Source: https://www.trans-lex.org/100660/_/berger-klaus-peter-set-off-in:-icc-bull-2005-at-17-et-seq/
Timestamp: 2019-04-19 23:01:20+00:00

Document:
Berger, Klaus Peter, Set-Off, in: ICC Bull. (Special Supplement) 2005, at 17 et seq.
Document-Id: 100660, Please cite as: "https://www.trans-lex.org/100660"
It was high time to include provisions on set-off in the UNIDROIT Principles, for two reasons: one relates to the practice of international contract law (1) and the other to the theory of transnational commercial law (2).
Set-off is based on the idea that the performance of mutual claims between two parties must be simplified and that therefore, whenever equity (aequitas, Billigkeit) requires, they should be set off against each other.12 Thus, the debtor sets off the cross-claim owed to him by the creditor against the claim he owes to the creditor.13 Set-off avoids the need for each party to perform its obligation separately where separate performance would be contrary to good faith. It is based on the principle of dolo agit qui petit quod statim redditurus est, which is part of good faith and fair dealing, a duty recognized under Art. 1.7 and regarded as "one of the fundamental ideas underlying the Principles”14.
the other party’s obligation must be due.
The Principles of European Contract Law contain similar prerequisites, albeit in two separate articles (13:101 and 13:102 (1)). The fourth requirement listed above is not mandatory under the European Principles .18 There is also an interesting terminological difference between both sets of rules: The UNIDROIT Principles describe set-off from the obligor’s standpoint and speak of the parties’ 'obligations' (to perform), whereas Art. 13:101 of the European Principles focuses on the obligee's perspective and refers to the parties’ 'right to performance ("claim")', the notion of 'claim' being a central concept underlying many provisions in the European Principles.19 From a linguistic perspective and in view of the dual purpose of set-off to enforce and perform claims, it seems to be more appropriate to speak of the setting-off of a 'claim' rather than the setting-off of an 'obligation' to perform.
This rule is in conformity with Art. 18 (2) of the UN Convention on the Assignment of Receivables in International Trade 25. Once notified of the assignment, the obligor is aware of the new situation and does no longer deserve to be protected with respect to a right of set-off in disregard of the mutuality requirement. The Principles of European Contract Law contain an identical rule in Art. 11:307 (2) (a). Art. 11:307 (2) (b), however, extends the protection by allowing the debtor to declare set-off against the assignee in respect of a claim "closely connected with the assigned claim”, irrespective of when the notice of assignment was received.26 This accords with Art. 18 (1) of the UN Convention, which provides that the debtor may raise against the assignee all defences and rights of set-off arising from the original contract, or any other contract that was part of the same transaction, which would have been available to the debtor if the assignment had not been made and the claim had been made by the assignor. This means that under the Convention - contrary to Art. 9.1.13 (2) of the UNIDROIT Principles - rights of set-off arising from the original contract or a related transaction may be raised against the assignee even if they become available to the debtor after notification of the assignment.27 Art. 19 (1) of the Convention provides that the debtor may agree with the assignor not to raise the right of set-off against the assignee, in which case the debtor waives the protection offered by the applicable rules on assignment and set-off. Since party autonomy is a basic pillar of both the European and the UNIDROIT Principles,28 the principle expressed in Art. 19 (1) of the UN Convention also applies to the set-off under those two sets of rules.
The requirement that the two claims to be set-off must, at the moment the set-off becomes effective, involve 'performances of the same kind' again follows from the fact that set-off is rooted in the principle of good faith. Simplification of performances between two parties, i.e. the avoidance of unnecessary exchanges of performances between them, makes sense only in those cases where these performances are in fact similar in nature and can be set-off according to a common standard. Hence, it is a requirement found in most legal systems.
Setting off money claims is commonplace in international business and does not pose any particular problems except in the case of foreign currency debts, which are dealt with in Art. 8.2.29 English law restricts set-off to monetary debts, due to the exceptional nature of specific performance in common law30. As for non-monetary claims, a typical example would be securities, whether certified or dematerialized.
payment of specified cash or securities is possible'31. It is doubtful that this rule would apply in practice, given the inherently different nature of both obligations.
