Compensatio or Set-off has been formulated in similar terms by many jurists.

Janak de Silva*

(A) Meaning and Effect

The meaning of Compensatio or Set-off has been formulated in similar terms by many jurists.

Set-off is an adjustment of debits and credits one against the other. Or, as Cujacius says, it is a releasing from a debt due to another by the reckoning of a debt due to oneself

Compensatio is the setting off of a credit against a debt existing between the same persons of an equal value. This must be properly or strictly set forth in law, because otherwise it cannot be ascertained

Should A, while owing B a sum of money on one transaction, be entitled in the same capacity to claim another sum from B also in the same capacity, upon some other transaction, he may be permitted to set off against the sum due from him on the former transaction whatever is due to him on the latter. Should his debt be larger than his credit, his debt would then be reduced to the extent of the credit while if the credit be equal to or greater than the debt, the debt would be wiped out altogether.iv

This principal of law originated from the Roman Law and was later adopted into the Roman-Dutch Law. It would appear that many Roman jurists used the words Compensatio or Set-off in an analogus sense as seen above, although this principle of law was identified as Set-off in the English Law in terms of which there were certain material differences with Compensatio as known in the Roman Law which will be discussed later.

It needs to be considered as to when set-off or compensatio takes effect and whether it needs to be pleaded specifically. Compensatio takes effect pso jure, that is to say, by the mere operation of law without being pronounced by the judge or opposed by the parties. As soon as a person who is a creditor of another becomes his debtor of a sum of money or other matter susceptible of compensation with that of which he is creditor

* State Counsel

making clear that it was already created retrospectively by law from the time when a debt started to be due on both sides. The declaration does not wipe out the obligation, but notifies that it had already previously been wiped outvi. Thus, it is seen that although compensatio operates ipso jure, it needs to be specifically pleaded although a judicial pronouncement on it is merely to notify that the obligation has been extinguished.

The effect of set-off being raised before a judge by an opposite party is not to make it appear that such opposing party also admits that he is a debtor for what has been demanded. The person against whom suit is brought is not considered to make any admission as to the plaintiffs claim because he employs an exception. Nor is anyone prevented from employing a number of defences and exceptions, though they are different, so often as the law does not stand in the way. It matters little indeed in regard to this question whether one sets up in a judicial proceeding a method by which one is ipso jure protected or a method by which one is protected by exception only. This is particularly so if you bear in mind that “It make no difference whether one has ipso jure no action, or is robbed of strength by an exception” raised in a judicial proceeding. Nor is it right that one who defends himself by a more powerful method of release, by which he declares that he is ipso jure protected, should be in a worse position than one who employs a defence which in some respects is weaker, as when he says that he is fortified by an exceptionvii.

(B) Origin and Historical Development

The term compensatio comes from the ancient custom of weighing up bronze, when coin had not as yet been invented, or had indeed been invented but was still won’t to be weighed up rather than to be counted up. The result of this was that an equal amount of bronze which was due on either side ceased, when weighed together, to be due on either side, and only that which because of its preponderance was not weighed together remained in credit on the one side.

In order to understand the development of this principle in the Roman-Dutch Law, an insight is needed of the procedure adopted by the Romans in the adjudication of claims.

Judicial proceedings in the classical period of Roman Civil Procedure was two fold, the proceedings “in jure” and the proceedings “in judicio”.

The proceedings “injure” are the proceedings before the magistrate, that is to say, before a judicial officer, the organ and representative of the sovereign power of the State. And since the introduction of the praetorship the “magistrate” meant, as a rule, the praetor. The object of the proceedings in jure was, first to ascertain whether the plaintiffs claim is admissible at all, i.e. whether there is any form of civil procedure by which it is enforceable

Thereafter, the magistrate or the praetor, as the case was, made an appointment of a private judge or several private judges, acting under oath to hear and determine the issue formulated in the “in jure” proceedings. The decree whereby they were appointed was known as The Formula.

The Formula was generally framed as an order to condemn, and consisted accordingly, as a rule, of two main parts: the “intentio” and the “condemnatio”. The form is, in outline, as follows: If you (judex) are satisfied that such and such a right exists, or such and such a fact is true (intentio),

condemn the defendant (condemnatio)

The proceedings that takes place then before the judex were known as proceedings “in judicio”. The object of these proceedings were to obtain a judgment (sententia) of the judex on the formula.

The Civil Law did not recognise that a defendant had any right of compensatio and it was a matter entirely within the discretion of the judge whether he would allow a set – off or not.

The absence of a right of set-off on the part of the defendant made itself felt at once in the actiones stricti juris. According to the civil law, a person who was sued on a loan was liable to condemnation notwithstanding the fact that he could prove a counter-claim against the plaintiff for a capital sum equal in amount to that which the plaintiff was seeking to recover from him. It was through the action of the praetor that the existence of an admissible counter – claim, which was already a material fact in actiones bona fide, became a material fact in actiones stricti juris as wellix.

