1. Comparison of set-off systems

In accordance with the nature of the choices made OHADAC Principles, the second section of this chapter introduces a conventional rule for set-off. Although it is not as exhaustive as a legal set-off regime, like the ones on which the other international texts are based, the rules included in this section are the result of a comparative approach to the legal regulation of set-off presents in the Caribbean law systems and they aim to ensure transparency and agility in legal transactions.

In countries that follow the civil law model, set-off has a substantive nature, whereas in common law systems set-off was originally conceived as a strictly procedural device (independent set-off). In this last case, simultaneous extinction of the claims of the subjects involved takes effect only after judicial procedure. Until then, all the legal and contractual means required to perform the contract should be used, without the obligor being able to invoke or declare set-off.

However, the difference between the two legal families is not as considerable as it may seem. On one hand, common law systems have “transactional set-off”, whose substantive nature has been confirmed by authors and case law [Hanak v Green [1958], 2 QB 9, 29; BICC plc v Burndy Corp [1985], RPC 273, 315; Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri) (1978), 1 QB 927, 981F; Aectra Refining and Manufacturing Inc v Exmar NV (1994), 1 WLR 1634, 1649; Eller v Grovecrest Investments Ltd (1995) 1 QB 272; Modern Engineering (Bristol) Ltd v Gilbert-Ash Northern Ltd (1974), AC 689, 717; transaction set-off is considered a means of payment in Burton v Mellham (2006), UKHL 6, 23)]. On the other hand, in civil law systems, it is possible that the judge declares set-off even if not all the requirements established in the respective legal system for legal set-off are met and in the absence of a contractual set-off agreement.

2. The requirement of reciprocity in the OHADAC legal systems

The reciprocity of claims is an essential requirement for legal set-off, such that the other requirements serve only to enable automatic set-off. The aim behind this requirement is to avoid the claim of one person being used without his or her consent to satisfy the obligation of another person. Accordingly, in principle, an obligation cannot be set off with a claim external to the obligation or an obligation external to the claim.

Legal provisions of many legal systems include reciprocity as a requirement for set-off. Article 1.289 of the French and Dominican Civil Code simply requires that two persons be obliged to each other. A similar statement can be found in Article 1.714 Colombian Civil Code; Article 1.073 of the Haitian Civil Code; Article 2.141 of the Nicaraguan Civil Code; Article 13:101 PECL; Article III-6:102 DCFR and Article 8.1 UP. However, Article 218 of the Proposals for the Reform of French Law on obligations of 2013 no longer refers to obligations but to “reciprocal obligations”. Other civil codes (Article 806 of the Costa Rican Civil Code; Article 1.469 of the Guatemalan Civil Code; Article 1.473 of the Honduran Civil Code; Article 2.185 of the Mexican Civil Code; Article 1.081 of the Panamanian Civil Code; Article 1.149 Porto Rican Civil Code) reproduce the more concrete wording of Article 1.195 of the Spanish Civil Code, which specifies that both people must be by their own right each other's obligee and obligor. It follows that people with a special connection with someone else's estate (representatives, agents, heirs, partners, etc.) cannot set off their obligations with a claim of this estate because they would not be offsetting on their own right. According to this, paragraph 3 of Article 6:127 of the Dutch and Suriname Civil Code establishes that the right to set off does not exist when the claim or the counterclaim of the obligor or the other party belong to separate properties. Furthermore, Article 1.474 of the Honduran Civil Code, Article 1.082-1 of the Panamanian Civil Code and Article 1.150-1 Porto Rican Civil Code follow Article 1.196 Spanish Civil Code and add that every obligor must be each other's main obligee and obligor. According to this rule the obligor cannot set off with a claim that is owned by an accessory obligor (like the bail) or to set off while he is still an accessory obligor.

