Waiver of setoff: Overview, definition, and example
What is a waiver of setoff?
A waiver of setoff is a legal provision in which one party voluntarily gives up their right to offset or reduce a debt or obligation owed to another party by claiming that the other party owes them a separate debt. In other words, a waiver of setoff means that a debtor cannot use a claim they have against the creditor as a defense or reduction in the amount they owe under a specific agreement or contract.
Setoff generally allows a debtor to deduct amounts they are owed by the creditor from the amount they owe to the creditor. A waiver of setoff explicitly prevents the debtor from exercising this right, often making the full amount due enforceable regardless of any outstanding claims the debtor may have against the creditor.
Why is a waiver of setoff important?
A waiver of setoff is important because it clarifies the terms of a financial arrangement by preventing the debtor from using unrelated claims to reduce or avoid payment. This provision provides certainty and security to the creditor, ensuring that they receive the agreed-upon amount without any deductions or offsets. It also prevents the debtor from using unaddressed claims as leverage in negotiations.
In commercial agreements, a waiver of setoff can protect businesses from situations where they could face delays or reductions in payment if a counterclaim or unrelated debt exists. It ensures the contractual obligations are clear, and payments are made in full and on time.
Understanding a waiver of setoff through an example
Imagine a business, ABC Corp., enters into a contract with XYZ Ltd. to purchase goods. The terms of the agreement include a clause that specifies a waiver of setoff, meaning that ABC Corp. cannot reduce its payments for the goods by claiming that XYZ Ltd. owes them money for a separate contract dispute.
Later, ABC Corp. claims that XYZ Ltd. owes them a sum of money due to a breach of a separate agreement. Despite this, ABC Corp. cannot use the claim as a setoff to reduce the payment owed under the current contract for goods. They are still required to pay the full amount for the goods as agreed.
In another example, a borrower, John, has an outstanding loan with a bank. The loan agreement includes a waiver of setoff, which means John cannot use any claim he may have against the bank (such as a potential refund from a separate issue) to reduce his loan balance. John is still obligated to repay the loan in full, regardless of any unrelated claims he may have.
An example of a waiver of setoff clause
Here’s how a waiver of setoff clause might appear in a contract:
“The Borrower hereby waives any right to setoff, counterclaim, or deduction against the amounts due under this Agreement. The Borrower acknowledges and agrees that all payments due under this Agreement are to be made in full without any adjustment or reduction, regardless of any claims or amounts the Borrower may be entitled to from the Lender for other matters.”
Conclusion
A waiver of setoff is a provision that prevents a debtor from reducing or offsetting the amount they owe under a specific agreement by claiming unrelated debts or claims against the creditor. This clause is crucial for ensuring that creditors are paid in full and on time, without the risk of deductions or delays due to unaddressed claims. For businesses and individuals involved in financial agreements, understanding and including a waiver of setoff provision helps ensure clarity and enforceability in the payment 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.