If the defendant pleaded an admissible counter – claim in the proceedings in jure- i.e. in the first stage of the suit, before the magistrate, prior to the granting of the formula – the praetor would give effect to such a plea by inserting an exceptio doli in the formula. He would treat an attempt of the plaintiff to enforce a stricti juris negotium, without taking notice of a proper counter – claim on the part of the defendant, as an inequitable proceeding which, though permissible according to the civil law, he (the praetor) would refuse to allow. But the result of an exceptio doli of this kind, granted on the ground of a counter claim properly set up by the defendant, was not a set – off, but a dismissal in toto of the plaintiff’s claim ( provided the defendant succeeded in proving his counter – claim in judicio), and that quite regardless of the amount of the counter – claim. Thus, what the praetor had done in the cases of actiones stricti juris was not to introduce the principle of set – off, but to compel the plaintiff, by indirect means ( viz. on pain of forfeiting his whole claim), to deduct the amount of the counter claim himself at the time of commencing his action, or rather before the granting of the formula”.

The next step in the development of compensatio was effected by a rescript of Marcus Aurelius which provided that, where an exceptio doli was inserted in the formula in a judicium stricti juris on the ground of an admissible counter – claim, such an exceptio should operate by way of set – off. In all cases, therefore, where an exceptio doli was thus inserted, the defendant, on making good his plea, was not for that reason entitled to have the claim against him dismissed in toto, but was only entitled to have it dismissed to the extent of his counter claim. The necessity, however, for the praetorion remedy by exceptio doli remained unaffected, and if the defendant in an actio stricti juris failed to get such an exceptio inserted, he was precluded from raising a plea of set off. In other words, the defendant in a judicum stricti juris was still obliged to set up his counter claim in jure with a view to having an exceptio doli embodied in the formula. The civil law still refused to acknowledge any right of compensatio, and , where the principle of compensatio was admitted it took effect, as before, not ipso jure, but only ope exceptionis, i.e. by virtue of praetorian law.xi

Justinian subsequently made a plea of set – off a ground of defence operating ipso jure in the processual sense of the term. According to Justinian’s law a plea of set – off may be advanced at any stage of the action, and the judge need not be expressly authorised to take such a plea into account. The only condition required is that the counter claim shall be easy of proof (liquida), i.e. the evidence necessary to establish it must not delay the final decision of the suit. With this restriction Justinian admitted pleas of set-off in all cases whatever, in cases where the claims arose ex dispari causa as well as in those where they arose ex eadem causa, and even in cases where the plaintiff sought to assert a claim- e.g. for damages- by means of a real action. Certain specified cases only were excepted, e.g. the actio deposit directa. But even in Justinian’s law the effect of a counter – claim, from the point of view of private law, was not to cancel the other claim ipso jure, but merely to suspend it – a further act ( viz. an agreement or a judgement) being necessary to convert the suspension into an extinction.xii

(C ) Consequences of Set-off

(1) That in case my creditor, with whom I have deposited effects as a security, afterwards becomes my debtor, I can demand these effects back, provided I offer him the balance due to him.

(2) That when a debt carries interest, and the debt to be set-off against it does not bear interest, the debt bearing interest is extinguished to that amount, and the interest in the same proportion.

(3) That although my creditor is not bound to accept a partial payment, yet, however, when he becomes my debtor for a less sum than I owe him, he is obliged to abate his demand pro tanto, as the legal consequence of set-off.

(4) That having paid a debt already extinguished by set-off, we are entitled to recover back the money so paid, as not being due unless such payment be made in satisfaction of a judgment.xiii

(5) Where A is indebted to B on several separate accounts, and he is B’s creditor in a certain sum of money, the compensation ought to be made against that debt which it is most to A’s advantage to discharge, provided it had been contracted before B’s debt to him.xiv

(6) One who is liable to incur a penalty or fine for default escapes it if he had a right of set-off at the time when payment had to be made in order to escape the penalty. xv

(D) Difference between Compensatio and Set-off.

The effect of compensatio is similar to payment in that the debt is extinguished or diminished pro rata, but it differs in certain material respects from set-off as known to English statute Law and the Civil Procedure Code. Compensatio is not a claim to set one demand against another but rather a plea that a claim is not sustainable in whole or in part on the ground that it has been extinguished in whole or in part as effectively as by payment. In other words while set-off treats a debt as being alive, compensatio treats the debt as extinguished to the extent of the counter claim. The extinction takes place ipso jure and does not depend upon any admissions made by the parties. By way of contrast, set-off permits the debtor at his option to pay or contest the claim, leaving it open to him to institute a separate action for his debt if he so chooses. xvi

The distinction between Compensatio and Set-off is exemplified when one considers these principles in relation to payment. Many Roman jurists including Voet considered that the effect of compensatio is similar to payment as it extinguished the debt. However, set-off is entirely distinct from payment. Payment is satisfaction of a claim made by or on behalf of a person against whom the claim is brought. The person paying performs the obligation in respect of which the claim arises, which thereby becomes extinguished. Set-off exempts a person entitled to it from making any satisfaction of a claim brought against him, or of so much of the claim as equals the amount which he is entitled to set-off, and thus to the extent of his set-off he is discharged from performance of the obligation in respect of which the claim arises. xvii

(E) Pre-requisites for operation of Compensatio.