In international trade, parties often owe each other monetary obligations in different currencies. It could be thought that such claims may not be set-off against each other because payments in different currencies do not involve performances of the same kind as required by Article 8.132. Such a strict rule would, however, run counter to the needs of international business and modern legal practice, as illustrated by English law. For a long time it was held that foreign currency obligations had to be expressed in sterling to be enforced in English courts. However, the modern view is that foreign currency obligations should be converted into sterling or, if both claims are expressed in foreign currencies, the currency of the lesser debt should be converted into the currency of the greater debt at the rate prevailing at the date of the judgement ordering set-off33.
Article 8.2 provides that the right of set-off may be exercised if both currencies are freely convertible and the parties have not agreed that the party declaring the set-off shall pay only in a specified currency. The reason for the second condition is that a party impose upon the other party a mode of performance that is contrary to their agreement. Art. 13:103 of the Principles of European Contract Law contains a similar rule but does not expressly require that the currencies be freely convertible. This is due to the fact that the European Principles are concerned with contract law in Europe, a large part of which has a single currency (euro) and where the other currencies are at least always freely convertible. The UNIDROIT Principles, on the other hand, are a restatement of international contract law and have to take account of the fact that at a global level, there exist currencies that are not freely convertible34.
since the relative value of a currency that is not freely convertible cannot be readily ascertained for the purpose of set-off, set-off cannot be used to impose payment in such a currency on the other party35.
Likewise, the commentary on Article 13:103 of the Principles of European Contract Law is based on the assumption that an exchange rate is available for the currencies in which the claims are expressed. It suggests that the unified exchange rate be applied if such a rate exists or, if not, the buying rate for the currency of the claim against which set-off is declared36. Since set-off is a form of payment of the debt owed by the party declaring set-off, Article 6.1.9 (3) of the UNIDROIT Principles, which provides that payment is to be made according to the applicable rate of exchange prevailing when payment is due.
Pursuant to Art. 8.1 (1) (a) of the UNIDROIT Principles, a debtor may set-off his cross-claim against the creditor's claim before the latter falls due, provided he is entitled to perform his obligation37. The set-off thus becomes effective when the other side receives notification of it. In this case, the exchange rate will be the official rate prevailing on the date of notice of set-off.
The requirement that the other party's obligation must be ascertained as to its existence and amount derives from the role of set-off as a means of private enforcement of a cross-claim. Such private enforcement is permissible only if and to the extent that the cross-claim is uncontested as to its existence and amount. This will be the case if it is based on a valid and executed contract or a final judgment or award which is not subject to review40. The amount is unascertained if it is fixed, i.e. liquidated.
In reality however, the Principles of European Contract Law and the UNIDROIT Principles are not so far apart. The commentary on the European Principles gives as an example of a situation where set-off should be allowed even if the cross-claim is unascertained a cross-claim whose value will be ascertained during the course of legal proceedings relating to the principal claim.42 This would in fact appear to be a case of an ascertained claim since the court or arbitral tribunal will decide on the set-off in its final judgement or award, i.e. after the amount of the cross-claim has been ascertained. The same could be said when it is certain that the amount of the cross-claim exceeds the amount of the principal claim, for this would mean that the amount of the cross-claim is ascertained at least up to the amount of the principal claim. Both of these situations would therefore be covered by Article 8.1 (1) (b).
either by explicit agreement or by referring to a set of arbitration rules like the new Swiss Rules43, to extend the tribunal's jurisdiction to claims arising from other contracts.44 The commentary on the European Principles states that in those cases where the two claims do not arise out of the same legal relationship, the discretion granted by Article 13:102 (2) will usually be used by the court or arbitral tribunal to reject set-off.45 In the end, therefore, it is difficult to imagine that the need for a cross-claim to be ascertained as to its existence and value when the two claims do not arise out of the same contract would not be an independent prerequisite under the European Principles, too.
