CHAPTER XXXVIII.

SET-OFF.

[* § 1430, 1431. Set-off as matter of equitable jurisdiction.

§ 1432. The subject affected by statutes.

§ 1433. Lord Mansfield's exposition of the subject.

§ 1434. Equity decrees set-off under peculiar circumstances.

§ 1435. Will do it where credit is given in faith of it.

§ 1436. Must be special grounds for equitable set-off.

§ 1436 a. As where the debts are mutual, and one merely equitable.

§ 1437. Will not set off debts not mutual, unless special equity.

§ 1437 a-1437 b. Further illustrations of the subject.

§ 1438. Compensation in the civil law.

§ 1439. Was regarded as resting upon natural equity.

§ 1440. Counter-claim extinguished in civil law.

§ 1441. In civil law claims for specific articles set off.

§ 1442. Rights of sureties to set-off in civil law.

§ 1443. Debts assigned set-off in civil law.

§ 1444. Regret that courts of equity have not adopted these maxims.]

§ 1430. IT remains for us to take notice of a few other matters, over which courts of equity exercise a jurisdiction, either in its own nature exclusive, or, at least exclusive for particular objects, and under particular circumstances. Upon these, however, our commentaries will necessarily be brief, as they either are not of very frequent occurrence, or they are, in a great measure, embraced under the heads which have been already discussed.

§ 1431. And, in the first place, let us consider the subject of SET-OFF, as an original source of equity jurisdiction.1 It is not easy to ascertain the true nature and extent of this jurisdiction, since it has been materially affected in its practical application in England, by the statutes of 2 Geo. II. ch. 22, and 8 Geo. II. ch. 24, in regard to set-off at law, in cases of mutual unconnected debts; and by the more enlarged operation of the bankrupt laws, in regard to set-off, both at law and in equity, in cases of mutual debts and mutual credits.3

§ 1432. It was said, by a late learned chancellor, that before the

1 Set-off was formerly called Stoppage. See Downam v. Matthews, Prec. Ch. 582; Jeffs r. Wood, 2 P. Will. 128, 129.

2 See Bac. Abr. by Guillim, title Set-off, A. B. C.

3 See stat. 4 & 5 Anne, ch. 17; 5 Geo. I. ch. 11; 5 Geo. II. ch. 30; 46 Geo. III. ch. 135; 6 Geo. IV. ch. 16; Babbington on Set-off, ch. 5, p. 116, &c.

statutes of set-off at law, and the statutes of mutual debts and credits in bankruptcy, "this court (that is, the court of chancery as a court of equity) was in possession of it (i. e. the doctrine of set-off), as grounded upon principles of equity, long before the law interfered. It is true, where the court does not find a natural equity, going beyond the statute (of set-off), the construction is the same in equity as at law. But that does not affect the general doctrine upon natural equity. So, as to mutual debts and credits, courts of equity must make the same construction as the law. But, both in law and in equity, that statute, enabling a party to prove the balance of the account, upon mutual credit, has gone much farther than the party could have gone before, either in law or in equity, as to set-off." This is not a very instructive account of the doctrine; for it leaves in utter obscurity what were the particular cases in which courts of equity did interpose upon principles of natural equity.2

§ 1433. Lord Mansfield has expressed his views of the subject of set-off in equity in the following language: "Natural equity says, that cross-demands should compensate each other, by deducting the less sum from the greater; and that the difference is the only sum which can be justly due. But positive law, for the sake of the forms of proceeding and convenience of trial, has said, that each must sue and recover separately, in separate actions. It may give light to this case, and the authorities cited, if I trace the law relative to the doing complete justice in the same suit, or turning the defendant round to another suit, which, under various circumstances, may be of no avail. Where the nature of the employment, transaction, or dealings, necessarily constitutes an account, consisting of receipts and payments, debts and credits, it is certain, that only the balance can be the debt; and by the proper forms of proceeding in courts of law or equity, the balance only can be recovered. After a judgment, or decree to account," both parties are equally actors. Where there were mutual debts unconnected, the law said, they should not be set-off; but each must sue. And courts of equity followed the same rule, because it was the law; for, had they done otherwise, they would have stopped the course of law in all cases where there was a mutual

1 Lord Eldon in Ex parte Stephens, 11 Ves. 27; Green v. Darling, 5 Mason, 207, 208; Ex parte Blagden, 19 Ves. 467.

2 The general principles of the English

law, as to set-off, are well summed up in Mr. Evans's edition of Pothier on Obliga. tions, Vol. 2, p. 112, No. 13.

demand. The natural sense of mankind was first shocked at this in the case of bankrupts; and it was provided for by 4 Anne, ch. 17, § 1, and 5 Geo. II. ch. 30, § 28. This clause must have, everywhere, the same construction and effect; whether the question arises upon a summary petition, or a formal bill, or an action at law. There can be but one right construction; and, therefore, if courts differ, one must be wrong. Where there was no bankruptcy, the injustice of not setting off (especially after the death of either party) was so glaring, that Parliament interposed by 2 Geo. II. ch. 22, and 8 Geo. II. eh. 24, § 5. But the provision does not go to goods, or other specific things wrongfully detained. And, therefore, neither courts of law nor equity can make the plaintiff, who sues for such goods, pay first what is due to the defendant; except so far as the goods can be construed a pledge; and then the right of the plaintiff is only to redeem."1

