Encyclopedia of Private International Law
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Encyclopedia of Private International Law

Edited by Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio

The role and character of Private International Law has changed tremendously over the past decades. With the steady increase of global and regional inter-connectedness the practical significance of the discipline has grown. Equally, so has the number of legislative activities on the national, international and, most importantly, the European level. With a world-class editor team, 500 content items and authorship from almost 200 of the world’s foremost scholars, the Encyclopedia of Private International Law is the definitive reference work in the field. 57 different countries are represented by authors who shed light on the current state of Private International Law around the globe, providing unique insights into the discipline and how it is affected by globalization and increased regional integration. The Encyclopedia consists of three inter-linked pillars, enhanced by sophisticated search and cross-linking functionality. The first pillar consists of A-Z coverage of the scope and substance of Private International Law in the form of 247 entries. The second pillar comprises detailed overviews of the Private International Law regimes of 80 countries. The third pillar presents valuable, and often unique, English language translations of the national codifications and Private International Law provisions of those countries. This invaluable combination represents a powerful research tool and an indispensable reference resource.
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Chapter S.8: Set-off

Michael Hellner

I. Concept and function

Set-off is a defence that can be used by a defendant against a plaintiff’s claim. If set-off is allowed the sum that plaintiff owes defendant should be deducted from the plaintiff’s claim. The following simple example can serve to illustrate the functioning of set-off: a claims payment of EUR 10,000 from B for the rent of office premises. B claims an offset of EUR 1,000 for repairs that B had to make in order to be able to use the premises for the agreed purpose. If set-off is allowed B will only have to pay A the net sum of EUR 9,000. Although set-off in certain laws in theory operates automatically, in practice set-off has to be invoked. This use of set-off as a defence characterizes the terminology. Hence the party claiming set-off is referred to as the debtor and the other party is referred to as the creditor. The claim against which set-off is invoked is referred to as the principal claim (or sometimes the passive claim) and the claim that is used for offsetting is referred to as the counterclaim (or sometimes the active claim).

The claims that are to be set off against each other can be either contractual or non-contractual or both. For example, A’s claim against B may be contractual and B’s claim against A may be non-contractual. In fact, any combination of the two is possible. If we turn back to the example given above we may add to the factual circumstances that B remains in the premises after the rental contract has been terminated and still does not pay the rent. A’s claim against B for remuneration for the use of office space after the termination of the rental contract will be non-contractual – depending on the applicable law the claim can be characterized as one under unjust enrichment or in tort.

The various claims that the parties have may be governed by different laws. A’s claim for the payment of rent may be governed by a law other than B’s claim for reimbursement for repairs. The question arises which law should be applied to the right to set-off itself and this entry of the Encyclopaedia will deal with the law applicable to set-off between contractual obligations, between non-contractual obligations, mixed obligations and the particular case of set-off in insolvency.

What is more, different courts could have jurisdiction to hear the claims. For instance, if the parties have different domiciles and the claims are based on contracts with different places of performance arts 4 and 7(1) of the Brussels I Regulation (recast) (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement p. 1635of judgments in civil and commercial matters (recast), [2012] OJ L 351/1; →Brussels I (Convention and Regulation)) would not point in the direction of one court being competent to hear all claims. As we will see later in this entry, jurisdiction to entertain a request for set-off depends on whether it is formulated as a counterclaim in the procedural sense of the expression or merely as a defence which would result in a sum being deducted from the plaintiff’s claim.

II. The law applicable to set-off between contractual obligations

1. The Rome I Regulation

In the European Union, the law applicable to →contractual obligations is determined according to the rules in the Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), [2008] OJ L 177/6; →Rome Convention and Rome I Regulation (contractual obligations)). In this context it is worth mentioning that the →CISG (United Nations Convention of 11 April 1980 on Contracts for the International Sale of Goods, 1489 UNTS 3) does not contain any rules on set-off. This means that even if the laws of two contracting states are applicable – and the CISG according to its art 1(1)(b) applies – the matter will be left to national law. In other words, choice of law matters.

