The availability of set-off in arbitration

In proceedings brought in the English courts in which the claimant is seeking a sum of money from the defendant, it is open to the defendant to seek to set off against that claim any sum which is allegedly owing by the claimant to him. English law for this purpose distinguishes between ‘transaction’ set-off and ‘independent’ set-off. The former arises where the sums claimed made by the parties arise out of ‘the same transaction or one so closely related that it operates in law or in equity as a complete or partial defeasance of the … claim’. By contrast, in the case of independent set-off, the defendant is in effect seeking an abatement of damages for an entirely unconnected reason, and the plea is open to him only if the sum allegedly due by the claimant can easily be calculated.

The above definition of transaction set-off and the distinction between transaction and independent set-off was drawn by Hoffmann LJ in Aectra Refining and Manufacturing Inc v Exmar NV [1995] 1 Lloyd’s Rep 191. These principles break down in the context of arbitration, because in the absence of any agreement to the contrary, the arbitrators have jurisdiction only over disputes over the contract in which the arbitration clause appears: independent set-off cannot, therefore, operate, although transaction set-off is available given that it operates as a defence to the claim over which the arbitrator does have jurisdiction. In Econet Satellite Services Ltd v Vee Networks Ltd [2006] EWHC 1664 (Comm) it was held that even transaction set-off can fall outside the jurisdiction of the arbitrators unless it arises under the very contract in which the claim itself is made.