Set-off clause
A right letting one party deduct amounts the other owes it from payments it owes the other, so only the net balance changes hands.
What it means
Set-off, also called offset, lets a party reduce what it pays by amounts the other side owes it. If a client owes a supplier $10,000 for services, and the supplier owes the client a $2,000 credit, set-off lets the client simply pay $8,000. Contracts may grant a set-off right, limit it, or exclude it entirely.
The risk lies in who decides what is owed. A broad clause might let a customer deduct any amount it claims the supplier owes, including disputed damages, under this contract or any other contract between them. A small subcontractor could see its invoices cut to cover a claim it disputes, and then have to sue to get paid.
Set-off rights favor the party making payments. Suppliers often try to exclude set-off entirely or limit it to amounts that are undisputed or finally decided. Some legal systems allow set-off in certain situations even without a clause, and the rules, including how set-off works when a party becomes insolvent, vary by jurisdiction.
What to watch for
- Check whether set-off is limited to undisputed amounts or allows deductions for claims the other side merely asserts.
- See whether it reaches amounts under other contracts or with affiliates, not just this agreement.
- Look for a requirement to give written notice and an itemized explanation before deducting.
- If you are the one being paid, check whether the contract excludes set-off and requires payment in full.
Example clause
Client may set off against amounts payable to Contractor only those amounts that Contractor has agreed in writing are owed to Client or that have been finally determined by a court or arbitrator. All other amounts must be paid in full without deduction.
The client can deduct only debts you have agreed to or a court has confirmed, not ones it merely claims.