There are four pre-requisites for the operation of compensatio. Both debts must be

(i) of the same nature

(ii) liquidated

(iii) fully due

(iv) payable by and to the same persons in the same capacities.xviii

(i) Debts must be of the same nature.

In order to constitute the right of set-off , or compensatio, it is necessary, first, that the debts or obligations to be set against each other be of the same nature as money against money, but not money against grain.xix The setting-off must clearly show that the credit is of the same value as the debt. And, therefore, it admits of money against money, or in claims which the debtor may pay with money. Also all matters consisting in measure, weight, and money, against things of similar nature

The debt of an indeterminable thing of a specific kind, though not consumable, is susceptible of compensation. On the contrary, where a thing , although in its nature consumable , is due as a specific and determinate object, the debt is not susceptible of compensation. Thus, if A owes B a horse indeterminately , that is, without reference to any particular horse, and B becomes indebted to A likewise, the two debts may be set – off against each other. But if A owes B a particular horse, or a quantity of wine from a particular vintage, and B contract as obligation to give A a particular horse or a quantity of wine from a particular vintage, the two debts cannot be set-off against each other. There is, however, one case in which the debt of a specific determinate thing may be susceptible of compensation, that is, where A is under obligation to give B an undivided part of a specific thing , and B contracts an obligation to give A a similar share of the same thing. Here the two obligations may be set off against each other.011

Although a debt of an indeterminate thing of a certain kind cannot be opposed to a debt of a certain specific thing of the same kind, it does not follow that the debt of a specific thing may not be opposed to a general debt of the same kind. For instance, A is B’s creditor for six pipes of wine of a particular vintage and his debtor for six pipes of wine generally, B cannot set off the quantity due from A against the particular wine which is due from him. On the contrary, if B demand the six pipes of wine which A owes him generally, A may set-off the six pipes which are due from B particularly. This compensation depends upon the choices of A

(ii) Debts must be liquidated.

The rule by which we are to determine whether or not a demand can become the subject of a set-off, is by inquiring whether it sounds in damages

A debt is said to be liquidated when it is clear that it is due, and to what amount, cum certum est, an et quantum debeatur. A disputed debt, then, is not liquidated, and cannot be opposed in compensation, unless the person who opposes it has proof at hand and is in a situation to justify his claim promptly and summarily. Even if it be evident that it is due, if it is not clear to what amount it is so, and if the liquidation depends upon an account of which a long discussion would be necessary, the debt is not liquidated, and cannot be opposed in compensation.xxv Thus, set-off cannot pleaded in an action for breach of agreement, where the damages are unliquidated, such as on a promise to indemnify

(iii) Debts must be fully due.

Both debts forming the subject matter of compesatio or set-off must be fully due and owing as at the date when they are to be set-off.

The rule that the debt opposed by way of compensation must be fully due is subject to the condition that a term of mere grace is not to be taken into account. So where a defendant has been allowed by the judge time to pay the amount of the decree, and before the expiration of such time he becomes the plaintiffs creditor on a separate obligation, the plaintiff may oppose in compensation the debt which the defendant owes him, although the time allowed as aforesaid has not expired.xxxv Whatever is owed against a day is not set- off before the day has arrived, although the duty to give exists. Such a debt is nevertheless by no means to be confused with those debts which in fairness and goodness carry some kind of stay of payment – such as those which are due on the cause of a judgement whereto a stay of four months is attached. Nothing forbids such debts being set – off in the meantime, since it is one thing for the day of an obligation not to have arrived, and another thing for time for payment to be vouchsafed from considerations of human feeling.XXXVI

(iv) Debts must be payable by and to the same person in the same capacities.

The debts must be payable by and to the same persons in the same capacities. A debt due personally from a trustee or executor cannot be set-off against a debt due to such a person in his capacity as trustee or executor. The two parties must mutually owe each other something in their own right, each person having the double quality of creditor and debtor.xxxvii Thus, where a municipal corporation opened three separate accounts with the plaintiffs bank, the first as the corporation, the second as managers of public baths and washhouses, and the third as the local board of health, and was sued for a balance due on the first account, it was held that it could set off sums due to it on the second and third accounts.xxxviii

(F) Set -off in particular cases. (i) Agents and Assignees.

