Source: https://www.trans-lex.org/100660/_/berger-klaus-peter-set-off-in:-icc-bull-2005-at-17-et-seq/
Timestamp: 2018-02-24 18:04:43
Document Index: 420462084

Matched Legal Cases: ['Art. 18', 'Art. 11', 'Art. 11', 'Art. 18', 'Art. 9', 'Art. 19', 'Art. 19', 'Art. 8', 'Art. 13', 'arty35', 'Art. 8', 'Art. 13', 'Art. 13', 'Art. 7', 'Art. 7', '§ 1', '§ 5', '§ 24', '§ 1', 'Art. 1', 'Art. 13', 'Art. 13', '§ 2', '§ 24', 'Art. 9', 'Art. 9', 'Art. 9', 'Art. 9', 'Art. 11', '§ 5', '§ 5', '§ 11', '§ 24', 'Art. 13', '§ 5', '§ 5', '§ 24', 'Art. 13', '§ 5']

Berger, Klaus Peter, Set-Off, in: ICC Bull. (Special Supplement) 2005, at 17 et seq. | Trans-Lex.org
Berger, Klaus Peter, Set-Off, in: ICC Bull. (Special Supplement) 2005, at 17 et seq.
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The requirement of mutuality of claims is generally recognized in all legal systems 21. It follows from the good faith origins of the set-off defence which call for simplification of performance when two parties are at the same time obligor and obligee towards each other. The comment on Article 8.1 rightly states that the parties must be the obligor and obligee of each other 'in the same capacity'22. Set-off is therefore excluded if one of the parties is the obligee of the other party in another capacity, e.g. as trustee. It is excluded, too if the claim to be set-off is not against the other party but against one of its subsidiaries or its mother company,20 which are different legal entities.23 An exemption from this strict rule is allowed for the assignment of claims, so as not to prejudice the obligor of the assigned claim. Accordingly, Article 9.1.13(2) of the UNIDROIT Principles provides that the obligor may exercise against the assignee of a claim any right of set-off available to the obligor against the assignor under Article 8.1 up to the time notice of assignment was received by the obligor.24
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.
The question of whether two obligations are of the same kind may give rise to difficult problems. The official comment on Article 8.1 states that an obligation to pay money may be set-off against an obligation to deliver securities 'if the securities are easily convertible and if there is no agreement to the effect that only the
b. Foreign currency set-off
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.
The Comment explains that this part of Article 8.2 is of declaratory nature only:
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.
This requirement derives from the role of set-off as a means of performance of the claim that the other party has against the party declaring set-off. That latter cannot
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.
Art. 13:102 (1) of the Principles of European Contract Law takes a much more liberal approach. It gives judges and arbitrators some discretion by allowing an unascertained claim to be set off if this "will not prejudice the interests of the other party”. The official commentary explains that if it were a genuine requirement for the cross-claim to be ascertained this would go too far and unnecessarily restrict set-off in cases where the interests of the other side are not prejudiced.41
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).
The fact that the differences between the European Principles and the UNIDROIT Principles are apparent rather than real is confirmed by the fact that Article 13:102 (2) of the European Principles presumes that the other party’s interests will not be prejudiced if the claims of both parties arise from the same contracts. As an exception to the rule laid down in Article 8.1 (1) (b) of the UNIDROIT Principles, Article 8.1 (2) similarly provides that the claim of the party declaring set-off need not be ascertained as to its existence and amount if the claims arise from the same contract. This will very often necessarily be the case in international business where disputes are frequently referred to arbitration. Given that the arbitral tribunal's jurisdiction only extends to claims arising out of or in connection with the contract containing the arbitration clause, this will generally mean that they arise from the same contract. The parties may choose, however, 23
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 idea of set-off as a defence that must be raised by notice of one party does not undermine the principle of party autonomy under Article 1.1 of the UNIDROIT Principles and Article 1:102 (1) of the Principles of European Contract Law. The parties may always agree that their mutual claims are being
IV. Effect of set-off
Article 8.5 of the UNIDROIT Principles takes a very straightforward approach to the effect of set-off. If the conditions for set-off are fulfilled, a declaration of set-off takes effect as from the time of notice (Article 8.5 (3)), discharging the claims of both sides (Article 8.5 (1)). If the obligations differ in amount, set-off discharges the obligations up to the amount of the lesser obligation (Article 8.5 (2)). As opposed to countries like Germany, the Netherlands, and those legal systems where set-off applies by operation of law, e.g. Belgium, France, Luxembourg, set-off under the UNIDROIT Principles does not operate retrospectively but only prospectively. Again, the reason is legal certainty. Since set-off requires notice to the other side to become effective58, it will be relatively easy in practice to determine the exact date when the claims were discharged59. This, in turn, makes it easier for the parties to draw precise legal consequences from the fact that the claims have been extinguished through set-off. Below are some examples of possible consequences:
* Professor and Executive Director, Center for Transnational Law (CENTRAL), University of Cologne, Germany; member of the global faculty at the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP), University of Dundee, Scotland
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.
6See, e.g. Stooke v. Taylor (1880) 5 Q.B.D. 569 at 575; Commercial Factors Ltd. v. Maxwell Printing Ltd. [1994] 1 NZLR 724 at 735; R. Derham, supra note 2 at § 5.72
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 [1958] 2 Q.B. 9; "The Kostas Melas” [1981] 1 Lloyd’s Rep. 18, 26; Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] 1 Q.B. 927 at 982; for Australia AWA Ltd. v. Exicom Australia Pty Ltd., [1990] 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.
19Ibid., xvii (Introduction).
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.
23Ibid; see also P.R. Wood, supra note 10 at § 24-162: "It goes without saying that reciprocal claims owing by separate corporate personalities, such as parent and subsidiary companies, are not eligible for set-off and there are many international decisions upholding this basic proposition.”
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.
29Ibid at 260.
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., [1976] 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.
38Ibid. at 257.
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.
43See Article 21 (5) Swiss Rules of International Arbitration: 'The arbitral tribunal shall have jurisdiction to hear a set-off defence even when the relationship out of which this defence is said to arise is not within the scope of the arbitration clause or is the object of another arbitration agreement or forum-selection clause.'
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.
50See also P.R. Wood, supra note 10 at § 24-13: "There is something... to be said for the Germanic approach which allows extrajudicial set-off but requires some positive action so as to confer predictability.”
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.
56See ICC Award No. 3540, supra note 18, at 131: 'Considering that, in the case at hand, the agreement of the parties has not discarded the principle of set-off as permitted in the various legal systems;...'
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.
62N.C. Ndoko, 'Les mystères de la compensation' Rev. trim. dr. civ. 1991, 661: 'C’est une institution qui ne semble cependant pas avoir tombé tous ses mystères.'
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.