Setoff of Mutual Claims in Arbitration Proceedings

• Litigation & arbitration

It is well known that arbitration is the most common means of resolving commercial disputes today. The advantage of arbitration also lies in the fact that the parties can agree on all details of the consideration of a case.

Setoff of homogeneous mutual claims is one of the convenient ways for termination of obligations that may contribute to the settlement of the conflict if it has already arisen or brewing.

Procedure

Although the material nature of counterclaims setoff as a unilateral transaction is of no doubt, in practice there are two options of procedural implementation of the setoff.

First, the setoff procedure may be initiated by one of the parties by filing a corresponding application. This application is considered by the other party; in the event of an agreement it is signed and comes into force upon signature.

Second, setoff is made with the consent of both parties by signing an agreement (contract) for setoff of homogeneous mutual claims. In this case, the setoff is considered to have been committed since the signing of the agreement by the parties.

Basic Terms

Setoff of counterclaims is one of the ways for termination of liabilities and can be carried out under the following conditions:

• There are claims in return;
• Claims are similar, usually, counterclaims are of financial character;
• Claims have a specific deadline, and it came, and if the deadline is not set or set by the point of presentation;
• Provisions in respect of the offset of counterclaims impossibility are absent in a contract or in law.

Courts Practice and Enforcement in Ukraine

If counterclaims setoff is conducted through a state court, the court requires a written claim for the setoff (and its copy) addressed (sent) to the other party and the court. The party which has received an application may provide its objections, particularly as to the nature, duration, volume of performance, etc., by going to court with the application for remedies provided by law to protect its rights. In that case, the dispute will be subject to the resolution of the court on the merits, taking into account all the materials and facts of the case.

If the application for the setoff of counterclaims is not appealed it is deemed that the receiver agreed on the setoff under the terms and amount specified in the application.

At the stage of enforcement proceedings the option to setoff counterclaims also exists and opening enforcement proceedings do not preclude termination of obligations by counterclaims setoff.

Law of Ukraine “On enforcement proceedings” does not prohibit the setoff of mutual claims, although this method of enforcement is not expressly provided for in the law.
Thus, the setoff of mutual claims may be refused by the state executive, which may be appealed to the court.

Position of International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC at the UCCI)

In accordance with the Rules of the ICAC defendant may file a counterclaim or file a claim with the aim of offsetting provided there is an arbitration agreement covering such claim or related claims. The counterclaim must be related to the original one.

In practice, decisions of ICAC provide as follows:

• Party may not file a claim of setoff arising from the contract that is not in dispute;
• Setoff can not be performed on the claims arising from different contracts because the court is limited by the scope of the arbitration agreement set in the contract;
• ICAC also has neither the right nor the possibility to verify the homogeneity of claims submitted to offset, the validity of the contract, whereof the claims for setoff drive, as these issues are not covered by the arbitration agreement between the parties.

The main disadvantage of ICAC at the UCCI Ukraine is the inability to setoff counterclaims between the parties on various related contracts. For example when one party is a debtor under a contract and the applicant for setoff under another contract, the state court can logically use in this case the procedure of setoff of homogeneous counterclaims between the parties. ICAC Rules prohibit such actions and refers to the requirement of considering the case within the frames of a specific contract.

The practice of Other Arbitration Institutions

The vast majority of arbitral institutions may determine the range of their powers according to the case.

Positions of main international institutions are as follows.

The arbitration rules of the London Court of International Arbitration and The Arbitration Institute of the Stockholm Chamber of Commerce do not contain specific provisions on setoff of homogeneous counterclaims;

Rules of the International Chamber of Commerce (Paris) provide the possibility of counterclaims offsetting, but does not specify the mechanism of it.

Rules of International Arbitration Court of the Russian Federation allow claiming for a setoff of similar counterclaims if such requirements are attached to the initial claim.

Rules of Swiss International Arbitration provide the arbitral tribunal with the right to consider an application for counterclaims setoff even if such a claim is beyond the scope of the arbitration agreement and the specific agreement.

Recommendations

We strongly advise inserting the provisions in contracts to set possibility and procedure for homogeneous counterclaims setoff (including claims arising from other contracts). It is also advisable to provide for the right of setoff at the request of the parties which is to be adopted by the counterparty automatically, without objection. However, one must always consider the tax consequences as counter supplies become barter when money obligations under counter supplies are mutually terminated by setoff.

Published in Arbitration Watch.

Arthur Nitsevych

nitsevych@interlegal.com.ua

Alexander Chebotarenko

chebotarenko@interlegal.com.ua