(Court OF APPEAL)*

ABDALLA KHALLIL v. SHELL COMPANY LIMITTED

 ac-rev-358-1964

Principles

·  Equity- Equitable setofi-Applicable I the courts of the Sudan to relieve defendant from burden of elay and expense when the two transactions are the same or commected togethe-Mortgage deed and tenancy agreement concerned with same plots of land are connected together

Respondents-plaintiffs were mortgagors of two plots of land owned by applicant-dfendant. The same polts were leased to respondents on the day of the mortgage. The rent was to be retained by respondents towards settlement and untill the mortgage  debt is paid off. Respondents brought foreclosure suit against applicant, who asked for a set-off. Province Judge rejected applicant’s claim for a set-off.
Held: the decision of the porvince Judge rejected applicant’s claim for a set aside because:
(i)                  the Sudan courts, being courts of equlity , may apply eqitable set-off when the transactionns are the same or connected together so as to avoid delay and expense of a separate action by defendant.
(ii)                In this case, the two transactions, mortgage deed and tenancy agreement, although they are made in different instruments, are connected together, because they are concerned with the same plots of land and meant to stand side by side. Thus applicant-defendant is entitled to as for equitable set-off.
 

Judgment

Advocates: M. A . Mahgoub……………………..for applicant

      Abdalla El Hassan and Abdel Wahab Abu Shaiema…………for respondent

Babier Awadalla J. October 13, 1964:-This is an application for revision of the order of His Honour the Province Judge, Omdurman, dated june 22. 1964, rejecting applicant’s claim for a set-off in a foreclosure suit mortgaged to them by applicant in 1959.

The facts on which the foreclosure suit is based do not appear to be contested by applicant , but he claims that the very plots forming the subject-matter of the mortgage I question were leased by applicant to respondents on the day of the mortgage at an annual rental of Ł1.680.000m/ms, and that the rent due was to be retained by respondents towards settlement of and until the mortgage debt is paid off. Applicant contends that respondents by bringing the present foreclosure  Applicant contends that respondents by bringing the present foreclosure proceedings are repudiating the tenancy agreement under which the arrears of rent now amount to Łs.10.080.000m/ms, which greatly exceeds the amount now claimed in the foreclosur suit, viz, Łs,7.400.000m/ms.

The learned advocate for respondents applied to the Court below to disallow the set-off on the ground that it is bad in law in that its subject-matter  could only be raised by way of counterclaim. The * this argument and it is now for us to decide whether *

Is sound. The point is an interesting one especially* nowledge-it does ot seem to have been decided y our * . in fant there appears to be very little in our available legal literature on the subject of set off, due, apparently, to an ovious lacuna in our Cilvil justice ordinance . the questionn therefore falls to be decded in accordance with attempting this tas, Ifeel bound to discuss the basic aspects of the relevant principles both in England and India, eve though in doing this Imay not be able to escape the reproach of pedantry.

In England, the right in a defendant to plead a set-off was first recognized by the repealed statutes of set-off (Insolvent Debtor’s Relief Act 1729 and set off Act 1755). Those statutes enacted that where there were “mutual debts” between the plaintiff and defendant one debt might be set off againnst the other . Before those statutes, a defendant who had any cross-claim against the plaintiff could not raise it in the plaintiff’s action and had to brig a cross-action.

The scope of the statues was some what limited because they were applicable only in the case of debts pure and simple, i,e, claims for liquidated sums of money due from and to the parties in the same right.
 

At Odgers, Pleading and practice (18th ed, 1963), pp. 212,213, it is stated as follws;

“ it was held under these statues that there could only be a set-off were both debts were legal debts, such as would support an action of debt, covenant or assumpsit for the non-payment of money: it was not allowed in actions of trespass or upon the case or for general damages; and the demand intended to be set off must have been due from and not in the nature of a penalty. The debts must have been due from and to the same parties in the same right.”

Hence the flowing condition came to be recognized as essential at common law before a defendant could establish a right toset-off.

(i)                  the original suit must be for recovery of money.

(ii)                The defendant’s claim must be for an ascertained sum of money.

(iii)               The claim must be legally recoverable.

(iv)              Both the parties must fill the same character s they fill in the plaintiff’s suit.

(v)                The sum claimed by way of set-off should to exceed the pecuniary limits of the jurisdiction of the Court.

Although no set-off appears to have bee recognized in equity before the statutes, yet it is certain that the Court of Chancery applied the above statutory provisions to purely equitable claims though refusing to recognize them where there was an equity to the contrary-cf,,Snell, principles of Equity (25th ed, 1960) p. 515.

Furthermore, equity materially extended the right of set-off. This it did in two ways:

(i)                  by looking at the beneficial owner as the real owner in trust cases and so could-y injunction-compel other courts to regard his (I,e, the beneficial owner’s )rights and disregard the rights of the trustee, so that in answer to a claim by a trustee there could be set off a debt due to a defendant from the beneficiary, and

(ii)                in a claim arising out of transaction between the parties there could be set off a cross-claim arising under the same transaction, could be set off cross-claim  arising under the same transaction, whether sounding in debt or unliquidated damages or otherwise-cf. I diamond, Jacob, Adams and Neave, Annual Practice (1963), P. 450.

The set-off  recognized in Chancery outside the provisions of the statutes is what is now referred to as the equitable set-off and , since the judicature Act of 1873, can be set up by way of defense in any Court.

The equitable principle was applied in Morgan and Son Ltd. V. Martin Johnson and co. ltd. (1949) 1K.B. 107. In that case , plaintiffs claimed from defendants a certain sum of money for storage of vehicles. Defendants acknowledged that the sum claimed would have been due but for

The fact that the plaintiffs had negligently either  delivered one of the vehicles to the worn person or allowed it to be stolen. It was held that the amount of the damage claimed should be accepted in defence by way of equitabble set-off.