A defendant who is sued by the disclosed principal of an agent cannot set – off a debt due from the agent, and if the defendant is sued by the agent he cannot set – off a debt due from the principal, unless it can be shown that the agent has assented to such a set-off. A set-off will not be allowed if it would prejudice an agent’s lien for his expenses or any prior charge given him by his principal over the money in respect of which the action is brought.xxxix

A defendant sued on a liquidated claim by an undisclosed principal may set-off a debt due to him from the agent of that undisclosed principal, provided: (1) that the claim is in respect of a transaction entered into by the agent acting in his own name as principal If the defendant knows only that the agent is an agent, for example that he is a broker, without knowing his principal, he is put on inquiry and in an action by the principal cannot set – off a debt due from the agent, nor can he rely on any custom not known to the plaintiff as giving him the right of set-off. However, if the defendant believes that the agent, having the right to do so, for example if he is a factor, has sold in his own name to repay advances made by him to his principal, the defendant is not bound to make further inquiry, and so may set-off against a claim by the principal a debt due from the agent.xii

If the claim which the defendant seeks to set-off arises out of a transaction with an agent entered into by a broker acting on the defendant’s behalf, the knowledge of the broker is the knowledge of the defendant, and if the broker knew that the agent was an agent the defendant cannot set – off a debt due from the agentxlii

A broker may set-off as against his principal a debt due from the principal. Where a broker, the defendant, had purchased and then resold goods on behalf of the plaintiff he could not set-off the price paid by him to the original seller against the claim made by the plaintiff for the proceeds of the resale, even though the plaintiff knew that the defendant had acted throughout as broker, and the defendant was acting on del credere commission for the original seller.xliii

A claim under an insurance policy is a claim for unliquidated damages, and losses and premiums could not be set-off against each other under the Statutes of Set-off. However, the nature of the claim and cross-claim might in appropriate cases permit an equitable defence or counterclaim.xliv

(ii) Banks and Customers.

A bank is entitled to set-off what is due to a customer on one account against what is due from him on another account, even if the money due to him may in fact belong to another person, unless there is some equity sufficient to bar the legal right of set-off. However, a bank is not justified of its own motion in transferring a balance from what it knows to be a trust account of its customer to the customer’s private account, nor in setting off against its customer’s balance a debt from the customer before it has actually fallen due, nor may it set off any debt from its customer against the holder of a letter of credit given to the customer.xlv

A customer has a right to set-off a balance due to him from his bank against a debt due to the bank from him, unless he has notice that the debt due from him has been assigned to a stranger.xlvi

Where a customer of a bank having an account in his own name also has an account in the name of himself and another jointly, a right to set – off items in the two accounts will only arise where the customer is so beneficially interested in the balance of the joint account that a court of equity would without terms or inquiry compel a transfer of the account into the customer’s name alone.xlvii

(iii) Guardian and Ward.xlviii

A guardian who sues against his own debtor in his own name is not held liable to suffer set-off of what his own ward owes to the opponent sued.

Nor does what a guardian claims in the name of his wards from a debtor to the wards undergo set-off of what the guardian owes in his own personal name to such debtor of the wards.

But if a guardian is sued in his own name by his own creditor who is likewise a debtor of the ward, the position is rather that set-off is allowed of that which the guardian owes against that which is owed to his own ward.

Voet argues in favour of set-off in third case. That is because in this way no prejudice takes place to the ward or to the opponent. Rather does payment of both debts supervene as though by a sort of delivery brevi manu. Without a fresh suit or the expense of it a collection of the ward’s credit is solemnized, whereas the payment thereof would otherwise have to be obtained by the often lengthy detours, worries and costs of litigation. What Antonius Faber has to say in the passage cited below supports this.

This is so provided that the debt to the ward is such as is capable of collection

Let us suppose that what is owed to the guardian himself by the creditor of his ward is capable of collection, that is to say, it is due by natural and at the same time by civil law. I am then not unaware that even in that case the requirements of set-off fail if we adhere to the familiar letter of the Civil law. According to such letter what is due to another than the plaintiff cannot be set off

It is quite true that one person can pay on another’s behalf, but cannot effectively agree to the set-off of his own personal credit for that other. Still such third-party creditor could have made room for set-off through means of cession of action, since in accord with what was said above what is in turn due on a ceded action is also correctly set – off. It would therefore be unfair for the youth of the ward, which is the only bar to the ward ceding an action to the guardian or the guardian to the ward, to be in this way a cause of loss to the ward, and for his position to be worse than that of majors. There is

an exception to above position when a curator of insolvent estate sues the guardian for ward’s debt. These things are so unless perchance the creditor of the ward has gone bankrupt, and the curator assigned to his estate sues the guardian with a view to payment of the debt owed by the ward. In that case it can hardly be that the guardian by raising a set-off of what is due to him in his own name from the unsound debtor can preserve for himself entire his right of credit to the prejudice and defrauding of the rest of the creditors

Apart from this, however, it appears to be quite undeniable that when one is at the same time debtor and creditor of another embarrassed person who surrenders his estate or goes bankrupt, he correctly raises against the curator of the estate a set-off of such claims up to a corresponding amount on both sides

