Subject_1 COMPENSATION - RETENTION. Subject_2 SECT. I.
Nature of Compensation.
Sir William Maxwell of Monreith v. Creditors of Sir Godfrey M'Culloch
Date: 15 November 1738 Case No. No 7.
Found, that a creditor in more debts than one, has the option to use either he chuses, in compensation.
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In a question of compensation and recompensation, the Lords abstracted from the specialties that were pleaded in the case; and the dispute turned upon the general point, Whether compensation was the operation of the law or of the Judge? Some of the Lords were for the first, that it operated ipso jure, eo ipso that the parties became mutual creditors; and appealed to Stair, who lays down the rules for compensation and recompensation, as received with us, from the civil law. Others maintained, that compensation had no effect till it was proponed and applied by the Judge; that when compensation is sustained, our law, upon principles of equity, gives it an operation retro to stop the course of annualrent, and in that sense only is the common maxim to be understood, that compensation operates retro et ipso jure. Upon these principles, it was urged to be optional to the party to propone it or not, or to propone it upon one or other debt; and supposing one debt better secured than another, why should he not be entitled to compense upon the debt least secure? The vote was stated in these precise words, “Whether, to the party creditor in more debts, it was optional which of them to make use of by way of compensation?” and it carried in the affirmative.
Fol. Dic. v. 4. p. 158.*** Kilkerran observes the same case thus:
It had been generally held, that how soon parties became mutual creditors, compensation did that moment take place retro et ipso jure; in other words, that it was the operation of the law: And such had been Lord Stair's notion of it, appears from his having laid down the rules for compensation and recompensation as received with us from the civil law.
But, upon a more mature consideration of the nature of compensation, and the reason of the thing, in this case, a very different notion prevailed; namely, that compensation is not the operation of the law, but of the Judge; and that it has no effect till it is applied by the Judge: That it is true, when it is applied, the law, upon principles of equity, gives it effect retro to stop the course of annualrent; and that, in that sense only, is the common maxim to be understood, that compensation operates retro et ipso jure; and this being so, that it is optional to the party to plead it or not, or, if he be creditor in more debts, to plead it on which of them he pleases: And that, as this was agreeable to principles, it was just in the reason of the thing; for, where one lends his money to his creditor, and for which the creditor, in place of applying it in payment, has agreed to give his bond for it, why should the law put it out of his power to pay what he owes, and continue his money so lent in his former creditor's hand, where he thinks it a good security? Or, where one is creditor in more debts, why should he not have it in his power to compensate upon the debt which is least secure?
And, accordingly, in this case, where the last happened to be the point in dispute, the abstract point was determined, that a party, creditor in more debts, has it his option which of them he shall make use of by way of compensation.