Again, in Hana v. Green (1958) 2 QB. 9, the plaintiff sued the defendant –a building contractor-for breach of  a buildig contract for failure to complete. The defendant claimed by way of set-off on a quantum meruit in respect of extra work  done outside the contract and for loss caused by plaintiff’s Act in refusing to admit defendant’s wormen and for trespass to tools. It was held that in equality neither of the claims (i.e. of plaintiff and defendant 0could be insisted upon without the other being taken into account and the defendant had an equitable set-off which defeated the plaintiff’s claim. Sellers L.J. said;

Some counterclaims might be quite incompatible with a plaintiffs claim, in  way connected with it and wholly unsuitable to be used as  a set-off, but the present class of action involving building or repairs, extra and incidental work so often leads to cross-claims for bad or unfinished work, delay or other breaches of contract that be astute to restrict the right but rather to develop[ it and discourage litigationn when no or little monetary nenefit ensuses on blabce. It cannot,as I see it, mae any differece which side commences proceedings I which cross-claims arise. If there is a set-off at all each claim goes against the other and either extinguishes it or reduces it” Hanak v, Green (1958) 2 Q B .29.

It appears that there are three cases in which a claim to an equitable set-off would not now be recongnised even in England ,viz:

(a)    a set-off for bad work in an actio against a servant for wages,

(b)   a claim for breach of covenant in a claim against the tenant for arrears of rent,

(c)    a claim for damages for breach of warranty of quality of goods in an action on a bill of exchannge given for the price.

In India, the provisions of the statutes were incorporated into the Indian Procedure Act 1882 ,s, 111, and are now to be found in rule 6 of Order 8 of the Act of 1958.

But although the equitable set-off was ot given any recognition by statute in India, yet, the courts there have recognised its applicability outside the Acts. In Iyantial and Another v. Abdul Aziz and Another (1956) A.I.R. Pat. 200. it is stated as follows:

“ The provisions of order 8,r, 6, which deal with legal set-off are not exhaustive, because apart from a legal set-off, which is expressly
 

provided in the Code, an equitable set-off may also be pleaded, it the defendant’s claim shows to have arisen from the same transaction as the plaintiff’s claim .

the rule does not take away from the parties any right to set-off which they woud have had independenty of the Code. Thus in cases of mutual debits and credits and in cases where cross-demands arise out of the same transaction, or, are so connected in their nature and circumstances as to make it inequitable that the plaintiff should recover, and the defendant driven to cross-suit, courts have allowed a plea of set-off even though the amount may be an unascertained sum. This set-off is own as an equitable set-off.” 

It will therefore be see that inn India the distinction between a statutory and an equitable set-off is that wile I the former a Court is bound to entertain and adjudicate upon the plea when raised, the defense in the latter cannot be claimed as a matter of right but the Court has a discretion to adjudicate upon it in the same suit or to order it to be dealt with in a separate suit; cf. II. A. I.R. Commentaries, The Code of Civil procedure (6th ed, 1957) 2400.

At IV Chitaleyand Ramaratanan, fifty years Digest (950), 135, it is stated as follows:

“The principle of equitable set-off is  that right of set-off exists not only  in cases of mutual debits and credits but also where cros-demands areise out of the same transaction or are so connected in their nature and circumstances as to mae it inequitable that the plaintiff should recover and the defendant be driven to a cross suit. There must be some equity connecting the cross-demands.”

It was held in India that in a suit by the vendor for unpaid purchase money in respect of sale not being given effect to was allowed to be set off as both claims arise out of the same cause of action, cf, Sakhanuni perdya and Another v. Nimmaraju Kaondayga and others (1948) A.I.R.Mad.430.

The Indian authorities available show that the defence is conceded on grounds of expediency in order to do justice between the parties in one and the same proceedings and so avoid a circuity of actions. It would therefore be disallowed if it would result in great delayor unecessary expense to the plaintiff.

The Sudan courts-being courts of equity-would no doubt receive and apply the equitable rule as it did in respect of what is know as a legal set-off. The guiding principle in its application would be the relief of defendant from the burden and expense of counterclaim or cross-action
 

Where the two claims are so connected together that it would be unjust to deal with the one without also dealing with the other . in the present case though the mortgage deed and the tenancy agreement may have been contained in different instruments, yet the fact that they were both concluded on one day suggests that the two transactions were to stand side by side. In fact it is very difficult without carefully discerning the whole transaction to come to any decision as to which of the two dealings –the mortgage and the lease-was the basic and primary relation between the parties and which was the ancillary,. Some material why the agreement of lease was not consummated and what was the impact on the relationship  of the parties, of the fact, if it be a fact , that such agreement was not duly registered under the land settlement and Reistration Ordinance 1925. if applicant could establish his contentions not consummated, then the alledged mortgage may mean nothing for a mortgage is not mortgage simply because it is so designated by the parties.

Even though a mortgage, in substance, could be established, I believe it would be a great hardship on applicant if he were driven to the trouble and expense of separate action only to find in the end that the property had been sold in the earlier foreclosure suit.

For the above reasons, I think that the question whether the present claim by applicant is one for liquidated amounts or sounding in damages is, in the circumstances, quit immaterial, and a set-off in cases of this sort would be allowable in equity.

This application is therfore alowed with costs and the decision of His Honour the Province Judge rejecting applican’s claim to a set-off  be set aside.

M. A. Abu Rannat C.J. october 13.1964:- I concur    
 

* Court : M. A. Abu Rannat C.J. and Babiker Awadalla J.