Likewise neither are letters of respite abar to set-off being raised against one who has gotten them and is following up a debt to himself. It is one thing for payment of debt to be stayed, which is the only effect of such letters


(iv) Sureties and Principal Debtors. xlix

Ordinarily, a surety when sued under his guarantee may raise a set-off or counter-claim against the creditor. This is because a surety stands in the shoes of the principal debtor who is himself entitled to a set-off against the creditors demand arising out of the same transaction as the debt guaranteed.1

If a surety is sued on his suretyship he is able to set – off not only what is due on the other side to himself but also what is due to the principal debtor

The rule that we can only oppose by way of compensation what is due to ourselves is subject to an exception in the case of sureties. A person required to pay a sum of money to which he is liable as a surety may oppose as a compensation not only what is due from the creditor to himself but also what is due to the principal debtor. But the principal cannot oppose to his creditor the compensation of a debt to his sureties.1′

(vi) Landlord and Tenant.lii

Where a landlord receives from his tenant a sum in advance to be accounted for as and for rent, the tenant is entitled to set-off the unpaid rent against the sum so held by the landlord. So also money paid by the tenant in excess of the authorised rent is not key money and may be set-off by him against rents due but not where such sum is received as a deposit, in which case it is not open to the tenant to set-off the rent as it falls due each month against the deposit nor is there any duty on the landlord to apply the deposited sum in satisfaction of unpaid rent. A payment will not, however, be treated as a deposit unless it can be unequivocally treated as such.

A tenant is not entitled to set-off against a claim for arrears of rent a sum overpaid by him to the landlord in respect of some other premises if the sum so due to the tenant is uncertain, as where it can be ascertained only by virtue of the terms of a decree to be entered in the future.

In regard to rent a plea of set-off need not be expressly taken in the pleadings, for any money overpaid to the landlord as rent and not for any other purpose extinguishes pro tanto by operation of law the rent as it falls due. Indeed a settlement in account may be equivalent to the receipt of a sum of money although no money may pass.

(vii) Employer and Employee or Independent Contractor

The right of an employer to make certain deductions from his employee’s wages is governed by the contract between them and sometimes by usage, and is controlled by statute. An employee discharged without proper notice may set – off a claim for wages in lieu of notice against a claim by the employer for money had and received. However, it has been held that an employer sued for wages cannot set -off a sum claimed for the value of goods lost by the negligence of his employee unless there is an agreement between them authorising such sum to be deducted from the wages.liii

Proceedings between an employer and an independent contractor, involving as they usually do a contract for services or work and labour, are subject to the rules governing abatement and equitable defence.liv

(viii) Partners

The law as to set-off between joint debts and several debts applies when one or more of the parties is a firm. Therefore, where a defendant is sued by a firm he cannot set – off a debt due from one of the partners individually unless the partners have permitted one of their number to deal as a sole trader with the defendant and thereby led him to believe that he was dealing with an individual and not with a firm, and the defendant in this belief has made advances or given credit to that partner. In such a case the defendant may set- off against the firm the debt due from the individual partner in respect of that advance or as to which the credit has been given. Similarly, if in like circumstances an individual partner has agreed to allow a set-off, the agreement is binding on the firm provided the debt is due in respect of a matter within the scope of the apparent authority given by the firm to the individual partner. However, if the other party knew that somebody besides the individual partner had an interest in the debt sued for, he will not be allowed to set- off a debt due from the individual partner, and an agreement to allow him to do so, if made without the authority of the other partners, is not binding on the

A shareholder may set – off against a call a debt presently due and owing to him by the company while the company is a going concern. However, a set-off made within six months of a winding up petition may constitute a fraudulent preference.

A debenture holder cannot set off a debt due from him to the company against sums due from the company to him on his debentures, nor can a company’s solicitor set – off an unliquidated claim for his costs against calls made in respect of shares in the company held by him.

In a winding up, whether compulsory or voluntary, the ordinary rules of set-off apply in the case of a solvent company , but if the company is insolvent the mutual credit provisions of bankruptcy apply. Further in a winding -up a contributory cannot himself set – off a debt owed to him by the company, although his trustee in bankruptcy may do so. Where the liability of either the contributory

or the company is unlimited the court may allow the contributory to set – off money due to him in his personal capacity but not money due to him as a member of the company.lvi

(ix) Owner of Property and Improver

By being in possession of property which we bona fide believe to be our own, we also acquire, per consequentiam rei, the dominium of the fruits of such property.lvii In other words, a bona-fide possessor of property is not bound to account to the rightful owner for the rents and profits of the property enjoyed by him, that is to say, the rents and profits so enjoyed are to be deemed to be the property of the bona-fide possessor.1viii However, this entirely depends on the bona fides of the possessor. A bona-fide possessor acquires all the fruits gathered by him before the litis contestatio, that is, before the closing of the pleadings in an action with reference to the possession or ownership of the ground, whether they have already consumed or are still in existence,lix but he is bound to restore to the owner of the property all fruits actually gathered by him after litis contestatiolx as the status of a bona-fide possessor becomes converted into a mala-fide possess by the litis contestatio. He is even liable for the fruits which he might have gathered after the litis contestatio but negligently omitted to gather.lxi