Reciprocity is also considered an essential requirement under common law systems (mutuality). Independent set-off is not allowed when the trustee wants to set off an obligation of the beneficiary with a claim of his own in order to follow the interests of the beneficiary. However, the consideration of the owner of the claim (see through) is possible in equity [Bankes v Jarvis (1903) 1 KB 549, 552). It is also possible that the beneficiary sets off with a claim that the trustee is holding in its name [Cochrane v Green (1860) 9 LB (n.s.) 448, 464, doubting this Middleton v Pollock, ex parte Nugee (1875), LR 20 Eq 29]. In the field of transactional set-off there is controversial case law according to which a tenant can set-off with a counterclaim that it has with his former landlord [Smith v Muscat (2003), EWCA Civ. 962]. A winding down of the reciprocity requirement also has been considered necessary when, for example, a third person sells goods to the trustee in a transaction authorised by the trust and the trustee pays the price with his own money. In this case, it is held that it should be able to offset damage caused by the defective goods with the price paid for them.

Departing from the general rule, some civil codes from the OHADAC area have regulated some specific examples of lack of reciprocity. Articles 1.716 Colombian Civil Code and 2.141 of the Nicaraguan Civil Code state that the main obligor cannot set off against the obligee what the obligee owes to the bail and that if the obligor of a ward is required to pay, it cannot set off with what the custodian owes to it. These rules are followed in both civil codes with a rule on set-off in case of joint obligors. In accordance with Article 1.716 Colombian Civil Code, set-off is not possible except if the owner of the counterclaim allows for it. In accordance with Article 2.142 of the Nicaraguan Civil Code in this case set-off is possible without need for any intervention of the joint obligor which owns the counterclaim. Another particular case is dealt specifically in Article 1.474 of the Guatemalan Civil Code, according to which a broker or another intermediary cannot set off the sums that he receives to buy specific goods nor the price received for the goods sold with the sums de principal owes to it. Finally, in accordance with Article 2.143 of the Nicaraguan Civil Code, in case of securities payable on demand the obligor cannot set off with the endorsee what was owed to it by the former endorsers.

Apart from these special rules, proper exceptions to the general rule can also be found in legal systems within the OHADAC area. The most relevant ones are the possibility of set-off after assignment of the principal claim, the possibility of setting off with a counterclaim that is owned by another of the joint obligors and the possibility that the bail pleads set-off with regards to what the obligee owes to its principal obligor. The first two exceptions are dealt with in Section 1 of Chapter 8 and in Section 4 of Chapter 4 of these Principles.

The third exception concerning the bail has been expressly regulated in Article 1.294 of the French and Dominican Civil Code (maintained in Article 225 Proposals for the Reform of French Law on obligations of 2013), 1.475 of the Guatemalan Civil Code, 1.078 of the Haitian Civil Code, 2.145 of the Nicaraguan Civil Code, 1.083 of the Panamanian Civil Code, 1.151 Porto Rican Civil Code, 1.121 St. Lucian Civil Code and 1.336 of the Venezuelan Civil Code. This rule would have its counterpart in a rule stating that the obligor cannot set off with a claim of the bail. Article 2.198 of the Mexican Civil Code allows the bail that has been sued by the obligee to plead set-off with an own claim against the obligee for the benefit of the obligor. Article 6:139 of the Dutch and Suriname Civil Code also deal with the surety and in general with the person whose goods serve as a security for someone else's obligation, but they do not refer to the possibility that the bail offsets with a claim of the obligor. In accordance with Dutch and Suriname Law, it is only possible to invoke the suspension of the liability as far as the obligee is entitled to set-off his secured claim against a due and demandable obligation indebted to him by the obligor. This is a dilatory defence as known from German and Swiss law (§ 770 German Civil Code, Article 121 Swiss Civil Code). In these legal systems set-off also requires a declaration. The guarantor and the person whose goods serve as a security for someone else's obligation may furthermore invoke that they are released from their liability as far as the obligee has lost its right of set-off unless the obligee had reasonable grounds to waive this right or he is not to blame for the loss.

Finally, Article 1.717 Colombian Civil Code introduces a particular exception: the agent may set off with an own claim the claim of a third party against the principal if it provides a security stating that the principal will confirm the set-off. But it may not set off a claim that a third party has against him with a claim owned by its principal unless the principal itself agrees.

