Henriksens Rederi A/S THZ Rolimpex (The Brede)  2 Lloyd’s Rep. 333;  3 All ER 589 by Lord Denning MR (p.594-595):
…when applying the law of limitation, a distinction must be drawn between a matter which is in the nature of a defence and one which is in the nature of a cross-claim. When a defendant is sued, he can raise any matter which is properly in the nature of a defence, without fear of being met by a period of limitation. No defence, properly so-called, is subject to a time-bar. But the defendant cannot raise a matter which is properly the subject of a cross-claim, except within the period of limitation allowed for such a claim. A cross-claim may be made in a separate action, or it may be made by way of set-off or counterclaim. But on principle it is always subject to a time-bar. … If he brings it by a separate action or arbitration, he must start his proceedings within the prescribed time or else he will be barred. If he raises it as a 'claim' by way of set-off or counterclaim the law is governed by s.28 of the Limitation Act 1939 which says:
“For the purposes of this Act, any claim by way of set-off or counterclaim shall be deemed to be a separate action and to have been commenced on the same date as the action in which the set-off or counterclaim is pleaded.”
…Where the plaintiff owes the defendant a debt arising from a separate transaction, the defendant can raise it by way of set-off. If it is time-barred at the date when the plaintiff issues his writ, it is time-barred still. But if it is not time-barred at the time when the plaintiff issues his writ, the defendant can raise it in opposition to the plaintiff’s claim without being affected by any intervening running of time.
…Where the defendant has a cross-claim for damages arising from a separate transaction, he can either bring a separate action for it: in which case he is subject to the ordinary time-bar. Alternatively, he can raise it by way of counterclaim. … If it is not time-barred at the time when the plaintiff issues his writ, the defendant can raise it in opposition to the plaintiff’s claim without being affected by any intervening running of time.
…When it does not arise out of a separate transaction, but out of the same transaction, then it is not within s.28 at all. It can be raised … as matter of defence, either legal or equitable, so as to reduce or extinguish the claim; and, being matter of defence, it is not subject to a time-bar.
First, when the cross-claim goes directly in diminution or extinction of the claim, such as cases where goods are sold with a warranty, and by reason of the breach of warranty the goods are worth less than the contract price… In every such case it is plain that the plaintiff, not having completed the agreed work in accordance with the contract, is not entitled to the whole of the agreed sum. He ought not, therefore, to recover judgment for that sum, but only for the lesser sum. When the defendant says: 'You have not done the work up to the agreed standard, and you are, therefore, not entitled to the agreed price', that is matter of defence in law and not of set-off or counterclaim. This is borne out by the words of Parke B in the leading case of Mondel v Steel ((1814) 8 M & W 858 at 871, 872, [1935-42] All ER Rep 511 at 516):
“… it is competent for the defendant … not to set-off, by a proceeding in the nature of a cross action, the amount of damages which he has sustained by breach of the contract, but simply to defend himself by shewing how much less the subject-matter of the action was worth, by reason of the breach of contract … '
Secondly, when the cross-claim does not reduce the value of the goods sold or the work done, but causes other damage. Such as cases where goods are delayed in delivery and the buyer has a cross-claim for damages for delay… So also with any breach by the plaintiff of the selfsame contract, the defendant can in equity set up his loss in diminution or extinction of the contract price. It is in the nature of a defence. As such it is not subject to a time-bar.