§ 1434. If this be a true account of the matter, then it would seem that courts of equity did not, antecedently to the statutes of set-off, exercise any jurisdiction as to set-off, unless some peculiar equity intervened, independently of the mere fact of mutual, unconnected accounts. As to connected accounts of debt and credit, it is certain, that both at law and in equity, and without any reference to the statutes, or the tribunal in which the cause was depending, the same general principle prevailed, that the balance of the accounts only was recoverable; which was, therefore, a virtual adjustment and set-off between the parties.2 But there is some reason to doubt, whether Lord Mansfield's statement of the jurisdiction of equity in cases of set-off is to be understood in its gen-, eral latitude, and without some qualifications. It is true that equity generally follows the law, as to set-off; but it is with limitations and restrictions. If there is no connection between the demands, then the rule is, as it is at law. But, if there is a connection between the demands, equity acts upon it, and allows a set-off under particular circumstances.*

§ 1435. In the first place, it would seem, that, independently of

1 Green v. Farmer, 4 Burr. 2220, 2221. 2 Dale v. Sollet, 4 Burr. 2133.

3 See Duncan v. Lyon, 3 Johns. Ch. 358, 359; Dale v. Cooke, 4 Johns. Ch. 11; Howe v. Sheppard, 2 Sumner, 109, and cases there cited; Green v. Darling, 5 Mason, 207; Peters v. Soame, 2 Vern. 428; Gordon v. Lewis, 2 Sumner, 628.

4 Whitakar v. Rush, Ambler, 407, 408, and Mr. Blunt's note (4); Hurlburt v. Pacific Insur. Co., 2 Sumner, 471; Rawson v. Samuel, 1 Craig & Phillips, 161, 172, 173; Clark v. Cost, 1 Craig & Phillips, 54; [Ex parte Knight and Raymond, L. R. 20 Eq. 515].

the statutes of set-off, courts of equity, in virtue of their general jurisdiction, are accustomed to grant relief in all cases, where, although there are mutual and independent debts, yet there is a mutual credit between the parties, founded, at the time, upon the existence of some debts due by the crediting party to the other. By mutual credit, in the sense in which the terms are here used, we are to understand, a knowledge on both sides of an existing debt due to one party, and a credit by the other party, founded on, and trusting to such debt, as a means of discharging it. Thus, for example, if A. should be indebted to B. in the sum of £10,000 on bond, and B. should borrow of A. £2000 on his own bond, the bonds being payable at different times, the nature of the transaction would lead to the presumption that there was a mutual credit between the parties, as to the £2000, as an ultimate set-off, pro tanto, from the debt of £10,000. But if the bonds were both payable at the same time, the presumption of such a mutual credit would be converted almost into an absolute certainty. Now, in such a case, a court of law could not set off these independent debts against each other; but a court of equity would not hesitate to do so, upon the ground either of the presumed intention of the parties, or of what is called a natural equity.2 If, in such a

1 See Ex parte Prescott, 1 Atk. 331. In Hankey v. Smith (3 T. R. 507, note), it seems to have been thought by the court, that to constitute mutual credit within the Bankrupt Acts, it is not necessary that the parties mean particularly to trust to each other in each transaction. Therefore, where a bill of exchange, accepted by A., got into the hands of B., and B. bought sugars of A., intending to cover the bill, it was held to be a case of mutual credit, although A. did not know that the bill was in B.'s hands. Lord Kenyon said, the mutual credit was constituted by taking the bill on the one hand and selling the sugars on the other hand; to which Buller, J., assented. The distinction between a mutual debt and a mutual credit is, in this view, extremely nice. In Trench v. Fenn (Coke, Bank. Laws, 569, 4th edit.; 544, 5th edit.; s. c. 3 Doug. 257), Mr. Justice Buller said: Wherever there is a trust between two men on each side, that makes a mutual credit. In Olive v. Smith (5 Taunt. 60), Mr. Justice Gibbs

said, that Lord Mansfield, in Trench v.
Fenn, adopted it as a principle, that,
wherever there is a mutual trust, that is,
wherever one party, being indebted to
another, intrusts that other with goods,
it is a case of mutual credit. See also
Atkinson v. Elliot (7 T. R. 376); Olive
v. Smith (5 Taunt. 67, 68). In Key v.
Flint (8 Taunt. 23), Mr. Justice Dallas
said, that mutual credit meant something
different from mutual debts. Mutual
credit must mean mutual trust. In Rose
v. Hart (8 Taunt. 499, 506), the court
narrowed the extent of former decisions,
and held, that, in order to constitute s
mutual credit, the demands must be of
such a nature as must terminate in cross-
debts. See Easum v. Cato, 5 B. & Ald.
861; [Astley v. Gurney, L. R. 4 C. P.
(Ex. Ch.) 714].

2 Lord Lanesborough r. Jones, 1 P. Will. 326; Ex parte Flint, 1 Swanst. 33, 34; Downam v. Matthews, Prec. Ch. 580, 582. See also a decision of Lord Hale, cited in Chapman v. Derby, 1 Vern. 117; Jeffs v. Wood, 2 P. Will. 128, 129; Meli

case, there should be an express agreement to set off the debts against each other, pro tanto, there could be no doubt that a court. of equity would enforce a specific performance of the agreement, although at the common law, the party might be remediless.1

§ 1436. In the next place, as to equitable debts, or a legal debt on one side, and an equitable debt on the other, there is great reason to believe, that, whenever there is a mutual credit between the parties, touching such debts, a set-off is, upon that ground alone, maintainable in equity; although the mere existence of mutual debts, without such a mutual credit, might not, even in a case of insolvency, sustain it. But the mere existence of cross