In common law reference must be made to the interveners. Interveners are specific subjects (assignees, owners of a floating charge, obligees with a Mareva injunction, a principal if its agent had concluded a contract without specifying that it was acting on behalf of its principal, etc.) whose intervention puts an end to reciprocity. It must be assessed in every particular case if priority must be given to the guarantee function of set-off or to the interest of the intervener. The type of set-off must also be taken into consideration. The general rule in these cases is that the obligor may set off against the intervener in the same manner as if he were the obligee if claim and counterclaim had been created or had resulted of a transaction entered before the time in which the obligor knew about the intervention. Additional requirements apply in the context of an independent set-off.

The set-off of an own obligation with someone else's claim or of someone else's obligation with an own claim is also not possible according to the OHADAC Principles. On the one side, the common understanding of the reciprocity requirement allows a regulation in accordance with all the legal traditions of the geographical area. On the other side, if we consider that the obligations imposed by these Principles are not of legal nature but the result of an agreement of the parties a restriction to its effects to the sphere of the contractual parties seems most advisable.

The wording of Article III-6:102 (c) DCFR has also been adopted. It seems very appropriate because it does not only prevents agents, trustees, etc. from offsetting an own obligation with a claim of the principal, beneficiary etc., but it also contains the prohibition to set off with a seized claim.

The traditional exception to the reciprocity requirement in favour of the bail has not been included. As it has been seen, this exception has only sense when set-off operated automatically and is not included in the legal systems that require a declaration of set-off.

3. Effects of set-off

The substantive or procedural characterisation of set-off may affect greatly the regulation of it effect. In those OHADAC legal systems which follow the French and Spanish traditions it is considered that set-off takes effect automatically, even when the parties ignore the meeting of the legal requirements (Article 1.715 Colombian Civil Code; Article 809 of the Costa Rican Civil Code; Article 1.290 Dominican an French Civil Code, maintained in Article 223 of the Proposals for the Reform of French Law on obligations of 2013; Article 1.074 of the Haitian Civil Code; Article 1.480 of the Honduran Civil Code; Article 2.186 of the Mexican Civil Code; Article 2.140 of the Nicaraguan Civil Code; Article 1.088 of the Panamanian Civil Code; Article 1.156 of the Puerto Rican Civil Code; Article 1.118 of the St. Lucian Civil Code; Article 1.332 of the Venezuelan Civil Code). The automatic effect of set-off is not satisfactory in terms of legal certainty, as the existence or non-existence of the claim in the assets of de obligee will depend exclusively on the existence of legal requirements, which may sometimes be difficult to assess. Nevertheless, the consequences of the automatic effect of legal set-off in these legal systems are influenced in particular by the fact that the judge cannot declare set-off ex officio, but the set-off must be declared by one of the parties in the proceedings. Due to this rectification at the procedural level, the French-Spanish solution comes closer to the solution maintained in the civil legal systems of Germanic influence, according to which set-off can only take place after a declaration. Consequently, it has retroactive effect as from the time when the legal requirements are met. This is also solution adopted in Articles 6:127 and 6:129 of the Dutch and Suriname Civil Code, Article 302 of the Cuban Civil Code and Article 1.471 of the Guatemalan Civil Code.

However, the option for one solution or the other will have significant consequences. First, in the legal systems where set-off occurs automatically, a payment made when the requirements for set-off are met is considered a waiver of set-off (e.g. Article 1.299 of the French and Dominican Civil Code; Article 1.084 of the Haitian Civil Code). The voluntary waiver to extinguish the personal claim means that third parties should not be negatively affected by this decision, unless the obligee was not aware of its right to set-off. This could lead to a condictio indebiti. In legal systems that require a declaration, if there is no declaration, there is no set-off to be waived and the obligee cannot use a condictio indebiti to recover the money it has paid. However, in both cases, interest for late payment and penalties will no longer apply. The party declaring set-off will be entitled to recover default interest or sums paid in this respect as from the time when set-off occurred or the time when the requirements for set-off were met.

Secondly, in legal systems where set-off occurs automatically, joint obligors that do not own the counterclaim could in principle plead the set-off that has already taken place if the obligee requires payment from any one of them. In the legal systems in which set-off requires a declaration of the owner of the counterclaim, the other solidary obligors cannot, in principle, replace the owner of the counterclaim and declare set-off. In this case, the set-off would be a personal exception.