Article 17 of the Rome I Regulation contains a specific rule on the law applicable to set-off by operation of law. This is a novelty in comparison to the Rome Convention (Rome Convention on the law applicable to contractual obligations (consolidated version), [1998] OJ C 27/34), which did not contain an explicit rule concerning set-off. However, it was generally held that the question was covered by art 10(1)(d), according to which the various ways of extinguishing obligations were included in the scope of the applicable law. However, this solution carried with it an inherent uncertainty when the two or more obligations involved were governed by different laws with different rules concerning set-off. Which of the laws determined the conditions for and effects of set-off? In art 17 Rome I Regulation it has now been clarified that set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted – the principal claim.

Set-off may take place either by operation of law or because the parties have agreed on set-off. The Rome I Regulation covers both these situations but it is only the first situation that is dealt with in art 17. The law applicable to contractual set-off is determined by the general rules of the Regulation. Having said this, both situations deserve our attention. Contractual set-off plays a great practical role in particular in connection with payment systems and financial markets.

2. Set-off by operation of law

a) General approaches to the law applicable to set-off

Prior to the inclusion of an explicit rule in the Rome I Regulation, various different approaches to the issue of the law applicable to contractual set-off were taken and advocated throughout Europe. The three main approaches were (i) application of the law of the forum; (ii) a cumulative application of the laws involved; and (iii) application of the law of the principal claim – the solution chosen in the Rome I Regulation.

Prior to the entry into force of the Rome I Regulation in English and Scots private international law (→United Kingdom) a claim would be set off against the principal claim only if this were possible according to the law of the forum. The advantage of applying the law of the forum is obvious: it is simple and reduces the cost of proceedings. The problems inherent in the application of the law of the forum are also obvious. First, the law of the forum need not have any connection whatsoever to the contractual obligations involved in the set-off. Applying the →lex fori could therefore be quite inequitable. What is more, applying the law of the forum encourages forum shopping (→Forum (and law) shopping) and the possibility of forum shopping in its turn leads to a race to the courts.

The cumulative solution was favoured in French (→France) and Italian (→Italy) private international law. Set-off would only be allowed if it were possible under both the law applicable to the principal claim and the law applicable to the counterclaim. The main argument for a cumulation of laws is one of equity – if the extinction of two debts is involved it is only fair that the conditions for their extinction must be satisfied for both. This p. 1636rule allegedly applies in all legal systems in internal situations and should therefore also apply when two or more laws govern the different debts. The law governing the counterclaim is as worthy of consideration as the law governing the principal claim. Another argument in favour of the cumulative solution is that it is neutral in relation to which of the parties that first brings an action and thus renders his claim the status of ‘principal’. If one applies the law of the principal claim to set-off, a party, A, that has reason to fear that his debtor, B, would bring a counterclaim for set-off could stand to gain from being the first to sue if the law applicable to A’s claim against B does not allow it. This could lead to a race to the courts. Using the cumulative approach there would be nothing to gain from suing first; the result would always be the same irrespective of which claim is regarded as ‘principal’.

The solution chosen in the Rome I Regulation is that the law applicable to the principal claim determines the right to set-off. This solution goes particularly well within systems in which set-off has to be declared by a party. It also appears to have been somewhat of a majority opinion in →Germany and the Scandinavian countries. It is also the solution chosen in art 148(2) of the Swiss Private International Law Act (Bundesgesetz über das Internationale Privatrecht of 18 December 1987, 1988 BBl I 5, as amended). The rationale behind applying the law of the claim against which set-off is declared is that the (main) creditor cannot defend himself against the extinction of his claim and therefore should have the benefit of the protective rules of the law applicable to his own claim. The rule protects the party facing set-off.

b) Scope of the law applicable to set-off

The law applicable to the issue of set-off should in principle govern all matters connected therewith – irrespective of the fact that set-off might be characterized as procedural in the applicable law. Only procedural issues sensu strictu, such as the question of at what point in time in proceedings a declaration of set-off must be made and what form it should have, should be governed by the lex fori.

