No setoff: Overview, definition, and example
What is no setoff?
A no setoff clause in a contract prevents one party from reducing the amount they owe by deducting any claims, damages, or debts the other party may have against them. In simple terms, it means that each party must pay what they owe in full, without making deductions for any disputes or counterclaims.
This clause is commonly used in loan agreements, service contracts, and commercial transactions to ensure that payments are made as agreed, without delay or adjustment due to unrelated claims.
Why is no setoff important?
A no setoff clause protects businesses by ensuring they receive payments in full, without the risk of deductions due to disputes. Without this clause, a party might withhold payment or reduce the amount owed by claiming damages or compensation, even if those claims are unrelated to the payment obligation.
For businesses, this clause helps maintain predictable cash flow and reduces financial uncertainty. It ensures that obligations are fulfilled separately and that any disputes are handled through the proper legal channels, rather than affecting payments.
Understanding no setoff through an example
Imagine a supplier delivers goods to a retailer under a contract that requires full payment within 30 days. Later, the retailer claims the supplier delivered some defective products and wants to deduct the cost of the faulty goods from their payment. However, the contract includes a no setoff clause, meaning the retailer must pay the full amount as agreed and resolve the defective product issue separately.
In another example, a business takes out a loan from a bank. The borrower later claims the bank overcharged them on fees and wants to deduct the disputed amount from their next loan payment. If the loan agreement includes a no setoff clause, the borrower must still make the full payment and handle the dispute separately.
Example of a no setoff clause
Here’s how a no setoff clause might appear in a contract:
"The Borrower shall make all payments due under this Agreement in full, without any setoff, counterclaim, deduction, or withholding for any reason whatsoever."
Conclusion
A no setoff clause ensures that payments are made in full and on time, without deductions due to disputes. It protects businesses from unexpected payment reductions, helping to maintain financial stability and enforce contract terms.
For SMBs, including a no setoff clause in contracts can prevent payment delays and ensure smoother financial operations by keeping obligations and disputes separate.
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.