If there are mutual debts between a plaintiff and a defendant, the defendant may, by way of defence, set off any debt that was owed by the plaintiff to the defendant and was due and payable at the time the defence of set off was filed. It does not matter whether the mutual debts are of a different nature: CPA s 21(1).

The defence is available where one or more of the mutual debts is owed by or to a deceased person who is represented by a legal personal representative: s 21(2). It is not available to the extent that the plaintiff and the defendant have agreed that debts may not be set off against each other: s 21(3).

Section 21 does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise (s 21(4)), and is subject to s 120 of the Industrial Relations Act 1996: s 21(5).

Section 120 of the Industrial Relations Act 1996 prohibits a defence of set off to a claim for remuneration in respect of goods or services supplied by the employer or at its direction.

In s 21, “debt” means any liquidated claim: s 21(6).

Section 21 extends to any debt arising under an agreement entered into before 15 August 2005 and to any other debt arising before that date except that, in respect of the former, the court may order that the section does not apply “if it is satisfied that it would be in the interests of justice to make such an order”: CPA Sch 6 cl 6.

Historically, the requirement of mutual debts required that the demands must be between the same parties and that the debts not be due to the parties in different rights See New South Wales Law Reform Commission, Set Off, 2000, NSWLRC Report No 94 at 40.

However, the latter requirement has been altered by s 21(4) as set out above.

For the history of set off and the reasons for the re-introduction of statutory set off in the CPA see the NSWLRC Report, above.

The provisions of the CPA do not affect the availability of equitable set off which remains applicable in appropriate circumstances. It is not excluded by the absence of mutuality or the circumstance that one of the claims is not liquidated. What is required is that the contrary liabilities are sufficiently closely connected that it would be inequitable for the plaintiff to be permitted to proceed with its claim without making allowance for the defendant’s claim against it: Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receivers and Managers appointed (1997) 42 NSWLR 462 at 481–482, 488–489.

As to the relevant tests and examples of cases in which the defence of equitable set off has been relied upon, see Ritchie’s [s 21.10].

Further, the provisions of the CPA do not affect the availability of the defence of contractual set off or set off by agreement. Such a defence can arise — as in the case of any other contractual term — expressly, by implication, from a course of conduct, or by custom. See NSWLRC Report, above, at 4; Re Application of Keith Bray Pty Ltd (1991) 23 NSWLR 430 per McLelland J at 431.

Quite apart from the Act and Rules, the Supreme Court has inherent power to order that one judgment be set off against another whether there be one or more proceedings: Ryan v South Sydney Junior Rugby League Club [1975] 2 NSWLR 660 per Bowen CJ in Eq at 664; Wentworth v Wentworth (unrep, 12/12/94, NSWSC) at 3–4, Wentworth v Wentworth (unrep, 21/2/96, NSWCA) at 2–3. These cases deal with set off as to costs. However the principle is not so limited.

In courts other than the Supreme Court (CPA s 96(5)), a judgment debtor may apply for an order that the judgment be set off against another judgment of the same court in respect of which the judgment debtor is the judgment creditor: s 96(2). If an order is made, set off is effected in the manner provided by s 96(3). Judgments of different Local Courts are taken to be judgments of the same court and the application can be made to either court: s 96(4).

A related situation is that the court, where there is a claim by a plaintiff and a cross-claim by a defendant, may give judgment for the balance or in respect of each claim: s 90(2). The same can be done in respect of several claims between plaintiffs, defendants and other parties.

Section 22 of the CPA permits a defendant to bring a cross-claim against a plaintiff and a cross-claim involving third parties provided that, as to third parties, the relief sought relates to, or is connected with, the subject of the proceedings brought by the plaintiff: s 22(1)–(2).

Section 22 is procedural only and does not negate the need for a cross-claimant to establish a right to relief independently of the section: Dillingham Constructions Pty Ltd v Steel Mains Pty Ltd (1975) 132 CLR 323 per Barwick CJ at 328, Gibbs J at 330.

The cross-claim must be one seeking such relief as the court might grant against a cross-defendant in separate proceedings commenced by the defendant: s 22(1).

The cross-defendant has the same rights in respect of his or her defence against the claim as he or she would have in separate proceedings commenced against the person by the defendant: s 22(3)(a).

If not already a party, a cross-defendant becomes a party and, unless the court otherwise orders, is bound by any judgment or decision on any claim for relief in the proceedings including in any cross-claim: s 22(3)(b). See Insurance Exchange of Australasia v Dooley (2000) 50 NSWLR 289 per Handley JA at [12]–[19] and Bowcliff v QBE Insurance [2011] NSWCA 18 per Handley AJA at [27] and [36].

If a substantive right to relief is established, the court may make appropriate orders even in the absence of a formal claim: Adamopoulos v Olympic Airways SA (1991) 25 NSWLR 75 per Handley JA at 84–85.

A cross-claim may be contingent on the success of the plaintiff’s claim (Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 595–596) and may have been acquired after the commencement of the proceedings: Baldry v Jackson [1976] 2 NSWLR 415; Crothers v Hire Finance Ltd (1959) 76 WN (NSW) 469.

While s 22 leaves the court with a discretion not to entertain a cross-claim, the overriding purpose and object of the CPA suggests that such a course would be rare. Although, see Wood v Cross Television Centre Pty Ltd [1962] NSWR 528; (1961) 79 WN (NSW) 596, in which a cross-claim in defamation was involved. The same reasoning would still apply especially in relation to defamation.

The court may, at any stage of the proceedings, order that a cross-claim or a question arising in the cross-claim may be tried separately: r 9.8(a). It may direct generally the extent to which the usual procedures are to be modified because of the joinder of the cross-defendant: r 9.8(b).

Usually the original claim and all cross-claims are heard together. However, there may be circumstances that make it appropriate to hear a cross-claim or claims separately. An example is where a third party cross-defendant is an insurer and the issues go to the entitlement to indemnity: Martin v Cassidy (1969) 90 WN Pt 1 (NSW) 433.

Subject to a contrary direction, which would be unusual, a cross-defendant is entitled to participate in the trial between the plaintiff and the defendant, at least in so far as relevant to the defendant’s claim against the cross-defendant. Participation includes cross-examination of witnesses, the calling of evidence and making submissions: Insurance Exchange v Dooley, above, per Handley JA at [19].

A cross-claim may proceed even if the original proceedings have ended in judgment or been stayed, dismissed, withdrawn or discontinued: r 9.10(1).

The original proceedings may proceed even if the cross-claim has ended in judgment or been stayed, dismissed, withdrawn or discontinued: r 9.10(2).

A summary judgment may be stayed until determination of a cross-claim: r 13.2.

The court may give judgment for the balance of the sum awarded on the claim and cross-claim or may give judgment in respect of each claim: s 90.

As to costs, see ch 8 “Costs” at [8-0000].