Set-Off in International Arbitration
Austrian Yearbook on International Arbitration, 2015
Posted: 21 Jun 2015
Date Written: December 2014
International arbitration adapts to the increasingly complex and multi-faceted nature of international transactions. In the sphere of international commercial arbitration, two aspects of this nature bear mentioning: first, a single venture between parties from different countries may consist of several related contracts; second, parties from different countries who are long-term partners may engage in several unrelated ventures together. In each of these situations the parties are likely to develop reciprocal claims against each other. And in each of these situations, the parties may avoid cash-flow problems by extinguishing all reciprocal claims in a single judicial or arbitral proceeding, rather than litigating or arbitrating each claim separately and in various fora.
Set-off allows the parties to do the former. As defined and discussed further below, it is an operation by which two parties’ obligations towards each other are mutually discharged. A "supremely efficient" operation, set-off eliminates the unnecessary formalism of reciprocal payments, and as such enjoys support from the business community. However, the efficient outcome produced by set-off belies the complicated process of applying it in international commercial arbitration. An arbitral tribunal looking to apply set-off must determine complex issues of jurisdiction and governing law, and a court faces similar issues if confronted by set-off in proceedings concerning the enforcement of an award.
This article explores these various issues. Section II defines set-off generally, distinguishes it from counterclaims, and compares how set-off is conceived in different jurisdictions as a substantive or procedural right. Section III analyses the jurisdictional problems posed by set-off. It discusses different approaches to the question of whether an arbitral tribunal may set-off a respondent’s claim that arises from a legal relationship that is not covered by the arbitration agreement from which the tribunal’s jurisdiction over the claimant’s claim is derived. Section IV considers how different jurisdictions determine which governing law applies to the respondent’s claim. Section V discusses questions of enforcement of awards, which often attract little attention in the context of set-off. It examines whether, under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), a party can rely on a set-off before domestic courts to resist enforcement of an arbitral award.
Keywords: arbitation, set-off, international, claims, counter-claims, choice of law, governing law, conflict of laws,
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