A few words on setoff | In Principle

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A few words on setoff

The Supreme Court of Poland has recently issued several rulings on setoff (Civil Code Art. 498), confirming the existing line of case law and the established legal and commercial practice. The regulations on asserting the defence of setoff in civil proceedings have also been amended.

Setoff is a useful instrument allowing mutual claims between the parties to be extinguished. It applies when two persons are each both creditor and debtor to each other, and the subject of both claims is money or fungible goods. Setoff simplifies the flow of cash and results in de facto enforcement of the receivables. To effectively exercise the possibility of setoff at the pre-litigation stage, and at trial, it is essential to know not only the regulations adopted by the parliament but also the views expressed in the case law, particularly from the Supreme Court. The court holdings directly conflict with the wording of the Civil Code provisions governing setoff.

Under the literal wording of Civil Code Art. 498 §1, both claims must be due and payable for setoff to be possible. But the court decisions developed a different position, under which only the claim presented for setoff must be due and payable (the claim held by the entity making a declaration of setoff). This is a great help to entities seeking to make a setoff, holding a due and payable claim and not wishing to wait until the deadline for performance of the opposing obligation. This view was recently confirmed by the Supreme Court in the judgment of 5 March 2019 (case no. II CSK 41/18), holding, contrary to the wording of Civil Code Art. 498, that only the maturity of the claim of the party making the setoff is a condition for setoff. With respect to the opposing claim, the court deemed the possibility of satisfying the claim to be a sufficient condition.

In another judgment, of 22 March 2019 (case no. I CSK 71/18), the Supreme Court held that a contractual provision under which one of the parties may make a unilateral setoff against the other in a situation where the necessary statutory conditions for unilateral setoff have not arisen is impermissible. This ruling recognised the absolute nature of the setoff regulations and the limited freedom of the parties to shape this institution contractually. Contractual modification of setoff is possible, but it must remain in compliance with the statutory conditions for setoff. It is essential to be aware of this, to avoid the risk of invalidity of contractual provisions and doubts whether a setoff was made correctly and effectively.

The Supreme Court judgment of 15 February 2019 (case no. II CSK 723/17) is highly important for judicial practice. That ruling confirmed the previously adopted position that a standard power of attorney for litigation, the scope of which is defined by Civil Procedure Code Art. 91, does not authorise the attorney to make a substantive legal declaration of setoff. Thus an attorney in litigation must hold separate authorisation to declare a setoff on behalf of the client. Lack of such authorisation renders the declaration of setoff ineffective, which can have serious practical consequences.

In the context of setoff, we must bear in mind the much-discussed amendment of the Civil Procedure Code which entered into force on 7 November 2019. It introduced Art. 2031 of the code, limiting the ability to make a setoff during the course of judicial proceedings.

First, only a claim of the defendant arising out of the same legal relationship as the claim pursued by the plaintiff can be grounds for a defence of setoff. Thus, as a rule, setoff as a defence in litigation must concern the same legal relationship (e.g. the same contract). For example, a claim for the fee for performing a contract could be set off against a claim for a contractual penalty sought on the basis of the contract. An exception to the rule is when the defendant’s claim is undisputed and substantiated by a document not originating solely from the defendant. The general rule here is intended to avoid situations in which two essentially different cases, arising out of different legal relationships, must be decided in a single judicial proceeding, which could prolong the litigation.

Second, the defendant may assert the defence of setoff no later than when it joins issue on the merits of the dispute, or within two weeks after its claim becomes due and payable. Thus, once the setoff is possible, it is impermissible to delay asserting the defence. Delay exposes the defendant to preclusion and loss of the right to assert the setoff as a defence in the litigation.

Third, the defence of setoff must be asserted in a pleading meeting the formal requirements for a statement of claim (except for court filing fees).Thus it is not permissible to raise the defence of setoff orally at the hearing for inclusion in the record.

Agata Jóźwiak, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners