No set-off by obligors: Overview, definition, and example
What is no set-off by obligors?
"No set-off by obligors" is a provision in a contract or agreement that prevents a debtor (the obligor) from using any claims or amounts owed to them by the creditor (or any other party) to reduce or offset their own payment obligations under the agreement. In other words, the obligor cannot subtract or withhold payment for a debt on the grounds that they are owed money by the creditor or another party involved in the contract. This clause ensures that the full amount owed is paid, regardless of any counterclaims or offsets the obligor might have.
For example, if a company owes money to a supplier but also has an outstanding receivable from the same supplier, the "no set-off" clause would prevent the company from using the receivable to reduce the amount owed to the supplier. Instead, the company must pay the full amount due, even if they are owed money by the supplier.
Why is no set-off by obligors important?
The "no set-off" provision is important because it maintains clarity and ensures that obligations are met in full. It protects the creditor by preventing the debtor from using claims or potential future payments to reduce their current liability. Without such a provision, a debtor could withhold payment or reduce the amount owed under the pretext of a counterclaim, which could lead to disputes and financial uncertainty for both parties.
This provision is especially significant in long-term or complex contracts where multiple payments or transactions occur between the parties, and the risk of cross-claims or offsets could create complications.
Understanding no set-off by obligors through an example
Imagine a company, ABC Corp, that has entered into a contract with a supplier, XYZ Ltd. ABC Corp owes XYZ Ltd $100,000 for goods received, but XYZ Ltd also owes ABC Corp $40,000 for a different service. Under a "no set-off by obligors" clause, ABC Corp must pay the full $100,000 amount to XYZ Ltd, even though XYZ Ltd owes them $40,000. The $40,000 that XYZ Ltd owes to ABC Corp cannot be used to offset the $100,000 ABC Corp owes to XYZ Ltd, and both parties must settle the amounts independently.
In another example, a business enters into a loan agreement where they owe a lender $500,000. The borrower might have a claim against the lender for $50,000 due to a breach of contract, but the "no set-off" clause in the loan agreement prevents the borrower from reducing the loan repayment by that $50,000. The borrower must still pay the full $500,000 regardless of the claim against the lender.
An example of a no set-off by obligors clause
Here’s how a no set-off by obligors clause might look in a contract:
"The Obligor agrees that it shall not, under any circumstances, withhold or set-off any payment due under this Agreement by reason of any counterclaim, deduction, or set-off arising from any other matter or dispute between the parties. All payments shall be made in full without reduction, regardless of any claims or disputes."
Conclusion
The "no set-off by obligors" clause is an important safeguard for creditors, ensuring that debtors fulfill their payment obligations without using counterclaims or other claims as an excuse to reduce or withhold payments. It provides clarity, stability, and predictability in financial agreements, preventing unnecessary disputes and ensuring that both parties meet their obligations as agreed. This clause is especially important in complex business transactions or contracts with ongoing or multiple obligations.
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.