It is for the law of the principal claim to decide whether set-off is allowed or whether set-off is prohibited due to the character of the claim. In many legal orders there is a prohibition to set off against a claim for, by way of example, salary or maintenance. In this context it should be noted that such a prohibition could be internationally mandatory and find application through art 9 of the Regulation.

It is also for the law governing the principal claim to decide the prerequisites for set-off, in particular:

  • whether there is a requirement of mutuality, ie the creditor for the principal claim is the same as the debtor for the counterclaim;

  • whether there is a requirement of homogeneity, ie to which extent the two claims involved must concern matters of (more or less) the same kind, eg money;

  • the effect of connexity, ie a strong link between the two claims for instance through the fact that they arise from the same contract or linked contracts;

  • whether there is a requirement of liquidity, ie that the counterclaim is either exactly determined or can readily and without difficulty be computed;

  • to which extent there is a requirement of maturity, ie whether one or both of the claims must be due; and

  • the effect of limitation or →prescription; note that the question of whether a claim has expired or not is an incidental question to be determined by the law applicable to that claim.

It is also for the law governing the principal claim to determine questions of when and how set-off could be invoked (for strictly procedural issues concerning form etc, see above). Can set-off only be invoked through a counterclaim in court, or is an out of court declaration sufficient?

Finally it is for the law governing the principal claim to decide the effects of set-off, in particular from which point in time it takes effect. The alternatives here would be from the time when the two claims came into existence, from the time a declaration for set-off is made, from the time a counterclaim is made in court or from the time of a court decision.

It is for the law governing the counterclaim itself to determine to which extent this claim exists at all and whether it is mature, expired etc. These are all incidental questions pertaining to the quality of the counterclaim itself.

A disputed question is whether it is for the law governing the principal claim, ie the law governing set-off, or the law governing the counterclaim to determine whether the counterclaim is extinguished by the set-off or not. It could be said that art 17 only determines the right p. 1637to set-off and its effects on the principal claim. Should the law governing the counterclaim not allow or even know set-off the counterclaim would still exist. The only way to escape the counterclaim would then be to invoke →unjust enrichment, →estoppel or the like. This author would strongly oppose such an interpretation, which runs counter to the very purpose of the rule, viz to bring about the greatest possible certainty as regards the law applicable to and the effects of set-off.

3. Contractual set-off

Even before the advent of the Rome I Regulation, there appears to have been full consensus in legal writing that the law applicable to agreements to allow set-off should be the law governing the agreement itself. Now this is also made clear in art 17 Rome I, which is only applicable when ‘the right to set-off is not agreed by the parties’. This means that the applicable law will be determined according to the general rules in arts 3 and 4.

If the parties choose the law in accordance with art 3 then that law will apply. Article 3(1) in fine also allows the parties to make a separate →choice of law for the question of set-off. We are not aware that this should be common practice.

A complicating factor when discussing set-off agreements is their heterogeneity both in name and in nature. There is a multitude of types of contracts that contain agreements on set-off but very few go under the name of set-off agreements. Popular terms in business and banking circles are ‘clearing’ and ‘netting’, which regularly are understood to mean set-off. Other typical types of agreements involving contractual set-off are contracts for the opening of an account or credit with a bank, postal or bank giro accounts, revolving credit facilities etc. It is simply not possible to make sweeping statements on the law applicable to all kinds of contracts that include the question of set-off. Such contracts will have to be analysed on a case-to-case basis or at least according to their typology.

If we look at art 4 it is clear that to the extent that a contract containing provisions concerning set-off fits in with one of the various classes of contracts given in para 1 that rule will apply. If a contract for the sale of goods (→Sale contracts and sale of goods) also contains provisions concerning set-off it follows from art 4(1)(a) that the law of the country where the seller has his habitual residence will apply, also to the matter of set-off. If the contract is one for the provision of services, according to art 4(1)(b) the law of the habitual residence of the service provider will apply etc.

