anil's suit, lose or win it, and then file a fresh suit of her own, with a second set of fees, a second set of witnesses, and the risk that Anil is insolvent by the time she gets there.
That is wasteful for the parties and worse for the court, which must hear the same relationship twice. So the Code lets the defendant bring the cross-claim into the existing suit, and provides in both cases that the court can pronounce one final judgment on both claims.
The two devices differ in ambition. A set-off is defensive: it goes only so far as to wipe out or reduce what the plaintiff claims. A counterclaim is offensive: it is a cross-suit, and it can exceed the plaintiff's claim and survive the plaintiff abandoning his.
Set-off: Order VIII Rule 6
Rule 6(1) provides that 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 but not afterwards unless permitted by the Court, present a written statement containing the particulars of the debt sought to be set off.
Rule 6(2) provides that 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 on both the original claim and the set-off.
Rule 6(3) applies the rules about written statements to a written statement answering a claim of set-off.
The five conditions, from the rule itself
One, the suit must be for the recovery of money. Set-off has no place in a suit for possession or an injunction.
Two, the sum claimed must be ascertained. A figure, not a claim for damages to be assessed.
Three, it must be legally recoverable, so not a time-barred or otherwise unenforceable debt.
Four, it must not exceed the pecuniary limits of the court's jurisdiction.
Five, both parties must fill the same character in the set-off as they do in the suit.
Set-off and Counterclaim
The Code's own illustrations, which are the best explanation of condition five
The rule carries illustrations, and three of them exist purely to teach the "same character" requirement.
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 effects. C pays Rs. 1,000 as surety for D. D then sues C for the legacy. C cannot set off the Rs. 1,000, because neither C nor D fills the same character with respect to the legacy as they fill with respect to the payment.
A dies in debt to B. C takes out administration to A's effects and B buys part of the effects from C. In a suit by C against B for the purchase money, B cannot set off the debt, because C fills two different characters, as vendor in this suit and as A's representative in the debt.
A sues B on a bill of exchange. B says A wrongfully failed to insure B's goods and claims compensation as a set-off. The amount not being ascertained cannot be set off. That is condition two.
A sues B on a bill of exchange for Rs. 500. B holds a judgment against A for Rs. 1,000. Both being definite pecuniary demands, they may be set off. That is the rule working as intended.
Legal and equitable set-off
The set-off described in Rule 6 is called legal set-off, and its conditions are the five above.
Courts also recognise equitable set-off, which is not in the rule. It allows a defendant to set off an unascertained sum where the cross-demand arises out of the same transaction, or out of transactions so closely connected that it would be inequitable to make him pay first and sue afterwards. The distinction is a standing exam question, and the table below sets it out.
| Legal set-off | Equitable set-off | |
|---|---|---|
| Source | Order VIII Rule 6 | The court's equitable jurisdiction, not the rule |
| Amount | Must be ascertained | May be unascertained |
| Transaction | Need not arise from the same transaction | Must arise from the same or a closely connected transaction |
| Claimed as | A right | At the court's discretion |
| Court fee | Payable, as it is a cross-suit | Ordinarily follows the same treatment |
Counterclaim: Order VIII Rules 6A to 6F
Rule 6A(1) provides that a defendant may, in addition to his right of pleading a set-off under Rule 6, set up by way of counterclaim against the plaintiff's claim 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 it has expired, whether the counterclaim is in the nature of a claim for damages or not. The proviso adds that the counterclaim shall not exceed the pecuniary limits of the court's jurisdiction.
Set-off and Counterclaim
Rule 6A(2): the counterclaim has the same effect as a cross-suit, so the Court can pronounce a final judgment in the same suit on both the claim and the counterclaim.
Rule 6A(3): the plaintiff may file a written statement in answer to the counterclaim within the time the court fixes.
Rule 6A(4): the counterclaim shall be treated as a plaint and governed by the rules applicable to plaints.
The remaining rules complete the machinery.
Rule 6B: a defendant relying on a ground as supporting a counterclaim must state specifically in his written statement that he does so by way of counterclaim.
Rule 6C: where the plaintiff says the counterclaim ought to be tried as an independent suit instead, he may apply, at any time before issues are settled on the counterclaim, for an order excluding it, and the court may make such order as it thinks fit.
Rule 6D, and this is the rule to remember above all the others: if the plaintiff's suit is stayed, discontinued or dismissed, the counterclaim may nevertheless be proceeded with. That is the clearest proof that a counterclaim is a cross-suit and not merely a defence.
Rule 6E: if the plaintiff makes default in replying to the counterclaim, the court may pronounce judgment against him on it.
Rule 6F: where a set-off or counterclaim is established and a balance is found due to either party, the court may give judgment for that balance.