But, curiously, although in strict law as explained above, a bona-fide possessor is entitled to the benefit of fruits gathered by him during his possession, still, when it comes to a matter of calculating the amount of the compensation to be paid to him for improvements, the authorities are agreed that the rents and profits which have been received are to be set-off against the expen’ses incurred in producing these profits as well as in general improvement of the property itself.1xii And any quit rent or other charges of rates due upon the land should also be allowed in reduction of the claim to compensation. lxiii

The position then is that while a bone – fide possessor is not accountable for the income of the property possessed to its rightful owner, yet when he makes a claim to compensation for improvements, he is liable to deduct therefrom the amount of the income that he has derived from the property except the income from the improvements themselves.lxiv

It has been insisted by some jurists, that the fruits received by a bona -fide possessor in consequence of his improvements ought to be set-off against the expense incurred by him in making those improvements. The doctrine is opposed, and would seem not to be sanctioned. It leads to deprive the bona fide possessor of the protection which the law intended to give him, and , as the amount of the expenditure which he is entitled to recover is restricted to its value at the time he restores the property, there would be great injustice in subjecting him to the whole risk of that expenditure since it might happen that at the time of the restriction the value of the improvements had from various causes been diminished.lxv

(G) Claims that cannot be Set-offlxvi

(i) Deposit – There is no room for set-off in deposit, even though it is assumed that a thing of the same kind has been deposited on both sides. Raevardus discusses whether the law as to set-off being forbidden in deposit was in force even before the times of Justinian. However, Pothier states that where credit arises from the deposit itself, as in the case of expenses incurred for the preservation of the thing deposited, there is a right of compensation even in the case of deposit of a specific thing which may be retained until the credit is discharged.

(ii) Spoliation – Set-off has also been disapproved in cases of possession for a very brief time, when a person has wrongly seized possession by robbery, theft or otherwise of what belongs to


(iii) Taxes – It has been furthermore ordained in the interest of public benefit that no setoff can be raised against the collection of dues and taxes, whether they are owed to the Treasury or to the body of citizens.

(iv) Public corn supply – Nor against what is due to the Treasury or to the citizen body on the cause of the public corn supply.

(v) Some debts due to State or Treasury – There is also no setting off of what is due to the commonwealth on its register of loans or on the cause of fideicommissum

(vi) Future as distinct from past maintenance – Nor can anybody set off future maintenance, whether he owes it in virtue of contract or of legacy, and whether it is to be rendered to private persons or to a body or guild, such as an orphanage, infirmary, almshouse for old persons and the like. This is through the favour shown to maintenance, in respect of which many special provisions have been adopted apart from the common rules of law, to prevent the rendering of it being postponed, though apart from that postponement and suspension would have been approved in other cases.

This is otherwise than holds good with maintenance due in arrear, for the reasons that, just as it ceases to possess the proper nature of maintenance, since no one can be maintained in arrear, and takes on the nature of a simple debt, as we said above, so also it does not enjoy the privileges with which true maintenance has been fortified by law. It is the same if the question if one of payment of the value of maintenance already supplied, since that is a debt of moneys and not of maintenance.

(vii) Legacies left conditionally, if condition not strictly fulfilled – In addition if something has been bequeathed to anyone under condition “of giving ten to a third party”, it appears that setoff is not to be allowed so as to have the result that the condition as to giving would be deemed to have been fulfilled, since neither is it deemed to have been fulfilled by release, which is reckoned just as much as setoff among the methods by which an obligation is ipso jure destroyed.

The reservation must however be made that through the favour shown to freedom setoff is allowed to a slave conditionally freed if he has been bidden to be free subject to the condition “if he shall have given ten”. But that is not to be applied to the case before us, since in favour to freedom such a slave can also render those ten to the heir in installments, though otherwise payment of a debt in portions is not allowed against the wish of the creditor.

(viii) Price of goods sold in execution or insolvency – What is more, it has been approved by usage that setoff is not allowed in regard to the price of a thing sold, when a person who is a creditor on another cause has made the winning bid at a forced public auction which has taken place in the course of execution upon a judement or because a curator has already been appointed to the


(ix) Annual quitrent – Moreover I have already advised that setoff of yearly quitrent against another debt does not quite appropriately take place unless other circumstances accompany it.

