Clause primer
Contractual set-off clause
The clause allows one party to reduce a payment it owes the other by amounts the other party owes it, or forbids that reduction.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: right of set-off, setoff, offset clause, netting. Where you find it: Supply and distribution agreements, services and outsourcing agreements, credit and loan documents, master agreements covering multiple orders, and payables finance arrangements.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
Customer may set off against any amount payable to Supplier under this Agreement any amount that Supplier owes Customer under this Agreement or any Order, provided that the amount is undisputed or has been finally determined. Customer shall give Supplier written notice describing each set-off and its calculation no later than the date the reduced payment is made. Except as stated in this Section, each party shall pay all amounts due without deduction, set-off or counterclaim. Supplier's acceptance of a reduced payment does not waive its right to contest the set-off.
How it works
Scope of cross-claims
The clause defines which debts can be netted: amounts under this Agreement or any Order. Wider wording that reaches other agreements or affiliates greatly expands the right and is one of the first things to check.
Undisputed or determined amounts
Limiting set-off to undisputed or finally determined sums stops a payer from withholding money on the strength of a claim the payee contests. Without this limit, set-off can become a self-help pressure tactic in a dispute.
Notice
A notice requirement with a calculation lets the payee reconcile its receivables and challenge the deduction quickly. Missing notice language often leads to accounting disputes that look like nonpayment.
No-deduction rule and reservation
The general promise to pay without set-off narrows the right to the stated exception. The reservation sentence keeps acceptance of a short payment from being treated as agreement with it.
Why it is there
Set-off lets a party protect itself against the credit risk of a counterparty that owes it money by netting instead of paying in full and chasing a separate claim. It mainly protects the paying party, often a customer, lender or buyer. A no-set-off clause works the other way, protecting the payee's cash flow and, in financing, the value of receivables that a funder has bought or taken as collateral. The clause matters most when the counterparty becomes insolvent or a dispute is underway.
How it works with other clauses
- Payment terms: the no-deduction language should match the invoicing and dispute procedure so withheld amounts are handled consistently.
- Assignment and receivables financing: an assignee generally takes subject to some defenses and set-off rights of the account debtor, so financing parties often ask the payer to waive set-off.
- Liquidated damages and service credits: these are common sources of amounts netted against fees, and the clauses should state whether credits are applied by deduction.
- Bankruptcy: set-off rights in insolvency are governed by federal bankruptcy law and may be limited or stayed regardless of the contract wording.
Negotiating it
Who it protects: The party making payments, when set-off is permitted; the payee, when set-off is excluded.
If it protects you
- Keep the right to net across all orders under the master agreement.
- Resist a requirement that amounts be finally determined before set-off, or ask for a short window after which an unanswered claim is treated as undisputed.
- Keep notice obligations simple so a missed notice does not forfeit the right.
If it runs against you
- Standard ask: a general no-set-off clause; fallback: set-off limited to undisputed amounts under the same agreement with written notice.
- Ask that the right exclude affiliates and other agreements.
- If receivables are financed, ask for a set-off waiver or confirm the financing documents address it.
Escalate before accepting: A unilateral right to withhold any amount the payer claims, under any agreement with any affiliate, without notice, usually warrants escalation.
What AI explanations get wrong
- Assuming silence means no set-off; check whether the governing law gives a general right of set-off or recoupment absent contrary language.
- Reading a no-set-off clause as also excluding recoupment within the same transaction; check how the governing law treats the two concepts and whether the clause addresses both.
- Overlooking cross-agreement and affiliate reach; check the definition of the amounts that may be netted and the parties covered.
- Ignoring insolvency; check whether the analysis needs to account for bankruptcy limits on set-off.
Where the law varies
Whether a party has a set-off or recoupment right without contract language, and how far a waiver binds an assignee, depends on governing law and, in insolvency, on bankruptcy law. Treat these as points to confirm for the jurisdiction concerned.
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the Plugin Playbook: Vendor and Services Agreements.