No right of set-off: Overview, definition, and example
What is no right of set-off?
The "no right of set-off" clause in a contract specifies that one party cannot deduct or offset any amounts owed to them from what they owe to the other party. In other words, even if one party has a claim against the other (e.g., due to damages or unmet obligations), they are still required to pay the full amount specified in the contract without reducing it by any other amounts they believe they are owed.
For example, if a business owes $10,000 to a supplier, and the supplier owes the business $2,000 for a separate matter, a "no right of set-off" clause ensures that the business must still pay the full $10,000, rather than subtracting the $2,000 the supplier owes.
Why is no right of set-off important?
A "no right of set-off" clause is important because it ensures that payment obligations are clear and predictable. It prevents a party from withholding payment or reducing what they owe due to unrelated disputes or claims. This creates certainty for both parties, ensuring that payments are made in full and on time, regardless of any other claims or issues.
For businesses, this clause helps maintain the financial integrity of agreements and prevents delays in payment that might arise from unresolved disputes or claims for other matters.
Understanding no right of set-off through an example
Imagine a company enters into a contract with a vendor to purchase goods worth $20,000. At the same time, the vendor owes the company $5,000 for a different contract. Despite the vendor's outstanding debt, the "no right of set-off" clause in their agreement means the company must still pay the full $20,000 for the goods, and the vendor is obligated to pay the $5,000 separately.
In another example, a contractor who is hired to perform services agrees to pay a fixed fee of $15,000. However, the contractor also has a separate complaint about the client’s failure to meet certain terms in a previous contract. Despite this, the "no right of set-off" clause ensures that the contractor must pay the full $15,000, without reducing it due to the other complaint.
An example of a no right of set-off clause
Here’s how a "no right of set-off" clause might look in a contract:
"The parties agree that no right of set-off exists, and neither party shall withhold or reduce any payments due under this Agreement, regardless of any claims, disputes, or counterclaims against the other party."
Conclusion
The "no right of set-off" clause ensures that each party in a contract is required to fulfill their payment obligations in full, regardless of any separate disputes or claims. It provides clarity and financial certainty, preventing any delays or reductions in payment, and helps maintain the integrity of business transactions. Including this clause can help businesses avoid complications that may arise from unrelated issues, ensuring smoother, more predictable contractual relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.