If the contract does not fall under the typology in para 1 or under several of the categories therein, the contract, including its set-off provisions will be governed by the law of the country in which the party required to effect the characteristic performance of the contract has his habitual residence. If a characteristic performance cannot be determined for the contract we are left with trying to identify the country with which it is most closely connected and apply that law.

The contracts described above that include a financial institution keeping an account could be considered to be contracts for the provision of (financial) services and would hence fall under art 4(1)(b). We would apply the law of the habitual residence of the service provider, ie the financial institution. Even if the concept ‘contract for the provision of services’ were to be given a narrow interpretation, and we doubt it, the financial institution would be the party effecting the characteristic performance of the contract and the result would be the same.

A problem arises if both or none of the parties to such a contract are credit institutions, which is not uncommon. If one of them is the keeper of the account then we would argue that it is that party that effects the characteristic performance (or is even the service provider) and we should apply the law of its habitual residence.

If we turn to trade in financial instruments we find that there is a special rule in art 4(1)(h), which is concerned with the law applicable to trade in financial markets as defined in the MiFID (Markets in Financial Instruments Directive (Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, [2004] OJ L 145/1)). According to art 36(4) of the MiFID the public law applicable to a financial market should be the law of its home Member State. The Rome I Regulation takes this rule one step further and provides that that law should also govern any contracts concluded within such a system. However, set-off never takes place within such systems, only outside them. For the purposes of determining the law p. 1638applicable to set-off this rule is irrelevant. Set-off becomes relevant in the context of trade in financial instruments either between the seller and the buyer or between a buyer and an authorized operator on a market, for instance a stockbroker.

It is important to point out that art 4(1)(h) has no bearing on the legal relationship between a buyer and a stockbroker as the provision only applies to contracts concluded within the financial market. The netting that occurs on accounts held by stockbrokers on behalf of their clients, which could for that matter cover trade on several financial markets, would instead fall under art 4(1)(b) since it is covered by a contract for the provision of financial services. Hence, to the extent that the parties have not agreed on the applicable law such a contract will be governed by the law of the service provider, ie the stockbroker.

As indicated above, set-off also occurs between parties that trade directly with securities. Independently of whether the trade has taken place on a regulated financial market or over-the-counter, trade is followed by settlement, which is the procedure whereby the securities are delivered and paid for. This procedure today almost invariably takes place electronically through a settlement system. Settlement can either take the form of so-called gross settlement, aka trade for trade settlement, or through various forms of netting, ie set-off. Settlement systems fall under the Settlement Finality Directive (Directive 2009/44/EC of the European Parliament and of the Council of 6 May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims, [2009] OJ L 146/37) and, according to art 2(a), second indent of the Directive, the law of the Member State that the participants have chosen shall govern the settlement system – and they have to choose one. Since the parties will always have chosen the applicable law, it follows from art 3 Rome I Regulation that this choice will be respected. There is therefore no need for a rule similar to art 4(1)(h); but taking the belt and braces approach to ensure that this is understood by extremely risk-sensitive markets Recital (31) of Rome I makes it clear that the Regulation does not preclude the operation of a formal arrangement designated as a system under the Settlement Finality Directive.

At this moment it could be useful to call the reader’s attention to the fact that the exemption from scope in art 1(2)(d) of the Rome I Regulation for obligations arising under →bills of exchange, →cheques and promissory notes and ‘other negotiable instruments’ is of no relevance in the context of settlement. Securities qualify as negotiable instruments but for this latter category the exemption from scope is limited to ‘the extent that the obligations under such other negotiable instruments arise out of their negotiable character’. Factors relevant to us in the context of set-off such as whether there actually exists a contract for the purchase of certain securities and payment of the price remain within the scope of the Regulation. Obligations specific to the negotiable character that fall outside the scope of Rome I would include the bearer’s right upon the issuer/drawer, irrespective of there ever being a contractual obligation between the two.

