The Supreme Court on Equitable Set off and the Limitation Act

An
important question that has troubled the Indian courts over the years is
whether an equitable set off can be
raised even when, if it had been raised as a principal claim, it would have
been barred by limitation. For example: suppose X enters into a contract with Y
which it alleges Y has breached, and for which it institutes an action seeking
damages of Rs. 1 crore. Now if Y has an ascertained sum (a debt) owed to it by
X this can, of course, be taken into account but it is established law that
even an unascertained sum (for
example, a claim) can ‘postpone’ Y’s
liability to pay X until its own claim is determined or ensure that the two
claims are determined together. We have commented on this principle, known as equitable
set off (or sometimes as the ‘right of retention’, an allied principle) on this
blog.
The difficulty arises when the claim which Y seeks to raise through equitable
set-off is time barred so that, if Y instituted a separate suit based on that
claim, it would be dismissed under section 3 of the Limitation Act, 1963. As
Mihir has pointed out,
the Madras High Court, in 1915,
held that the Limitation Act ordinarily applies to equitable set-off. Sir John
Wallis CJ said in that case that “[i]t
would certainly not be equitable or in accordance with the equitable principles
administered by the Court of Chancery to allow the provisions of the Statute of
Limitations to be evaded in this way
” and Seshagiri Aiyar J came to the
same conclusion, following the judgment of Lord North in Fitton v Macclesfield 23 ER 474.

In
its recent judgment in Jitendra Kumar Khan v Peerless
General Finance
, the Supreme Court appears to have rejected this view.
The facts of the case do not emerge clearly from the Court’s judgment, but it
appears that a claim was instituted by the plaintiffs (“agents”) in the
Calcutta High Court in 1993 for commission of Rs. 25 lakhs allegedly due to
them from the company (“Peerless”). Peerless filed a written statement in 1994.
Four years later, it filed an application to amend the written statement to
plead that a sum of Rs. 4.19 lakhs was owed to them by the agents. The agents
opposed this application on the ground that it was inconsistent with Order VIII
Rule 6 of the CPC and time barred. The single judge agreed and refused leave to
amend the written statement. The Division Bench allowed an appeal preferred by
Peerless, holding that the Limitation Act does not apply to equitable set off
and that equitable set off is independent of the CPC. The agents then appealed
to the Supreme Court.

This
appeal raised an important point of law. As briefly described above, there
appears to be a difference of opinion in the High Courts in India on the
characterisation of equitable set off and it is also a controversial issue in
the common law world generally (see for example the observations of Lord
Denning summarised here).
Unfortunately, the Supreme Court affirmed the conclusion of the Division Bench without
a clear explanation of why the Limitation Act does not apply to equitable set
off. The Court’s reasoning appears to be that there can be equitable set off
unless it arises out of the same or a similar transaction which, while undoubtedly
true, throws little light on the treatment of equitable set off for the purposes
of limitation. Its reasoning is almost entirely captured by the following
passages:

16.
From the aforesaid enunciation of law it is quite clear that equitable set-off
is different than the legal set-off; that it is independent of the provisions
of the Code of Civil Procedure; that the mutual debts and credits or
cross-demands must have arisen out of the same transaction or to be connected
in the nature and circumstances; that such a plea is raised not as a matter of
right; and that it is the discretion of the court to entertain and allow such a
plea or not. The concept of equitable set-off is founded on the fundamental
principles of equity, justice and good conscience. The discretion rests with
the court to adjudicate upon it and the said discretion has to be exercised in
an equitable manner. An equitable set-off is not to be allowed where protracted
enquiry is needed for the determination of the sum due, as has been stated in …

17.
Tested on the aforesaid principles we are disposed to think that the Division
Bench has rightly allowed the amendment on the base that the claim put forth
could be treated as a plea in the nature of equitable set-off, for it has
treated the stand taken in the amendment petition to be a demand so connected
in the nature and circumstances that they can be looked upon as a part of one
transaction. The view expressed by the Division Bench has to be treated as a
prima facie expression of opinion. Needless to emphasise, whether the claim
would be allowable or not will depend upon the evidence adduced before the
Court so as to sustain a claim of equitable set-off…

It
is submitted that the answer to the limitation question really depends on more
substantial points and in particular on what one considers is the correct analysis
of the nature of equitable set off. It
is also, with respect, difficult to see how the conclusion that the Limitation
Act does (or does not) apply to equitable set off can be “treated as a prima facie expression of opinion”. One can readily
understand that approach if a court’s conclusion is that the plaintiff has an
arguable case that the cause of action arose within the limitation period (which
may well depend on whose version of the facts the trial judge accepts) but not
if the conclusion is that the Limitation Act can (or cannot) in principle apply
to a certain type of claim. One hopes that the Supreme Court will
return to this subject when the opportunity next arises.

About the author

V. Niranjan

1 comment

  • Rightly said, there is no analysis on the limitation query – the point in appeal – in this case.

    In absence of that, this decision, does very little to add to the unclear jurisprudence on equitable set off in India.

    As a matter of fact, although unnoticed by court, Order XX Rule 19(3) of the CPC also appears to recognize equitable set-off.

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