| Date | 25 July 1996 |
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| Judgment | Hoppe -v- Titman, 21 February 1996, 1996 CILL 1148 |
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| The Issue | Distinction between set-off and counterclaim, and raising a new action following settlement. |
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| Implication |
The need for clarity in drafting a notice of payment into court or a without prejudice offer to ensure the disputed matters are effectively disposed of. |
printThe distinction between a set-off and a counterclaim is important in the construction industry. When one party to a contract has cause to complain about the other party's performance, the most immediate and effective remedy is for the injured party to deduct a sum of money from what would otherwise be payable to, or claimed by, the offending party. This act of deduction is known as set-off. For a deduction to amount to a valid set-off, both the claim and the set-off must arise out of, and be inseparably connected with, a single transaction. A counterclaim on the other hand is of much wider concept. It is a claim which may be brought as an entirely separate action against a plaintiff. An important distinction is that a set-off may only be used to diminish or extinguish a claim made by the defaulting party, and is often therefore described as a shield. A counterclaim however is not limited as to amount in this way, and may be used as a sword. The principles related to set-offs were set out in the case of Modern Engineering -v- Gilbert Ash in 1974. These require a distinction to be drawn between a true set-off, whereby the defendant counterclaims in the action the amount of damages caused by the Plaintiff's breach of contract, and an abatement which is often but inaccurately referred to as a set-off. In the latter the defendant can 'simply defend himself by showing how much less the subject matter of the action was worth by reason of the breach of contract'. The recent case of Hoppe -v- Titman considered the distinction between set-off and counterclaim. Some years ago Mr Titman sued Mr and Mrs Hoppe for payment of his fees for architectural work. The Hoppes did not counterclaim but instead pleaded a defence of set-off alleging negligence. That action was settled by acceptance by Mr Titman of a payment into court. Two years later the Hoppes sued Mr Titman for professional negligence. The Court of Appeal was asked to consider whether the Hoppes were free to pursue their allegation of negligence or whether this should be considered 'res judicata'. The 1975 case of Yet Tung Investment Co Ltd -v- Dao Heng Bank Ltd was quoted by lawyers acting for the architect saying: "Where a given matter becomes the subject of litigation in a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of a matter ...... which was not brought forward only because they have, from negligence, inadvertence, or even accident, omitted part of their case." Lawyers acting for Mr and Mrs Hoppe contradicted this by saying that the rules concerning payment into court permitted the making of a counterclaim in a separate action. They cited the 1961 case of Martin French -v- Kingswood Hill Ltd. In this case the court held that a payment in by a defendant represented the sum calculated to satisfy the Plaintiff's claim and did not permit the defendant to pay in a balance between the Plaintiff's claim and the defendant's set-off and counterclaim. Consequently the cause of action in the counterclaim had not been extinguished. Lord Justice Devlin justified this decision in the following terms: "It is of course clear that if judgement is delivered upon a claim that is subject to a set-off, both the claim and the set-off are disposed of. The cause of action in the set-off cannot thereafter be raised in any new action, neither can it be raised by counterclaim. The matter is res judicata. But the conclusion of an action by payment into court is something quite different from its conclusion by a judgement." He went on to say: "The rules as drafted do not permit a defendant to strike a balance between the claim and the set-off and counterclaim and to pay in to satisfy the balance." Following the decision in Martin French, the Rules of the Supreme Court were amended to permit a party paying into court to refer to a counterclaim. Unfortunately none of this applied to the previous settlement between Mr Titman and Mr and Mrs Hoppe and accordingly the Hoppes were free to pursue the allegation of negligence. All of this highlights the importance of clarity in the drafting of without prejudice offers in arbitration where rules of court would not apply. The case also shows that in certain circumstances a defence of set-off may be preferable to counterclaim since there may be increased protection against the possibility that the Plaintiff's work may be even more defective than originally feared.
CJ-9624
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