The Set-off Paradox in International Arbitration

Abstract

Set-off is a defence to the whole or a portion of a claim based on a defendant’s claim to money which entails the mutual extinction of both claims, in full or in part. Set-off can be substantial in nature or procedural. When the defendant’s counterclaim or cross-claim does not fall within the scope of the arbitration agreement, the arbitral tribunal might be faced with a serious difficulty. Arbitral practice has so far resolved this problem in favour of party autonomy, as reflected in article 19-3 of the UNCITRAL Rules. This entails that arbitral proceedings may have to be stayed when the counterclaim or cross-claim does not fall within the arbitral tribunal’s jurisdiction, as provided by article 29 of the Swiss Concordat intercantonal. Yet this approach is not satisfactory when the law applicable to set-off provides for ipso iure retroactive extinction of the claims. Applicable arbitration rules may allow for this problem to be addressed, as in article 21-5 of the Swiss Rules of International Arbitration, which provides that ‘the arbitral tribunal shall have jurisdiction to hear a set-off defence even when the relationship out of which this defence is said to arise is not within the scope of the arbitration clause or is the object of another arbitration agreement or forum-selection clause’. Some authors, such as Prof. Poudret, suggested that, set-off being a defence attached to the main claim, the arbitral tribunal’s jurisdiction thereto should by nature be extended to the related counterclaim or cross-claim. Whether such an approach is appropriate is discussed in this article. The author submits that arbitral tribunals should abstain from extending their jurisdiction to a cross-claim or counterclaim falling outside their jurisdiction.