Set-Off in the Light of the Egyptian Civil Code and the Civil Transactions Law

The civil codes — the Egyptian Civil Code and the Civil Transactions Law among them — permit an obligation to be extinguished by means equivalent to payment, among them dation in payment, set-off, and merger of patrimonies. The best known of these is set-off. It is a species of payment of a debt, taking effect to the measure of the lesser of the two debts. It is a right afforded to a debtor to rely on the extinction of the obligation owed to his creditor without performing it in kind, against the extinction of what is owed to him by that creditor. This requires two mutual obligations corresponding in their object, even if each has a cause differing from that of the other, as the Egyptian Court of Cassation has held. Appeal 4664, year 78.

Al-Zarkashi says in al-Manthur: where a debt is established for one person against another, and the other holds the like against him — whether from a single source, such as a forward sale or a loan, or from two sources, such as a loan and a price — and the two debts correspond in genus, in kind, in quality and in being presently due, and whether the cause of their being owed is one, as with compensation for injury, or different, as with the price of a thing sold and a loan, there are four views:

The soundest according to al-Nawawi, and what al-Shafi'i laid down in al-Umm in Ikhtilaf al-Iraqiyyin, is that set-off takes effect by the very establishment of the two debts, with no need of consent; for one to claim from the other the like of what he owes him is mere obstinacy, serving no purpose.

The second: each falls away against the other if the parties agree; otherwise each may claim from the other.

The third: it falls away by the consent of one of them.

The fourth: it does not fall away even if they agree.

The Kuwaiti Encyclopedia of Jurisprudence states that, in the view of the majority of jurists, compulsory set-off requires the two debts to correspond in genus, in description, in being presently due, and in strength or weakness; no such correspondence is required for voluntary set-off.

Where the two debts are of different genera, or differ in description, or are both deferred, or one is presently due and the other deferred, or one is strong and the other weak, they do not meet in set-off save by the mutual consent of the two parties, whether their cause is one or different.

The Malikis do not hold with compulsory set-off taking effect of itself save rarely. Al-Dasuqi says: set-off is in most cases permissible; its being obligatory is uncommon, arising in three cases only — where both debts fall due, where the parties agree upon a term, or where the party whose debt has fallen due seeks it. In these the school holds that set-off must be adjudged.

Set-off

Article 362 of the Egyptian Civil Code provides that "a debtor has the right of set-off between what is owed to him by his creditor, even if the causes of the two debts differ, where the object of each is money or fungibles corresponding in kind and quality, and each is free of dispute, due for performance and capable of being claimed judicially. Set-off is not barred by the date of payment being postponed through a period of grace granted by the judge or conceded by the creditor."

The Civil Transactions Law complies with the same sense. Article 281 permits a debtor to set off "what is due for performance by him to his creditor against what is due for performance to him by that creditor, even if the causes of the two debts differ, where the object of each is money or things corresponding in kind and description, and each is free of dispute".

Set-off carries two senses, as the explanatory memorandum to the Egyptian Civil Code states. The first is payment: each of the two debts is set off in payment of the other. The second is security: whoever relies on it, so that what he owes his creditor meets what that creditor owes him by way of set-off, secures the satisfaction of his debt in priority to the other creditors.

Set-off is thus an instrument both of payment and of security: by it the two debts are discharged to the measure of the lesser, and by it a creditor also obtains satisfaction of his right in his debtor's patrimony in priority to the other creditors, the debt he owes being appropriated to the discharge of his own right. Set-off takes effect, once its conditions are met, whatever the cause — that is, the source — of the debt, whether that cause be a legal disposition or a material fact. The law has governed legal set-off, leaving the provisions of judicial and conventional set-off to the courts and to legal doctrine, laying down no texts on them, though legal writing and the rulings of the courts have set them out.

The kinds of set-off

One: legal set-off

Where a person with an interest relies on it, under Article 365 of the Egyptian Civil Code, the court must accede to his request and discharge the debt owed to him against the debt he owes, to the measure of the lesser, once the following conditions are met:

1. That each of them is personally liable for the debt he owes the other and is at the same time personally entitled to the right claimed — that is, that the two debts be mutual.
2. That the two debts correspond in their object, as money or fungibles equal in quality, or money and things corresponding in kind and description, as the Civil Transactions Law provides. Legal set-off is not valid where the objects differ; voluntary set-off may then be given effect.
3. That each of the two debts is capable of being claimed judicially: there is no set-off between a natural obligation and a civil one.
4. That each of the two debts is free of dispute, being certain and of known amount. The dispute must also be a serious one, or the debt is treated as free of dispute. What counts is the actual state of affairs as assessed by the trial judge, not what the debtor raises. A debt is of known amount where it can be assessed by a simple calculation, or where its elements are established before the court by documents or admissions not in dispute. Where assessing the debt requires intricate calculations requiring expert assistance, the debt is not of known amount, and set-off takes effect only after judgment assessing it.
5. That each debt is due for performance. A debt subject to a suspensive term admits of no set-off until the date of performance falls due; from that time it meets the other debt already due, and set-off takes effect.

Legal set-off may be relied on at any stage of the proceedings, even for the first time on appeal — unlike judicial set-off, which may not be raised for the first time on appeal.

1. That each of the two debts is capable of attachment. Where a creditor owes his debtor a debt of maintenance, he may not set that debt off against another debt owed to him by that debtor, for a maintenance debt may not be attached; the same holds of a pension. This is because set-off entails a compulsory payment and so takes the rule of attachment.

Once the foregoing conditions are met, legal set-off takes effect by operation of law from the moment they are met, and the two debts are extinguished to the measure of the lesser. This does not mean that the court takes the matter up of its own motion: a person with an interest must rely on it. Accordingly a litigant may raise before the court the defences barring set-off, such as the extinction by prescription of the right of the party seeking it.

Two: judicial set-off

Judicial set-off requires, according to the settled practice of the Court of Cassation, "that a principal action be brought in respect of it, or that it be sought by way of a counterclaim raised by the defendant in answer to his opponent's principal action". Hearing of 24 June 1971, vol. 22, civil.

The Board of Grievances has laid down among its principles that "the circuit's giving effect to judicial set-off between the parties has this consequence: the defendant is ordered to pay what the circuit arrives at after the set-off is made". Commercial Circuit, case 1803 of 1432, on appeal in case 5729 of 1436.

Three: conventional set-off

The Egyptian Court of Cassation has held that conventional set-off arises where "a creditor and a debtor agree that there be deducted for the debtor the measure of sums of unascertained amount to which the creditor is entitled". Appeal 4402, year 70.