Here too, the UNIDROIT Principles differ from the Principles of European Contract Law and have adopted a more debtor-friendly approach. Art. 14:503 of the European Principles provides that the obligor may invoke prescription up to two months after being notified of set-off. This more liberal rule is intended to protect the obligor, who has no reason to invoke prescription prior to receipt of the declaration of set-off, by allowing him a reasonable period of time after notification to raise the defence of prescription48. German law has adopted a third approach, more favourable to set-off. Under § 215 of the German Civil Code, the right of set-off is not excluded by prescription of the cross-claim, provided it could have been set off against the principal claim before becoming prescribed.
position taken in the UNIDROIT Principles is intended to provide legal certainty (both parties know exactly when set-off becomes effective), which is of paramount importance in international trade50. This approach also avoids unnecessary recourse to a court or arbitral tribunal51. It is thus in line with the nature of set-off as a means of private, i.e. out-of-court, enforcement of claims. This latter consideration convinced the drafters of the Principles of European Contract Law to adopt the same approach in Article 13:104.
The party declaring set-off may wish various cross-claims it has against the other side to be "paid” through set-off. In that case, Article 8.4 (2) of the UNIDROIT Principles provides three options. First, the declaring party may specify in its notice of set-off the claims to which set-off shall relate. Secondly, if it does not do so, the other party as the obligor of these claims, may, within a reasonable time, specify the claims to which it wishes the set-off to relate to. Thirdly, if that party remains silent, Article 8.4 (2) provides that the set-off shall relate to all these claims proportionally. Thus, the party declaring set-off does not bear the risk of an unspecific notice of set-off. The Principles of European Contract Law take a more restrictive approach: Art. 13:105 (1) provides that if the claims are not sufficiently specified the notice of set-off is ineffective. The party giving notice of set-off, as obligee of the various claims against the other side, bears the risk of imprecision52.
Chapter 8 of the UNIDROIT Principles does not contain a specific rule for the opposite situation in which the party declaring set-off owes different obligations to the other side. Art. 13:105 (2) of the Principles of European Contract Law provides that in such a situation the rule on appropriation of performance to different obligations in Article 7:109 shall be applied "with appropriate adaptations”. This means that, first, the party declaring the set-off may specify to which obligation the set-off shall be appropriated (Article 7:109 (1)). If it does not do so, the other party may appropriate the set-off to such obligations as it chooses provided that the obligation is due and not illegal or disputed (Art. 7:109 (2)). If that party does not declare to which obligations set-off is appropriated, it is appropriated according to the criteria laid down in Art. 7:109 (3).
As far as the UNIDROIT Principles are concerned, no specific reference is made in Chapter 8 to the parallel provision of Article 6.1.12. However, since set-off is a means of performance of the claims that the party declaring set-off has to perform, it goes without saying that Article 6.1.12 can be applied to set-off obligations, too, provided they are monetary obligations.
The principle of party autonomy also works in the opposite direction. Art. 13:107 (a) PECL provides that the parties may always agree to exclude a party’s right to set-off. The commentary rightly states that this "follows from the general principle of freedom of contract”55. Exclusion agreements are therefore also permissible for set-off under Chapter 8 of the UPICC even though they do not contain a parallel provision56. Given the significance which business practice and the UPICC themselves attach to the right of set-off, such an exclusion can be assumed only if the parties have used clear words or, in the absence of an express reference, if there is at least a clear implication to that effect pursuant to the general rules on interpretation in Chapter 4.57 If such a clause is contained in standard terms, it is invalid pursuant to Art. 2.1.20 UPICC if it is of such a character that the other party could not reasonably have expected it and has not expressly accepted that clause.
It has been said of the law on set-off that, from a comparative perspective, it "has not yet revealed all its mysteries”.62 With the new Chapter 8 of the UNIDROIT Principles, this statement is no longer true. International business now possesses a comprehensive, workable and highly practical transnational legal framework for set-off defences. The new rules on set-off provide yet another example of the fact that functional comparative analysis is not dead63 but very alive and highly successful. From the very outset of its work for the first edition of the Principles, the UNIDROIT Working Group has been concerned not only with the consolidation of common rules and principles contained in domestic legal systems, but also with codification, i.e. the shaping and modification of solutions to be found in domestic laws, in order to create new rules and principles which are more suited to the needs of international trade64. This does not mean that the task of the Working Group did not have its natural limits. They were reached whenever a rule would have interfered with mandatory provisions and the public policy of domestic legal systems. This applies, for example, to the law of insolvency set-off, which has remained outside the scope of the Principles of European Contract Law and the new Chapter 8 of the 2004 edition of the UNIDROIT Principles.