We finally turn to the question of ‘naked’ set-off agreements. Such an agreement is an agreement that is only concerned with set-off. A typical example would be when a party claims set-off of a counterclaim and the other party agrees or does not object. This would (or in the case of non-objection could, depending on the applicable law) constitute a set-off agreement pure. The question is what law governs such an agreement. The contract clearly does not fall under art 4(1) of the Rome I Regulation nor can it be said that either of the parties effects a characteristic performance. Hence art 4(2) is also not applicable. We are then left with art 4(4) and trying to find the country to which the contract is most closely connected.

If both claims are governed by one and the same law it would make sense to apply that law also to the set-off agreement. If in the context of the agreement one claim can be said to constitute the principal claim and one claim the counterclaim, we would argue that it makes sense to apply the law of the principal claim. Thus there would be no difference in the applicable law depending on whether there is an agreement or not and there would at least not be a private international law incentive to bring spurious claims that there is an agreement to set off. For all other cases we are left with simply trying to find the closest connection to the issue of set-off. Obviously this would have to be decided on a case-by-case basis.

III. p. 1639The law applicable to set-off between non-contractual obligations

Although not as common as set-off between →contractual obligations, set-off between non-contractual obligations does occur. A practically important situation is between insurance companies netting their obligations towards each other for payments made to various policyholders.

It follows from art 1(1) Rome I Regulation that it is only applicable to contractual obligations. The answer to the question of the right to set-off between non-contractual obligations will therefore have to be sought elsewhere, viz in the →Rome II Regulation (Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), [2007] OJ L 199/40). The problem is that the Rome II Regulation, as opposed to the Rome I Regulation, does not contain an explicit rule concerning the law applicable to set-off. However, according to art 15(h) Rome II Regulation the question of the manner in which an obligation may be extinguished is included in the scope of the applicable law. This leaves us in the same situation as we were in when trying to interpret the Rome Convention, viz that we do not know which law if there are different laws applicable to claim and counterclaim.

The Rome I Regulation still contains a similar provision concerning the extinguishing of obligations in art 12(1)(d). It still has a role to play in spite of art 17 Rome I Regulation since after all set-off is not the only way to extinguish a contractual obligation. Article 17 should therefore be interpreted as a clarification of art 12(1)(d). Given that what is said in art 17 was already at the time of the Rome Convention the majority interpretation and that the Rome I Regulation was adopted after the Rome II Regulation we would strongly advise against any a contrario conclusions induced by the absence of an explicit rule on set-off in Rome II. On the contrary we would submit that the only reasonable interpretation is that art 15(h) of Rome II should by way of analogy with Rome I be read to mean that the law of the principal claim is applicable to the right to set-off. An argument in favour of this interpretation is that Recital (7) of Rome I stipulates that the provisions of the Regulation are intended to be consistent with those of Rome II. There is a similar Recital (7) in Rome II that for obvious reasons – Rome II was adopted before Rome I – only refers to Brussels I (Brussels I Regulation, Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, [2001] OJ L 12/1) and not to Rome I. However, the message is clear: similar issues should be solved in the same manner in the two Regulations.

If the parties agree on set-off they have concluded a contract. Even if this contract concerns the setting off of two non-contractual obligations this contract will be subject to the rules in the Rome I Regulation since the right to set-off has been made contractual (see II.3. above on ‘Contractual Set-off’).

IV. The law applicable to set-off between contractual and non-contractual obligations

A tricky situation arises if one of the two claims involved in set-off is contractual and the other is non-contractual. One example would be a claim under contract with a counterclaim under product liability. A, with habitual residence in country X, has delivered several machines to be installed in B’s factory. The factory is located in country Y, which is the country in which B also has his habitual residence. One of the machines is defective and injures one of the workers. B incurs costs of EUR 200,000 for compensating the worker. After having repaired the machine, A demands a payment of EUR 4,000,000. B wishes to set off his counterclaim of EUR 200,000.

