Meaning of Set-Off Clause
A set-off in law is used by a debtor to diminish the overall liability for a debt claimed by a creditor.
For instance:
- A supplier claims £100 for services rendered.
- The customer claims that some of the work was defective. A value of £20 is attributed to the defects.
- The customer may have a set-off of £20 to diminish the overall liability to the supplier of £80.
Set off clauses prevent the paying party asserting that they are entitled to a set-off. The paying party must pay the sum properly claimed or invoiced.
Definition of a Set-Off
A set-off is:
something which provides a defence because the nature and quality of the sum so relied upon are such that it is a sum which is proper to be dealt with as diminishing the claim which is made, and against which the sum so demanded may be set-off
Essentially the claimant must give credit to the defendant for the ascertained sum in its action against the defendant. When the debtor has a true set-off it goes to the reduction of the sums owing to the creditor.
Set-offs do not rely on any express or implied contract between contracting parties. They are available as a right, unless expressly excluded by the contract terms.
Set-offs may be available for:
- Mutual debts:
The defendant owes £50 to the claimant. The claimant owes £20 to the defendant.
The defendant may set-off the debt of the claimant to him, to diminish the total sum of the claim - Sales of Goods
A defendant received defective goods (say they are not of a satisfactory quality, fit for purpose or don’t meet an agreed description).
The defendant may set a sum off against the claim.
The sum would need to be quantified by a court if the value is unascertained (compare mutual debts, where the sum is liquidated) - Provision of services:
A defendant may diminish the sum owed by the value of defective work owing to poor workmanship.
Types of Set-Off
There are three types of set-off. Each of them has a similar effect:
- Set-off at law or legal set-off:
Both sides in a set of legal proceedings have liquidated debts or money demands against one another.
In this context, liquidated sums that can be quantified or ascertained with certainty into an amount of money. - Diminution in value:
A claimant sues for an agreed price of a particular asset or services which was to be performed according to a contract.
The defendant claims a reduction in the value of the asset by a failure to comply with a warranty or work performed in accordance with the contract.
The asset has diminished in value as a result. - Equitable set-off:
Cross-claims of a defendant protect the defendant to some extent against the claimant’s claims.
This is particularly the case where the cross-claim relates to the particular subject matter of the claim.
Differences between Set-offs and Counterclaims
A counterclaim differs from a set-off.
A set-off is claimed in a Defence. It merely diminishes the overall liability (perhaps down to zero, but no further).
A set-off will relieve the defendant from paying a sum of the value of the set-off.
It will not entitle the defendant to obtain an award of that sum.
A counterclaim will.
Counterclaims
A counterclaim is set out in a statement of case and is an independent, free standing claim made by the defendant against the claimant - ie: a right to sue. The counterclaim may relate to the claim which is being defended, or it may not.
Both are usually pleaded in court cases.
Example: No Set Off clause
The customer will pay the sums invoiced by the supplier without right of set-off, deduction or withholding in any circumstances.
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