1UNIDROIT Principles of International Commercial Contracts 2004 (Rome: UNIDROIT, 2004) [hereinafter UNIDROIT Principles 2004]; on the drafting history, purpose and scope of the 2004 UNIDROIT Principles, see M.J. Bonell, 'UNIDROIT Principles 2004 - The New Edition of the Principles of International Commercial Contracts adopted by the International Institute for the Unification of Private Law‘ Unif. L. Rev. 2004-1, 5; see also E. Brödermann, Die erweiterten UNIDROIT Principles 2004' RIW 2004, 721.
2See the definition (in a bancruptcy context) by the US Supreme Court in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 at 18 (1995): The right of set-off ... allows entities that owe each other money to apply their mutual debts against each other, thereby voiding the absurdity of making A pay B when B owes A; see also Studely v. Boylston National Bank, 229 U.S. 523 at 528 (1913); see also R. Derham, The Law of Set-Off, 3d ed. (Oxford University Press, 2003) at § 1.01.
3Principles of European Contract Law, Part III, reprinted in O. Lando, E. Clive, A. Prüm & R. Zimmermann eds., Principles of European Contract Law - Part III (Kluwer Law International, 2003) at 59 ff.
4See K.P. Berger, 'Set-Off in international Economic Arbitration' (1999) 15 Arbitration International 53; J.-F. Poudret, 'Compensation et Arbitrage' in J.-M. Rapp & M. Jaccard, eds., Le Droit en Action (Faculté de droit de l'Université de Lausanne, 1996) 361.
5K.P. Berger, supra note 4 at 58ff.
7See UNIDROIT Principles 2004, supra note 1, Introduction to the 2004 Edition, vii at viii.
8Ibid., Introduction to the 1994 Edition, xiv.
9See R. Zimmermann, The Law of Obligations, Roman Foundations of the Civilian Tradition, 3d ed. (Oxford University Press, 1996), at 761; C. Appleton, Histoire de la compensation en droit romain (1895) at 769; S. Dullinger, Handbuch der Aufrechnung, (1995) at 148.
10For a comparative survey, see P.R. Wood, English and International Set-Off (London: Sweet & Maxwell, 1989) at § 24-4ff.
11See R. Derham, supra note 2 at 57; Hanak v. Green  2 Q.B. 9; "The Kostas Melas”  1 Lloyd’s Rep. 18, 26; Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc.  1 Q.B. 927 at 982; for Australia AWA Ltd. v. Exicom Australia Pty Ltd.,  19 NSWLR 705 at 711.
12See J. Kohler, 'Kompensation und Prozess', Zeitschrift für Zivilprozeß 1894, 1 at 11.
13P.R. Wood, supra note 10 at § 1-3.
14Comment No. 1 to Art. 1.7 in UNIDROIT Principles 2004 at 18.
15See www.tldb.de, Principle No. III.1 (Document ID: 916000); see generally K.P. Berger, in A.S. Hartkamp, M.W. Hesselink, E.H. Hondius et al. eds., Towards a European Civil Code, 3d ed. (Kluwer Law International, 2004) 43 at 51ff.
16Chapter 13, Art. 13:101 - 13:107, in Principles of European Contract Law - Part III, supra note 3 at 139ff.
17 (1982) VII Y.B. Comm. Arb. 124 at 131.
18See Comment A.1 and 2 to Art. 13:102 PECL in Principles of European Contract Law - Part III, supra note 3 at 144.
20(1982) VII Y.B. Comm. Arb. 124 at 131.
21H. Eujen, Die Aufrechnung im internationalen Verkehr zwischen Deutschland, Frankreich und England (1975) at 61; see also R. Derham, supra note 2 at § 2.81.
22UNIDROIT Principles 2004, supra note 1 at 255.
24Art. 9.1.15 (e) provides that in assigning the claim, the assignor undertakes towards the assignee that "neither the obligor nor the assignor has given notice of set-off concerning the assigned right and will not give any such notice”; if the obligor makes use of his right under Art. 9.1.13 (2) and gives notice of set-off to the assignee after the assignment, the assignee would have a claim for damages against the assignor for violation of his duty under Art. 9.1.15 (e), see comment 5 to Art. 9.1.15, UNIDROIT Principles 2004, supra note 1, at 288.