If we apply the Rome I Regulation to the contractual claim, art 4(1)(a) – or possibly 4(2) if the contract is for a combination of sale and installation – tells us that the law of B’s habitual residence, ie country X, governs the contract. For the counterclaim under product liability art 5(1)(a) of the Rome II Regulation indicates that the law of Y, being the place of the habitual residence of the person sustaining damage, should apply. We thus have a situation where we have a claim in contract, a counterclaim in tort and two different laws apply to the two claims.

We have previously established that the solution is to apply the law of the principal claim to this issue, irrespective of whether Rome I or Rome II is applicable to the two claims involved in set-off. However, in a situation such as this one could argue that neither of the two instruments is applicable. The question of set-off between a contractual and a non-contractual claim falls outside the scope of both since they are limited to contractual and non-contractual p. 1640claims respectively. The logical consequence if such is the case would be to say that the matter is left to national law.

Having said this we would nonetheless submit that that is an unsatisfactory answer. As a matter of policy it is very difficult to defend that the question of the law applicable to set-off will be answered differently depending on the characterization of the claims involved. What is more, we find it highly unlikely that the Court of Justice would leave the issue to national law if ever confronted with the problem. An alternative, but in our view less logical, solution would therefore be to let the characterization of the principal claim decide whether Rome I or Rome II is applicable. In that way there will be no lacunae. This solution is also in line with the view in art 17 (applied directly in the case of Rome I, or by way of analogy in the case of Rome II) that the law of the principal claim determines all aspects of set-off – in this case the characterization of the entire set-off situation as either contractual or non-contractual.

V. The law applicable to set-off in insolvency proceedings

In insolvency proceedings both the insolvent debtor as well as creditors may wish to demand set-off of their claims. It follows from art 4(2)(d) of the Insolvency Regulation (Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, [2000] OJ L 160/1) that the lex fori concursus shall determine ‘the conditions under which set-offs may be invoked’. This rule could, like any other rule involving the application of the lex fori, lead to forum shopping and to a certain extent does art 3 of the Insolvency Regulation make this possible. A creditor could chose to open insolvency proceedings either in the country where the debtor has its main interests or where the debtor has an establishment, but then limited to assets situated in the territory of that Member State. If the insolvency debtor has claims against the insolvency creditor it could be interesting to open insolvency proceedings in a country in which it would not be possible to offset those claims against those of the insolvency creditor. Such could be the case for the reason that under the lex fori a set-off is not allowed between the two claims in question or for the reason that this law excludes set-off in the case of insolvency proceedings.

The possibility for forum shopping (→Forum (and law) shopping) is an undesired consequence of the rule and the argument that application of the lex fori concursus would keep the cost of the proceedings down remains unconvincing, in particular since art 6(1) could lead to the application of foreign law (→Foreign law, application and ascertainment) to the question of the right to set-off anyway. In the 2012 proposal for a revision of the Insolvency Regulation (Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings, COM(2012) 744 final, at the time of writing still negotiated), no change is suggested but for a new art 6a on the law applicable to netting agreements, which stipulates that such agreements are exclusively subject to the law applicable to them (to be determined by the rules in the Rome I Regulation) – and not to the law applicable to the insolvency.

Article 6(1) of the Insolvency Regulation is a rule that protects insolvency creditors from the effects of insolvency in the case their right to set off should be adversely affected thereby. In the case of insolvency they will still have the right to demand the set-off of their claims if such a set-off is permitted under the law applicable to the insolvency debtor’s claim, ie the principal claim. A limitation is that the rule is only applicable to claims that have arisen before the opening of insolvency proceedings. Should the parties have agreed on set-off the law applicable to that agreement, as determined by the Rome I Regulation, will continue to apply. In a sense the rule can be described as a rule protecting ‘vested rights’. The insolvency should not deprive the insolvency creditor of a right to set-off that he would otherwise have had. As it is, the Regulation extends double protection to insolvency creditors. Either they can demand set-off of their claims according to the lex fori concursus or they could use their right under art 6(1) to do the same.