Thirdly, if set-off occurs automatically, once the legal requirements are met, the assignment of either claim or counterclaim after fulfilment of form set-off would be in fact the assignment of any one of the obligations concerned by the set-off, will actually affect the claim that has already been extinguished. That is why, in legal systems that include this rule, the assignee, in principle, can only enforce its own claim when there has been a waiver of set-off by the obligor, which is implicitly declared with the assignment. In legal systems where set-off requires a declaration, the end of reciprocity in the positions of obligor and obligee due to an assignment of the claim means that set-off cannot be declared after the date of the assignment. However, in these legal systems it is exceptionally allowed to declare set-off under specific conditions that aim to protect the assignee.

Lastly, if mutual claims are extinguished automatically when the requirements for set-off are met, the later limitation of one of the claims is irrelevant. Although the situation that entitles the party to set-off is necessary at the time of the declaration, in principle set-off is not necessary if said situation has already occurred, for example because one of the claims is time-barred. Consequently, in legal systems in which set-off has retroactive effect after its declaration, the possibility of declaring set-off with a time-barred claim must be explicitly allowed (e.g. Article 6:131 of the Dutch and Suriname Civil Code; Article 1.472 of the Guatemalan Civil Code]. This possibility is relevant with respect to counterclaims. If the principal claim is time barred, the obligor can plead its limitation to avoid set-off.

In the common law legal systems, set-off generally has an ex nunc effect. This is clear in the case of the independent set-off, which does not require that the claim and counterclaim arise from the same legal relationship or from closely connected legal relationships. Contractual set-off also does not have a retroactive effect, even if the fact it has been agreed in a contract to consider the possibility of a set-off still remains despite the assignment of the main obligation, for as long as the obligor has not been informed. However, there is no absolute certainty about the effects of the transactional set-off, which is possible because of the close connection between the claim and the counterclaim. It has been suggested that the transactional set-off should have retroactive effects as payment in arrears at the time the counterclaim is due. It also has been considered that if set-off is pleaded before the obligee has resorted to self-help remedies, the obligee will not be able to use them if the set-off extinguishes its claim entirely [Eller v Grovecrest Investments Ltd (1995), 1 QB 272, 278E; Fuller v Happy Shopper Markets Ltd (2001) 1 WLR 1681, 1690D]. However, the obligee must be allowed to resort to these remedies as long as the obligor does not declare the set-off. Conversely, if set-off is pleaded as a defence against a contested claim, it is considered that it should have retroactive effect. Another school of thought considers that transactional set-off does not legally extinguish the claim, but the exercise of contractual remedies by the obligee in this case would be abusive.

The UP (Article 8.5), the PECL (Article 13:106) and the DCFR (Article III-6:107) adopt a solution that originates from the Nordic countries. According to these sets of rules, set-off has ex nunc effect after notice has been given by one party to another. This is an optimal solution from the point of view of legal certainty, which also makes legal transactions easier because the existence of all the legal requirements is only relevant at the time of the notification.

With respect to existing solutions, it could seem at first that it would be possible to opt, in the OHADAC principles, for an automatic or ipso jure set-off with ex tunc effects up to its declaration or with ex nunc effects. The option for an automatic effect is the one that currently prevails in OHADAC area legal systems. However, this solution is not appropriate for enhancing cross-border legal relations in the region. On the contrary, it seems that best option with respect to legal certainty is to make the set-off depend on the declaration.

Nevertheless, it is not recommended to assign a retroactive effect to the declaration. This is because the retroactive effect is accepted only for transactional set-offs, and even then with certain reservations However, it does not seem advisable to give retroactive effect to the declaration. On the one side, in common law systems retroactive effect of set-off is only accepted with some reservations in relation to transactional set-off. Moreover, this solution may act as an incentive for the obligor because he will be interested in declaring set-off as soon as possible in order to avoid default interests or contractual or legal remedies for non-performance. If the obligor wants to declare set-off with retroactive or even automatic effect it can always resort to the national regulation which is applicable in order to fill in gaps left by these principles. Likewise, it is advisable to consider a set-off agreement with retroactive effect.

Lastly, set-off extinguishes the obligations concerned, totally if they are of the same value or amount, and partially if they are different. In the second case, set-off reduces the amount of the higher obligation by the amount of the lesser obligation, which will be the only obligation to be extinguished.