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Pascal Pichonnaz on set-off and commercial arbitration

What is set-off and how does it relate to commercial arbitration? The cumbersome transfer of money in international commercial transactions is complex enough without disputes arising and bringing issues of applicable law and jurisdiction. We sat down with Pascal Pichonnaz, co-author of Set-Off in Arbitration and Commercial Transactions, to discuss the concept and talk about how this field of law is developing.

What is the most controversial issue in your field right now?

A regular question which pops up is whether a party may rely upon set-off, despite that the cross-claim may not fall within the jurisdiction of the arbitral tribunal. There are still controversies on such issues, but the new trend broadly accepts the idea that set-off should be available even if the cross-claim is not within the jurisdiction of the arbitral tribunal.

How has thinking evolved on this issue?

At first, arbitrators and courts have been very reluctant to “frustrate” one party of its ordinary judge. However, under the influence of Civil law traditions, many arbitral institutions have set rules (especially Swiss Rules) that have largely opened the right to rely on set-off. It is linked to the idea that set-off is a kind of payment and that, therefore, it should be favored as much as possible. There are some limitations that should be considered, e.g. when a cross-claim is subject to a very specific jurisdiction (such as labour law tribunals).

Justice

Can you explain what set-off is to people who aren’t familiar to it?

As such, set-off is a very simple mechanism. When a person owes me 100 and I owe her 40, then we will simplify the regime as only the difference between both amounts should be paid. This works in everyday life, as long as people agree to it. What should happen however if one party does not want to set-off, either because she wants to be paid in cash for many possible reasons or because a suit has already been filed for one of the reciprocal claims? Many systems have different requirements to enable one party to impose set-off on the other. It makes it more difficult on a transnational perspective to decide when set-off should be available and when not. The whole issue becomes even more tricky when insolvency proceedings are open against one party; it is then very attractive to set-off one’s claim against the insolvent party with what he owes to the solvent one, since the creditor of the insolvent party will be better off by using set-off as by getting the “ordinary” insolvency percentage on his claim.

In arbitration, the situation is also critical, because the parties agree to submit a specific dispute to chosen arbitrators. Is it then really fair and justified to allow the arbitrators to decide also on the cross-claim, which was not part of the arbitral agreement? As I already mentioned, the tendency is to say yes. In other words, this field — especially in a transnational perspective — is really fascinating, important and difficult for practitioners.

Have there been any major or interesting set-off cases in arbitration and commercial transactions recently?

There are certainly many. However, what is peculiar with arbitration, is that you do not know always about these cases since they are not necessarily published or communicated. English law had, however, some important cases quite recently.

What do you hope to see in the coming years from both commercial arbitration and the issues it presents?

Commercial arbitration is still booming; the reasons for this are diverse. However, the more people are active on this field the more one needs to share the information (and awards) for the larger community. Indeed, what matters first for the parties is to get a solution, if possible the best they can get. However, there will be more and more a need to be treated equally despite the specific personalities of the arbitrators. Sharing common understandings across the legal cultures on how to deal with set-off would be already a good step forward.

What are scholars in the dicussing? For example, what was the most popular topic under discussion at the last conference you attended?

Well, I attended a conference on the importance of historical perspective in the evolution of modern concepts of law. While trying to envisage a harmonization or unification of private law in Europe for instance, one could ask whether it is useful to try to understand where the various concepts come from. Set-off is typical for that. The various answers in national systems are the result of a historical evolution that is rooted either in Roman law or in the specificities of Common law. To understand this evolution helps to get rid of old ideas when necessary and to craft a more contemporary regime of set-off, compatible with our modern needs.

What are you reading in your field at the moment?

I have just finished a very good book by Stephen Waddams on the principles of law. A fantastic book!

Pascal Pichonnaz has been a Professor at the Law School of the University of Fribourg (Switzerland) since 2001, where he is also Chair for Private Law and Roman Law (teaching Roman Law, Contract Law, European Private Law and European Consumer Law). He is also a visit professor at several institutions, including the Center for Transnational Legal Studies, the Paris Panthéon-Assas, the University of Rome and the University d’Auvergne Clermont-Ferrand. Along with Louise Gullifer he has written Set-Off in Arbitration and Commercial Transactions.

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Image credit: Justice lady. By 123ducu, via iStockphoto.

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