25UN Convention on the Assignment of Receivables in International Trade, adopted and opened for signature pursuant to UN General Assembly Resolution 56/81 on 12 December 2001, see UN Doc. A/RES/56/81 (2002) at 11.
26See Note to Art. 11:307 in Principles of European Contract Law - Part III, supra note 3 at 120.
27Explanatory Note by the UNCITRAL Secretariat on the UN Convention on the Assignment of Receivables in International Trade, UN Publ. No. E.04.V.14 at 37.
28See UNIDROIT Principles 2004, supra note 1 at 8.
30See R. Derham, supra note 2 at § 5.75; Note 3 to Article 13:101 in Principles of European Contract Law - Part III, supra note 3 at 142.
31UNIDROIT Principles 2004, supra note 1 at 256.
32Ibid. at 260; see also K.P. Berger, Der Aufrechnungsvertrag (1996) at 253.
33See R. Derham, supra note 2 at § 5.76; P.R. Wood, supra note 10 at §§ 11-19: "As a general proposition, it is considered that the courts ought to lean in favour of multi-currency set-off as being more consonant with the free use of many currencies in international transactions, with commercial expectations and with the liberal attitude of English law to foreign currency claims'; see also Miliangos v. George Frank (Textiles) Ltd.,  A.C. 443.
34See M.J. Bonell, supra note 1 at 33 with reference to Articles 6.1.9 (1) (a) and 8.2.
35UNIDROIT (ed.), UPICC 2004, supra note 1, at 260.
36Comment B to Article 13:103 in Principles of European Contract Law - Part III, supra note 3 at 147.
37UNIDROIT Principles 2004, supra note 1 at 254.
39See Comment B.4 to Article 13:101 of the Principles of European Contract Law in Principles of European Contract Law - Part III, supra note 3 at 141.
40UNIDROIT Principles 2004, supra note 1 at 257.
41See Comment A.1 to Article 13:102 in Principles of European Contract Law - Part III, supra note 3 at 144.
44See K.P. Berger, supra note 4 at 78.
45See comment A.3 to Article 13:102 Principles of European Contract Law - Part III, supra note 3 at 145.
46See UNIDROIT Principles 2004, supra note 1 at 258; see also Article 10 (1) (b) of the Rome Convention on the Law Applicable to Contractual Obligations, which stipulates that the law applicable to the contact governs all issues relating to the performance of the contract.
47Comment to Article 10.10 in UNIDROIT Principles 2004, supra note 1 at 333.
48See Comment to Article 14:503 in Principles of European Contract Law - Part III, supra note 3 at 206.
49See generally H. Eujen, supra note 21 at 20ff.
51M.J. Bonell, supra note 1 at 23.
52See Comment to Article 13:105 in Principles of European Contract Law - Part III, supra note 3 at 150.
53See UNIDROIT Principles 2004, supra note 1 at 260; comment B to Art. 13:104 of the Principles of European Contract Law - Part III, supra note 3 at 149; see also P.R. Wood, supra note 10 at § 5-17ff.
54See generally K.P. Berger, supra note 32 at 19ff., 380ff.; P.R. Wood, supra note 10 at § 5-121ff. (for English law) and § 24-43 (from a comparative perspective).
55Comment A to Art. 13:107 PECL in: Lando/Clive/Prüm/Zimmermann (eds.), supra note 3, at 154.
57R. Durham, supra note 2 at § 5.79 with reference to English case law.
59M.J. Bonell, supra note 1 at 23.
60On unjust enrichment as a general principle of transnational law, see the CENTRAL Transnational Law Database at www.tldb.de, Principle No. X.1 (Document ID 959000); see generally E. Clive in Towards a European Civil Code, supra note 15, 585 at 589ff.
61See UNIDROIT Principles 2004, supra note 1 at 264; comments B-H to Article 13:106 of the Principles of European Contract Law in Principles of European Contract Law - Part III, supra note 3 at 151ff.
63See J. Husa, 'Farewell to Functionalism or Methodological Tolerance?', RabelsZ 2003, 419 at 422ff.
64M.J. Bonell, An International Restatement of Contract Law, 2d ed. (Transnational, 1997) at 14f.; see also K.P. Berger, The Creeping Codification of the Lex Mercatoria (Kluwer Law International, 1999) at 147.

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