(x) The debt of a sum of money given or bequeathed to one for his sustenance and with a provision that it is not to be seized by his creditors is a debt against which no compensation can be opposed.lxvii(H) Difference between Retention and Set-off

The points of difference between Retention and Set-off are as follows: Set-off is tantamount to payment, while Retention is of use only so far as to secure the payment of what may be due

The right of retention is not to be confused with set-off, although it is in some things by no means unlike set-off, and on the analogy of set-off can be raised even in execution. Nor would you correctly say that retention falls away because set-off falls away. Retention applies even to individual things which do not allow of set-off and is allowed even as to debts which are not liquid. And it does not destroy an obligation ipso jure, as happens indeed by set-off.lxix

(I) Applicability of the principle in Sri Lanka

The first reported case where the principle of compensatio was considered appears to be the case of Vanderstraaten vs. De Latre [Ramanathan (1820-33)1] wherein this was pleaded and although it was recognized, the plea failed due to the claim being an unliquidated claim. However, the authoritative pronouncement that compensation as known to the Roman Dutch Law is part of the law of Ceylon was made in the case of Muttunayagam vs. Senathirajalxx wherein Garvin J. has stated that, “compensatio as known to the RomanDutch Law is a part of the living law of the land.”

On the other hand, setoff as recognized in the English Law appears to have been incorporated into the procedural law in certain cases as Sections 195,212 and 272 of the Civil Procedure Code set out instances wherein set-off can take place. However, it must be stressed that the right to claim set-off is not a mere matter of procedure, but is an inherent substantive right which cannot be taken away by any rules of procedural law. Therefore, it has been held that the provisions of the Code of Civil Procedure do not take away from the parties any right to setoff, which they would have independently of that Code.Ixxi The earliest reported case that I have been able to lay hands on in respect of the principle of set-off is the case of Missy Nona V. Jayesooriya lxxii wherein the Supreme Court held that a decree obtained against the husband alone cannot be set-off against a decree obtained by the husband and wife against the decree holder and that a decree obtained against a person as administrator cannot be set-off against a decree obtained by him personally.

It is also important to point out that a claim in reconvention as set out in Section 75(e) of the Civil Procedure Code is not a plea of set-off or compensatio. A claim in reconvention is a cross action and is based on a cause of action accrued in favour of the defendant whereas compensatio is a plea that a claim is not sustainable in whole or in part on the ground that it has been extinguished in whole or in part as effectively as by payment and set-off is a defence proper to an action whereby the defendant takes up the position that the plaintiff is a debtor of his and to setoff the sum of the said debt against the amount claimed by the plaintiff. As set-off is a defence proper to an action, a plaintiff who brings an action and is met by a set-off equal in amount to his claim must pay the defendant his costs of the whole action for he has failed in his whole action, whereas if the defendant can plead only a claim in reconvention for the same amount the plaintiff will recover his costs of the claim, and the defendant only his costs of the claim in reconvention, which is treated as a cross action by the defendant against the plaintiff.

However, where the Plaintiffs claim and the Defendant’s claim in reconvention are both upheld, the provisions of the Civil Procedure Code such as Sections 195 and 212 allows the court to apply the principle of set-off.

Section 11 of the Prescription Ordinance states that, “No claim in reconvention or by way of setoff shall be allowed or maintainable in respect of any claim or demand after the right to sue in respect of thereof shall be barred by any of the provisions hereinbefore contained.” Although this section states that a claim in reconvention or a set-off will not be allowed in the circumstance specified, it needs to be ascertained as to whether this section applies to compensatio as well and if so, to what extent it becomes applicable

The effect of Section 12 (present section 11) of Ordinance No. 22 of 1871 is to prevent claims which are already prescribed from been pleaded in reconvention. It does not abrogate the Roman-Dutch Law of compensation)lxxiii The bar introduced by Section 11 relates to “claims in reconvention or by way of setoff.” The words themselves and the enactment in which they occur which is based on the English Statute indicate that what is barred is a claim to set-off a demand against another.lxxiv They cannot fairly be construed to shut out proof that the debt of the plaintiff has been extinguished in any manner in which such a debt may be extinguished under the common law.lxxv Thus section 11 of the Prescription Ordinance does not prevent the defendant from pleading that the claim of the plaintiff is not sustainable in whole or in part on the ground that it has been extinguished in whole or in part due to the plaintiff been the defendant’s debtor in a sum either exceeding the sum claimed by the Plaintiff or in a lower amount even though an action to recover such debt would be barred at that time. Since this plea tends not to introduce set-off but rather to point out that it already existed of right a jure as far back as when the mutual debt accrued: nor does it extinguish an obligation, but “shows that it is already extinguished”.lxxvi This position is based upon the distinction between compensatio and set-off as compensatio treats a debt as extinguished ipso jure whereas set-off treats a debt as being alive.

