Road traffic accident claims, often involve claims by both parties (or more than two parties) that the other(s) are at fault for the accident and liable to compensate them for their loss. Because each claim will involve elements of uninsured loss and insured loss, the claims rarely proceed with a defence of set off pleaded (as the insurers would take the benefit of the defence) and often by way of separate proceedings rather than raised by way of counterclaim in one set of proceedings.
This is because of the unpleasant costs consequences which might follow. Due to the rule in Medway Oil and Storage Company v Continental Contractors  AC 88 in any case where there is a claim and counterclaim, perhaps 90% of the costs will be costs of the claim and 10% the costs of the counterclaim.
A costs order at trial where liability has been split, that the claimant have the costs of the claim and the defendant the costs of the counterclaim, will leave a defendant severely out of pocket.
Just occasionally, there are cases where it is appropriate to raise a defence of set off. There are three varieties of set off in the law of England and Wales. These are legal set off, equitable set off, and insolvency set off which arises through the application of the insolvency legislation. Insolvency set off has no application to road traffic litigation.
Legal set off is described by Lord Hoffman in the leading case of Stein v Blake (No 1)  AC 243 where he noted it in the following terms:
Section 323 is the latest in a line of bankruptcy set-off provisions which go back to the time of Queen Anne. As it happens, legal set-off between solvent parties is also based upon statutes of Queen Anne. But the two forms of set-off are very different in their purpose and effect. Legal set-off does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash-flow. As a matter of procedure, it enables a defendant to require his cross-claim (even if based upon a wholly different subject matter) be tried together with the plaintiff’s claim instead of having to be the subject of a separate action. In this way it ensures that judgment will be given simultaneously on claim and cross-claim and thereby relieves the defendant from having to find the cash to satisfy a judgment in favour of the plaintiff (or, in the 18th century, go to a debtor’s prison) before his cross-claim has been determined.
Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt’s creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance. So in Forster v. Wilson (1843) 12 M. & W. 191, 204, Parke B. said that the purpose of insolvency set-off was ‘to do substantial justice between the parties.’ Although it is often said that the justice of the rule is obvious, it is worth noticing that it is by no means universal. ( Wood on English and International Set-Off (1989), pp. 1165-1169, paras. 24-49 to 24-56.) It has however been part of the English law of bankruptcy since at least the time of the first Queen Elizabeth: see p. 282, para. 7-26.
Legal set-off is confined to debts which at the time when the defence of set-off is filed were due and payable and either liquidated or in sums capable of ascertainment without valuation or estimation.(emphasis added)
It follows from this formulation of principle, that a disputed unliquidated claim for damages cannot be relied upon to found a defence of legal set off as it is neither a debt, nor is it due and payable without valuation or estimation.
It follows that if any defence of set off is to arise, it must be an equitable set off. But a set off of “what” as against the pleaded claim? In order to establish a claim for damages the defendant must prove a cross claim to the court’s satisfaction on the balance of probabilities.
Such a cross claim, can be made either independently, by way of a second action, which doubtless would be ordered to be tried at the same time as the claimant’s claim, or made by way of counterclaim in the original action.
The defendant must establish his cross claim and obtain judgment for a specified sum so that he can set this off against the claimant’s claim. These matters cannot b pleaded as a mere defence. Without being brought as a “claim”, any allegations sought to be raised by defence are both nebulous and inchoate. The defendant cannot obtain a judgment, the claimant is embarrassed by the presence of the allegations and the court will have been deprived its fee, whether for issuing a claim or counterclaim.
The case of Hanak v Green  2 QB 9 remains the classical statement of the defence of equitable set off and when a party will be permitted to rely on a cross claim in defence of a claim made against him. It will be noted from the head note, that it involved a claim, against which no fewer than three counterclaims were made.
After noting the historical backdrop Morris LJ in his judgment stated:
After the Judicature Acts were passed it was no longer necessary for a defendant to bring a separate action if he had a cross-claim. He could present his cross-claim in the existing action brought against himself. So counterclaim, the creature of the Judicature Acts, became possible. Furthermore, it was provided that equitable defences could be relied upon in actions at law: see section 38 of the Supreme Court of Judicature Act, 1925 . Section 41 provides: “No cause or proceeding at any time pending in the High Court or the Court of Appeal shall be restrained by prohibition or injunction, but every matter of equity on which an injunction against the prosecution of any such cause or proceeding might formerly have been obtained, whether unconditionally or on any terms or conditions, may be relied on by way of defence thereto.