According to their wording arts 4(2)(d) and 6(1) only apply to the question of the right to set-off and not to the effects of set-off, most importantly the question of from which point in time it takes effect. How should the law applicable to that question be determined? As concerns art 4(2)(d) we are saved by the fact that the provision is not exhaustive. The lex fori concursus governs ‘in particular’ the question of the conditions for set-off but this does not exclude that it also governs the issue of the effects p. 1641thereof. Applying the law of the insolvency proceedings to all matters concerning set-off also corresponds to the telos of the rule, viz that (practically) all issues should be governed by one law. We see no reason why the legislator should have wanted →dépeçage.

If we turn to art 6(1) the limitation of the rule to the right to demand set-off is not a problem since the rule is identical with that of the Rome I Regulation. Whether it is art 17 of the Rome I Regulation or art 6(1) of the Insolvency Regulation that is applied to determine the law applicable to the effects of set-off is therefore mainly of academic interest.

VI. Jurisdiction to try claims for set-off

One could imagine a case in which the court, according to art 7(1) of the Brussels I Regulation (recast), assumes jurisdiction to hear A’s contractual claim against B on the basis that the contractual obligation in question is to be performed where the court is located. If in that procedure B invokes set-off against another contract according to which B has a claim against A, that is to be performed elsewhere, does the court have jurisdiction to hear also the claim for set-off? The problem is that while the court has jurisdiction to try the principal claim it would appear that it lacks jurisdiction to try the counterclaim.

There is a particular rule in the Brussels I Regulation that deals with counterclaims, viz art 8(3). According to this provision a court will have jurisdiction to hear a counterclaim if it arises ‘from the same contract or facts on which the original claim was based’. Article 14(2) gives the same right under the same conditions for insurance disputes, art 18(3) does the same for consumer disputes and art 22(2) for employment disputes. The problem lies in the restriction to the same contract or facts, which would bar courts from trying a counterclaim for set-off even if such connexity is not required by the applicable law.

Article 8(3) is applicable to counterclaims. Here, the terminology becomes a bit confusing. The terms used when describing set-off are usually ‘principal claim’ and ‘counterclaim’. However, not all (counter) claims for set-off qualify as counterclaims under the Brussels I Regulation (recast). The Court of Justice has distinguished between counterclaims and claims raised in defence during the proceedings (Case C-341/93 Danværn Production A/S gegen Schuhfabriken Otterbeck GmbH & Co [1995] ECR I-2053). The purpose of a counterclaim in its procedural meaning is to obtain an enforceable judgment. Set-off, when used as a defence in proceedings, can only be used to deduct from the plaintiff’s claim and the sum set off can therefore never exceed the principal claim. To which extent procedural set-off is allowed is determined by the law of the forum and if it allows it the rules on jurisdiction in the Brussels I Regulation (recast) constitute no obstacle.

Literature

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  • Heiko Eujen, Die Aufrechnung im internationalen Verkehr zwischen Deutschland, Frankreich und England (Metzner 1975);

  • Michael Hellner, ‘Set-off’ in Franco Ferrari and Stefan Leible (eds), Rome I Regulation: The Law Applicable to Contractual Obligations in Europe (European Law Publishers/NCTM 2009) 251;

  • Mathias Kannengiesser, Die Aufrechnung im Internationalen Privat- und Verfahrensrecht (Mohr Siebeck 1998);

  • Ole Lando, ‘Chapter 24 Contracts’ in Kurt Lipstein (ed), International Encyclopedia of Comparative Law, vol 3 (Mohr 1976);

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  • Ulrich Magnus, ‘Aufrechnung und Gesamtschuldnerausgleich’ in Franco Ferrari and Stefan Leible (eds), Ein neues Internationales Vertragsrecht für Europa – Der Vorschlag für eine Rom I-Verordnung (JWV Jenaer Wissenschaftliche Verlagsgesellschaft 2007) 201;

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