Legal set-off
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Legal set-off
/ˈliːɡᵊl sɛt ɒf/ (n.)
AKA statutory set-off: A set-off arising at law (and not by contract or equitable principles) under which a set off of debts will be recognised between two parties where the debts are mutual (between the same parties acting in the same capacity), are “liquidated” (fixed and certain in amount), due and payable at the time of set-off, and would each be recoverable by competently conducted legal action.
Legal set-off can only be asserted in legal proceedings and only arises when pleaded as a defence — there are those who would consider it a procedural defence rather than a substantive right. It does not extinguish either liability but leaves them as separate and distinct claims in existence until a judgment is given in which the claims are merged.
Quoth Mr G. Leggatt Q.C., presiding Deputy J in the Ch. D, in the case of Fearns v Anglo-Dutch Paint and Chemical Company Limited:
Legal set-off is a creation of statute. It originated in the Insolvent Debtors Relief Acts 1729 and 1735 which provided that where there were “mutual debts between the plaintiff and the defendant ... one debt may be set against the other”. Those rights are now enshrined in section 49(2) of the Senior Courts Act 1981 and CPR r.16.6: see Re Kaupthing Singer v Friedlander [2009] 2 Lloyd’s Rep 154, 156.
In Stein v Blake [1996] AC 243, 251C-D, Lord Hoffman said:
Legal set-off does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash-flow. As a matter of procedure, it enables a defendant to require his cross-claim (even if based upon a wholly different subject matter) to be tried together with the plaintiff's claim instead of having to be the subject of a separate action. In this way it ensures that judgment will be given simultaneously on claim and cross-claim and thereby relieves the defendant from having to find the cash to satisfy a judgment in favour of the plaintiff (or, in the 18th century, go to a debtor's prison) before his cross-claim has been determined.