If a plaintiff had a demand which was a matter of equitable jurisdiction and brought proceedings in a court of equity, then not only could there be a set-off in regard to any liquidated demand but the courts of equity allowed a defendant to defend by showing that he had what was called an equitable set-off – that is, as Lord Cottenham pointed out, some equitable ground for being protected against the claim.
He continued noting the position after the passing of the Judicature Acts :
In Stumore v. Campbell & Co.61 Lord Esher M.R. said: “The Judicature Acts, as has been often said, did not alter the rights of parties, they only affected procedure, so that no set-off could now be maintained in such a case as this. Before these Acts a person having a cross-claim must have raised it by a cross-action; but these Acts have given a right to counterclaim. In some of the cases language has been used which would seem to imply that a counterclaim is sometimes in the nature of set-off and sometimes not. No doubt matter is occasionally pleaded as counterclaim which is really set-off; but counterclaim is really in the nature of cross-action. This court has determined that, where there is a counterclaim, in settling the rights of parties, the claim and counterclaim are, for all purposes except execution, two independent actions. If the plaintiff sustains his claim, judgment goes for him on that; and if the defendant sustains his counterclaim, judgment goes for him on that. Either claim may be reduced by set-off. But if the plaintiff succeeds in the one case and the defendant in the other, there are two judgments which are independent for all purposes except execution.” Lopes L.J. said 62 that the Judicature Acts did not alter or intend to alter the rights of parties.
Since the passing of the Judicature Acts it is clear that reliance may be placed in any court upon any equitable set-off that formerly could only have been asserted in a court of equity: furthermore, counterclaims may be presented and there is no need to advance cross-claims in a separate action. But it is not *23 the case that every cross-claim may be presented as a set-off even if in amount it equals or overtops the claim. Nor does the mere fact that the cross-claim is in some way related to the transaction which gave rise to the claim serve to invest the cross-claim with the quality of set-off.
That Hanak v Green remains the law today was confirmed in the case of Geldof Metaalconstructie NV v Simon Carves Limited  EWCA Civ 667: the majority of the authorities since Hanak v Green have dealt with issues of whether a particular type of cross claim possessed by a fefendant, can be relied upon in the defence of equitable set off against a claimant’s claim. None of them have cast doubt on the fundamental position, that there must be a cross claim, “a claim”, whether advanced by separate action or more usually counterclaim, for such a question to arise.
Rule 16.6 CPR provides as follows:
16.6 Where a defendant –
(a) contends he is entitled to money from the claimant; and
(b) relies on this as a defence to the whole or part of the claim,
the contention may be included in the defence and set off against the claim, whether or not it is also a Part 20 claim.
Properly construed, it allows either a defence of legal set off (an undisputed debt) to be raised in the defence or a Part 20 counterclaim (a disputed claim for unliquidated damages) to be raised in the defence. What it does not do, is remove the necessity for a cross claim for unliquidated damages, raising a defence of equitable set off to be made by way of counterclaim, once the nature of the set off has been ascertained.
At trial the issue of Medway Oil, is commonly avoided by simply obtaining an order that the claimant has his costs and the defendant his costs, save where there might be some other reason, such as a part 36 offer to depart from that order.
It is interesting to note that the rule in Medway Oil is reflected in rule 45.29G(2): see below.
1) If in any case to which this Section applies—
(a) the defendant brings a counterclaim which includes a claim for personal injuries to which the RTA Protocol applies;
(b) the counterclaim succeeds; and
(c) the court makes an order for the costs of the counterclaim,
rules 45.29B, 45.29C, 45.29I, 45.29J, 45.29K and 45.29L shall apply.
(2) Where a successful counterclaim does not include a claim for personal injuries—
(a) the order for costs of the counterclaim shall be for a sum equivalent to one half of the applicable Type A and Type B costs in Table 6;
(b) where the defendant—
(i) lives, works, or carries on business in an area set out in Practice Direction 45; and
(ii) instructs a legal representative who practises in that area,
the costs will include, in addition to the costs allowable under paragraph (a), an amount equal to 12.5% of those costs;
(c) if an order for costs is made pursuant to this rule, the defendant is entitled to disbursements in accordance with rule 45.29I; and
(d)where appropriate, VAT may be recovered in addition to the amount of any costs allowable under this rule.
In a case where the Defendant might have a claim for say, £15,000 of damages but without a personal injury element, the solution is to avoid bringing a counterclaim and simply to commence a fresh action, to be heard at the same time as the original one.