Sunday, November 10, 2013

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.

1 comment:

Renu Gupta said...

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.