Limitation Period for Set-Off and Counterclaim Claims

In commercial litigation, defendants often respond to a claim not only by denying liability but also by raising a set-off or bringing a counterclaim. These mechanisms allow a defendant to reduce or extinguish the claimant's demand or pursue their own independent monetary claim within the same proceedings.

However, both set-off and counterclaims are subject to strict time limits under the Limitation Act 1980. Understanding when these limitation periods apply is essential because an otherwise valid defence or counterclaim may fail if it is brought too late.

This article explains how limitation rules apply to set-off and counterclaims in England and Wales, when time begins to run, and how courts treat these issues in commercial disputes.

Legal Framework: Limitation Act 1980

The key legislation governing limitation is the Limitation Act 1980, which sets out time limits for bringing different types of legal claims.

For commercial disputes involving contracts:

• Section 5: six years for simple contract claims
• Section 2: six years for tort claims
• Section 8: twelve years for deeds (specialty obligations)

Set-off and counterclaims do not create separate limitation regimes. Instead, they are assessed by reference to the underlying cause of action.

What Is a Counterclaim?

A counterclaim is an independent legal claim brought by a defendant against a claimant within the same proceedings.

It is treated as:

• A standalone cause of action
• Subject to the same limitation rules as if issued separately

This means a counterclaim must itself be within limitation at the date it is issued.

What Is Set-Off?

A set-off is a defence mechanism allowing a defendant to reduce the amount claimed by the claimant.

There are different types:

1. Legal set-off

• Requires mutual liquidated debts
• Common in commercial invoices and payment disputes

2. Equitable set-off

• Arises where claims are closely connected
• Requires a sufficient link between obligations

3. Contractual set-off

• Arises where expressly agreed in contract terms

Unlike counterclaims, set-off is primarily defensive, but limitation still plays a role.

Limitation Period for Counterclaims

General rule: same as primary claims

A counterclaim is subject to the same limitation periods as standalone claims:

• 6 years for breach of contract or tort
• 12 years for deeds

Key principle

A counterclaim must be in time at the date it is issued or pleaded, not the date the original claim was brought.

When Does Time Start for Counterclaims?

The limitation period begins when the cause of action accrues, meaning when:

1. Breach of contract occurs

• Non-payment, defective performance, or failure to perform obligations

2. Loss is suffered in tort claims

• For example, negligence or misrepresentation

3. Payment becomes due under contract or deed

• Missed invoice dates or repayment obligations

The starting point is independent of the claimant's original claim.

Special Rule: Counterclaims in Existing Proceedings

A key issue is whether a counterclaim introduced in ongoing litigation is time-barred.

General principle

• If a counterclaim is already time-barred before proceedings begin, it remains barred
• If it is in time when issued, it is valid

Procedural timing matters

A counterclaim is usually treated as brought on the date it is pleaded, not the date of the original claim.

This distinction can be critical where proceedings are issued close to the limitation deadline.

Limitation and Set-Off

Unlike counterclaims, set-off operates differently.

1. Defensive nature

Set-off is not a separate claim for relief but a defence to reduce liability.

Because of this:

• It may still be relied upon even if an independent action would be time-barred
• However, courts distinguish between strict legal set-off and equitable set-off

2. Legal set-off

For legal set-off:

• Requires mutual liquidated debts
• Courts may allow it even where limitation would bar a standalone claim, provided the debt existed before proceedings

3. Equitable set-off

For equitable set-off:

• Must arise from closely connected transactions
• Courts are more flexible
• Time-barred claims may sometimes still be considered if they directly relate to the claimant's claim

However, this is fact-sensitive and not guaranteed.

Key Distinction: Set-Off vs Counterclaim

Feature	Set-Off	Counterclaim
Nature	Defence	Independent claim
Limitation	May be flexible	Strictly applies
Relief	Reduces claim only	Can result in judgment for defendant
Court treatment	Linked to claimant's claim	Treated separately

Continuing Breach and Multiple Limitation Periods

Where underlying obligations are ongoing:

• Each breach may create a separate limitation period
• Older elements may be time-barred
• Set-off or counterclaims must be assessed per individual breach date

This is common in:

• Supply agreements
• Construction contracts
• Service contracts with staged payments

Effect of Acknowledgment or Part Payment

For counterclaims based on debt:

• Written acknowledgment or part payment can restart limitation under the Limitation Act 1980
• A new limitation period begins from the date of acknowledgment or payment

This may revive a counterclaim that would otherwise be close to being time-barred.

Fraud, Concealment, and Mistake

Under Section 32 Limitation Act 1980:

• Limitation may be postponed if facts were concealed or fraud occurred
• Time may start when the claimant discovers (or could reasonably discover) the issue

This is particularly relevant in commercial disputes involving financial misstatement or hidden breaches.

Practical Litigation Implications

For defendants

• Counterclaims must be checked for limitation before pleading
• Time-barred claims cannot generally be revived through litigation strategy
• Set-off may still be available even if a counterclaim is not

For claimants

• Defendants may reduce exposure through set-off arguments
• Counterclaims may significantly increase liability risk
• Limitation should be considered early in dispute assessment

For solicitors and businesses

• Accurate contract timelines are essential
• Cross-claims should be analysed separately for limitation compliance
• Early legal evaluation reduces procedural risk

Common Commercial Scenarios

1. Unpaid invoices with cross-claims

• Supplier claims payment
• Customer raises counterclaim for defective goods
• Each claim assessed separately for limitation

2. Construction disputes

• Contractor claims unpaid sums
• Employer counterclaims for delay damages
• Multiple limitation periods apply to different breaches

3. Long-term service contracts

• Ongoing performance issues
• Set-off used to reduce invoices
• Counterclaims arise for historical breaches

Common Questions from our Readers

Can a time-barred claim be used as a set-off?

Sometimes. Equitable set-off may allow reliance on closely connected claims even if they would be time-barred as standalone actions.

When is a counterclaim considered issued for limitation purposes?

Generally when it is formally pleaded in court proceedings.

Does limitation apply differently to set-off?

Yes. Set-off is primarily defensive and may be more flexible than counterclaims.

Can limitation restart a counterclaim?

Yes, if there is valid acknowledgment of debt or part payment under the Limitation Act 1980.

Key Takeaways

The limitation period for set-off and counterclaims in England and Wales is governed by the Limitation Act 1980 and depends on the underlying cause of action. Counterclaims are treated as independent claims and must be within the applicable limitation period when issued, usually six years for contract disputes. Set-off operates primarily as a defence and may, in some circumstances, be available even where a standalone claim would be time-barred. Correct classification and timing are essential in commercial disputes, where cross-claims often determine the outcome of litigation.