More comments on Equitable Set-Off and Retention

[An advocate sends in his views as a comment to a series of posts on equitable set-off, and I am happy to reproduce the same as a guest post (in order to appreciate the context of this comment, it might be necessary to read the previous posts in this connection).]

When Lord Collins in Inveresk says that the same result would arise even in English law, he relies on BMI Kemi. BMI Kemi is a leading decision on equitable set-off. So, a question which comes to my mind is this – is this right of retention really the same as an equitable set-off? For a set-off is by its very nature a matter raised before a Court which a Court (in the case of an equitable set-off) has the discretion to allow or to not allow. There is no ‘right’ as such – the remedy is discretionary. So is a party justified (as in Inveresk) in non-payment of certain sums admittedly owed to it without recourse to the Court? Let us put it in another way. Assume that A and B enter into Contracts 1 and Contract 2. Contract 1 has an arbitration clause, Contract 2 does not; the two contracts are part of the same transaction as such; but there is no incorporation of arbitration clause by reference. (An Inveresk situation with one of the two contracts having an arbitration clause would fit in perfectly.) A alleges breach of Contract 1 and claims Rs. 5000 as damages. The matter goes before the arbitrator. B claims that actually, A owes B Rs. 5000 under contract 2, so B is justified in non-payment. Now, if there is a right of retention, then B’s plea may well be justified; as the right will operate effectively to nullify A’s claim itself. But if there is a mere discretionary remedy available, can an arbitral tribunal (which may not be empowered to decide in equity) allow B such a relief? My point is this – does the fact that an equitable set-off may be available (note that it will never be the case that an equitable set-off is available as the remedy must necessarily be discretionary) also mean that it follows that the defendant can retain the moneys due? What exactly is the relationship between the two concepts – or are they just two names for the same concept?

Let’s take a look at the judgment of Lord Hope which is the majority judgment in Inveresk. In para 30, we see: “In simple terms, what Tullis Russell seek to do is to withhold, or "retain", payment of the sum sued for by Inveresk when the amount due to them has been ascertained, pending the ascertainment of their claim of damages so that, when it has become liquid, they may set off the amount of that claim against the sum payable to Inveresk. As a general rule payment of a debt which has been found to be due and payable cannot be withheld on a plea of retention in respect of a claim which is still illiquid. But Tullis Russell seek to rely on an exception to that rule which applies where the illiquid claim arises directly out of the same contract…” Is this equitable set-off? Is this something broader? To me this seems somewhat different from an equitable set-off. Next, in the same paragraph, “…retention does not operate to extinguish claims, whereas compensation when pled and sustained does have this effect…” Can we infer from this that retention is not a defence while compensation is? If so, is it not true that equitable set-off may be pleaded as a defence – once allowed by the Court it amounts as a defence? If this is also true, then it follows that equitable set-off and retention are two different things; which in turn would mean that Lord Collins was perhaps mistaken in relying on BMI Kemi for the proposition that the same result obtains under English law. Now let us turn to paragraph 33, where the following passage is cited with approval. “Compensation is pleadable only between liquid debts, with an exception, largely in the discretion of the court, in cases where an illiquid debt may be rendered liquid without delay….The right of retention when debts arise out of the same contract, or where bankruptcy has supervened, is considered further in a later chapter.” Now this seems more like equitable set-off. And if compensation is not the same as retention, and compensation is equitable set-off, then equitable set-off is not retention. The discussion in Lord Rodger’s judgment on the two types of retention may perhaps help one understand this better. For now, I am more confused and need to reflect on this further. At the end of the day, it may turn out to be nothing more than a terminological issue.

Meanwhile, I would also like to highlight a Madras High Court judgment from 1915(!) on a similar point – “It is well settled in. this Court that claims for unliquidated damages may be raised by way of equitable set off if they arise out of the same transaction as the plaintiff's cause of action, but I cannot agree that in a case like this such claim can be so set up even if it was (time-) barred at the date of the suit. It would certainly not be the equitable principle administered by the Court of Chancery to allow the provisions of the statute of limitations to be evaded in this way…” Chetty v. Desikar, (1916) 30 MLJ 59. 

Now to another issue – is there a difference between an unliquidated claim (which may arise in cases of an equitable set-off) and an illiquid claim (such as in Inveresk where retention comes into play). Perhaps, the former would refer to a set-off where the sum claimed is unliquidated, but it can be made liquid in the course of the same proceedings before the same court (as in a set-off or a counterclaim). In other words, the claim, while still unliquidated, is capable of being made liquid in the same proceedings. The latter might refer to claims which are not capable of being made liquid in the same proceedings (they may be under adjudication in a completely different forum, for instance). Can we say that equitable set-off pertains to cases of unliquidated claims; and retention to illiquid claims? Again, for now I have no definite answers and plenty of questions, but would be delighted for any clarity on the point from any of the readers…