Friday, December 9, 2011


Set-off, which is also referred to as offset, is a common law right to deduct any receivables from any payables. Whether a party has the right to perform set-off will depend upon several things. The most important is the law that applies to the contract. If that jurisdiction follows English common law you may have that right. In locations that don’t follow English common law, it would depend upon what the law of that jurisdiction allows. The next thing to check is whether your agreement has what's called a "merger provision". That's a statement that the agreement represents the entire understanding between the parties. The next thing to check is whether there is a limitation on remedies to only what is spelled out in the agreement. If you have a merger provision and the contract limits the parties to only have the remedies in the agreement a party may not have the right to perform set-off.

Why would you want to have set-off? While it’s a process that significantly complicates accounting for transactions, it does provide some protection in situations where both parties could be owing the other and may be use to manage credit. For example if you had a supplier that you needed to sell products to rather than consign, it would allow you to deduct any payments the supplier owes you from the payments you need to make to the supplier. This could be especially important if you were dealing with significant amounts and the supplier had a poor credit rating where you didn't want to allow them to increase the amount of payables to you. The reverse could be true for a supplier wanting to manage the amount of credit they are extending to a buyer that may not have a great credit rating. Rather than having to extend the additional amount of credit while you wait for payment, offset provides an immediate action. For offset to have significant value in a contract, the amounts involved would need to be significant as it does create a accounting complexity in tracking transactions.
If you feel that you need to have the right of set-off, rather that rely upon common law or statutory law I whould specify that right in the Agreement. If you don’t want to have set-off apply you should specifically disclaim any right to set off.Being silent in an agreement doesn't protect you from having a set-off if set-off is allowed by law,

If you spelled out that neither party had the right of set-off, that would extinguish the common law right.Courts would look firth to the intent of the parties that is expressed in the agreement.
The right of set-off only applies to the same legal entities involved. Just like a parent company isn't liable for a subsidiary unless they sign a parent or company guarantee, other entities of the buyer or supplier aren't liable for the payments for their other company legal entities unless they specifically agree to that in writing.For example If you sold product to Supplier Parent and had purchases from Supplier Subsidiary neither the Buyer or the Supplier would have the right of offset as the receivables and payables were not with the same legal entity.

Most companies will be very reluctant to do cross company set-off and that is especially true internationally. That’s not just because of the accounting problems it creates. It would also involve inter-company transfers of funds that can cause tax issues, It would also potentially involve currency losses or gains as the two companies settle accounts between them.

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