There are several reported cases wherein the principle of set-off or compensatio has been adverted to and in some cases applied by the courts of Sri Lanka. Proof of a judgement debt in insolvency proceedings does not deprive the judgement-creditor of the right to set-off as against the debt, a sum decreed to the insolvent by way of counterclaim in the action.lxxvii Where the plaintiffs as liquidators of a cheetu club sued the defendants, the first defendant as principal and the second and third defendants as sureties to recover a sum of money under an agreement in respect of a cheetu purchased by the first defendant

up preferential treatment.|XXV1iii Where a monthly tenant deposits a sum of money with the landlord on the agreement that it is to be held by the landlord and paid back to the tenant when the premises are handed over to him, it is not open to the tenant to set-off the rent as it falls due each month, against the deposit held by the landlord. If he does so setoff he is liable to be held to be in arrears of rent.lxxix Before a claim for set-off can be entertained, there must be an ascertained sum clearly due from the plaintiff to the defendant at the time of the institution of the action. Accordingly, in an action for recovery of arrears of rent due in respect of premises A, the tenant is not entitled to set-off a sum overpaid by him as rent to the plaintiff in respect of certain other premises B, if such over payment can be ascertained only by virtue of the terms of a Supreme Court decree obtained subsequently by the tenant upon an appeal preferred by him earlier from a judgement according to which there was no overpayment of rent in respect of premises B at the time when the action for rent due on premises A was instituted.lxxx


i. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by Pcrcival


ii. Charles Herbert’s translation of the Introduction to Dutch Jurisprudence of Hugo Grotious

iii. J. Henry’s translation of the Institutes of the Laws of Holland by J. Van der linden

iv. The Law of Contracts

v. Poth. 3.4.3.

vi. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by Percival


vii. ibid

viii. ibid

ix. Institutes of Roman Law by R. Sohm

x. ibid.

xi. ibid

xii. ibid

xiii. J. Henry’s translation of the Institutes of the Laws of Holland by J. Ven der linden page 272

xiv. Poth. 3.4.3

xv. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by Percival


xvi. The Law of Contracts

xvii. Halsbury’s Laws of England

xviii. The Law of Contracts

xix. J.Henry’s translations of the Institutes of the Laws of Holland by J. Van der Linden

xx. Charles Herbert’s translation of the Introduction to Dutch Jurisprudence by Hugo Grotious

xxi. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by

Percival Gane

xxii. Poth. 3.4.1

xxiii. Poth. 3.4.2

xxiv. per Tindal, C.J., Morley v. Inglish (4 Bingh. N.C. at page 71)

xxv. Poth. 3.4.2

xxvi. Hardcastle v. Netherwood, 5 B & A 93.

xxvii. Attwooll v. Attwooll 2E & B. 21.

xxviii. Grant v. Royal Exchange Co. 5M & S 439

xxix. Birch v. Depeyster 4 Camp. 385.

xxx. Gillingham v. Waskett. M’clell 198.

xxxi. Bell vs. Carey 8 C.B. 887

xxxii. Thorpe vs. Thorpe 3B & Ad. 580, 584.

xxxiii. Hutchinson v. Reid 3 Camp. 329

xxxiv. Collins vs. Collins 2 Burr 820

xxxv. Poth. 3.4.2

xxxvi. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by Percival


xxxvii. The Law of Contracts

xxxviii. Pedder v. Preston Corpn. (1862) CBNS 535.

xxxix. Halsbury’s Laws of England

xl. ibid,

xli. ibid

xlii. ibid,

xliii. ibid,

xliv. ibid.

xlv. ibid

xlvi. ibid.

xlvii. ibid

xlviii. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by Percival


xlix. ibid

1. Law of Damages and Compensation

li. Poth. 3.4.2

Iii. The Law of Contracts, C.G. Weeramantry

liii. Halsbury’s Laws of England

liv. ibid

lv. ibid

lvi. ibid

lvii. Koetze’s Translation of Van Leewen

lviii. The Law relating to the Right of Compensation for Improvements

lix. Voet 6 1 38

lx. Grot, 2 6 2 3

lxi. Voet 41 1 29 33.

lxii. The Law relating to the Right of Compensation for Improvements

lxiii. Voet 41 1 32.

lxiv. The Law relating to the Right of Compensation for Improvements

lxv. 3 Burge 34. see Voet 6 1 39.

lxvi. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by

Percival Gane

lxvii . Poth. 3. 4. 1.

lxviii. Laws of Ceylon

lxix. The Selective Voet being the Commentary on the Pandects of Johannes Voet as translated by Percival


lxx. 28NLR353

lxxi. Bhagat Panda v. Ramdeb Panda I.L.R. 11 Cal. 556

I.L.R.4 Bom 407.

lxxii. The Supreme Court Reports by Chas. M. Fernando

lxxiii. The Law of Ceylon

lxxiv. ibid.

lxxv. Muthunayagam v. Senathiraja (28 N.L.R. 353 at 364)

lxxvi. Voet XVI tit 2 S.2 Searle and Joubert p. 17.

lxxvii. Freudenberg vs. Weerapass (30 NLR 239)

lxxviii. Canagaratne vs. Chelliah (40 NLR 453)

lxxix. E. David Appuhamy vs. K. Subramaniam (55 NLR 397)

Ixxx. Dassanayake vs. Kumarakulasinghe (69 NLR 283)