Distinguish: set-off and counterclaim
| Set-off, Rule 6 | Counterclaim, Rules 6A to 6F | |
|---|---|---|
| Nature | A defence, which reduces or extinguishes the claim | A cross-suit tried in the same proceeding |
| Suit must be | For the recovery of money | Any suit |
| Amount | Ascertained sum (legal set-off) | Any right or claim, damages included |
| Can it exceed the claim | No, it operates only up to the plaintiff's demand | Yes |
| Cause of action arising after the suit | No | Yes, if before the defence is delivered |
| If the plaintiff's suit is dismissed | Falls with it | Survives, Rule 6D |
| Same character required | Yes | Not in those terms |
The one-line test: ask what happens if the plaintiff walks away. A set-off dies with the suit; a counterclaim carries on. That single question answers most exam problems on the pair.
A worked example
Anil sues Bhavna in the City Civil Court for Rs. 80,000, the price of goods delivered in March.
Set-off and Counterclaim
Bhavna is owed Rs. 50,000 by Anil on a promissory note. That is an ascertained sum, legally recoverable, within the court's limits, and both are suing in their own right. She may claim it as a legal set-off under Rule 6, in a written statement at the first hearing. If Anil's claim succeeds in full, the decree will be for the balance of Rs. 30,000, by Rule 6F.
Bhavna instead says the goods were defective and claims Rs. 2,00,000 in damages. That is not ascertained, so it is no legal set-off. But it arises from the same transaction, so she may press it as an equitable set-off, at the court's discretion, and because it exceeds Anil's claim she would in practice raise it as a counterclaim under Rule 6A, which has no ceiling below the court's pecuniary limit and can produce a decree in her favour.
Anil, seeing the counterclaim, withdraws his suit. Rule 6D: the counterclaim may nevertheless be proceeded with. Bhavna's claim is unaffected. Had she pleaded only a set-off, it would have gone with the suit.
Anil says the damages claim is too complicated to be tried here. His route is Rule 6C, an application before issues are settled on the counterclaim, asking the court to exclude it so it can be brought as an independent suit.
Anil ignores the counterclaim entirely. Rule 6E: the court may pronounce judgment against him on it.
Change a fact. Suppose Bhavna's Rs. 50,000 is owed to her not personally but as the executrix of her late father's estate. The "same character" condition in Rule 6 fails, exactly as in the Code's own first illustration, and there is no legal set-off. A counterclaim remains open to her.
What it does not mean
A set-off is not a counterclaim. It cannot exceed the plaintiff's claim and it does not survive the suit.
Legal set-off is not available for unliquidated damages. That is equitable set-off, and it needs the same transaction.
A counterclaim is not merely a defence. Rule 6A(4) treats it as a plaint, so it needs court fee and it is pleaded like a plaint.
A counterclaim is not open indefinitely. The cause of action must accrue before the defendant delivers his defence, or before the time for delivering it expires.
Equitable set-off is not a right. It is allowed at the court's discretion.
Quick revision
Set-off, Order VIII Rule 6. Five conditions: suit for recovery of money; ascertained sum; legally recoverable; within the court's pecuniary limits; both parties in the same character. Pleaded at the first hearing, not later without permission. Has the effect of a plaint in a cross-suit.
Set-off and Counterclaim
Equitable set-off: unascertained sums allowed where the cross-demand arises from the same or a closely connected transaction. Discretionary, and not in the rule.
Counterclaim, Rules 6A to 6F. Any right or claim, damages included, accruing before or after the suit but before the defence is delivered; not exceeding the court's pecuniary limits; treated as a plaint; must be stated specifically as a counterclaim (6B); may be excluded on the plaintiff's application before issues (6C); survives the stay, discontinuance or dismissal of the suit (6D); default by the plaintiff may lead to judgment against him (6E); the court may decree the balance (6F).
The test that settles most problems: if the plaintiff walks away, a set-off dies and a counterclaim lives.
Test yourself
1. State the conditions for a legal set-off. The suit must be for the recovery of money; the sum claimed must be ascertained; it must be legally recoverable from the plaintiff; it must not exceed the pecuniary limits of the court's jurisdiction; and both parties must fill the same character as they fill in the plaintiff's suit. It is claimed by a written statement at the first hearing, and not afterwards without the court's permission.
2. Give two differences between set-off and counterclaim. A set-off is a defence that can only reduce or extinguish the plaintiff's claim, while a counterclaim is a cross-suit which may exceed it and produce a decree for the defendant. And if the plaintiff's suit is stayed, discontinued or dismissed, the set-off falls with it whereas the counterclaim may nevertheless be proceeded with under Order VIII Rule 6D.
3. A defendant claims unliquidated damages arising out of the very transaction sued upon. Can he set it off? Not as a legal set-off, because the sum is not ascertained. He may claim an equitable set-off, which allows an unascertained sum where the cross-demand arises from the same transaction or from closely connected transactions, but that is at the discretion of the court and not a right.
4. When must the cause of action for a counterclaim have accrued? 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.
5. The plaintiff withdraws his suit after a counterclaim is filed. What happens to the counterclaim? It may nevertheless be proceeded with. Order VIII Rule 6D expressly provides that where the plaintiff's suit is stayed, discontinued or dismissed, the counterclaim survives.
6. What must a defendant do to raise a counterclaim properly? He must state specifically in his written statement that he relies on the ground by way of counterclaim, under Rule 6B, and the counterclaim is then treated as a plaint and governed by the rules applicable to plaints under Rule 6A(4).
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.