Set-off clauses

Authored by Karen Lee, Principal, Legal Know-How.

Purpose of this boilerplate clause

“Set-off” generally refers to a party reducing the amount it owes another party by an amount that the other party owes it. For example:

• Party A owes $100 to Party B.
• Party B owes $50 to Party A.
• In the above scenario, Party A may wish to set off the two amounts so that Party B’s $50 debt to Party A is discharged and Party A only needs to pay $50 to Party B.

Contractual set-off arises where a right of set-off has been created by contract. It is used when contracting parties want to extend or limit set-off rights which are available under general law. For example, a right of set-off in a loan agreement enables a borrower to apply an amount owed to it by the lender against an amount it owes to the lender. This allows the borrower to reduce its liability.

Aside from contractual set-off rights, other main types of set-off include:

• statutory set-off (sometimes referred to as “legal set-off”), such as under statutory court procedural rules;
• bankruptcy set-off (for individuals, under s 86 of the Bankruptcy Act 1966 (Cth)) and insolvency set-off (for companies, under s 553C of the Corporations Act 2001 (Cth) — practitioners may wish to refer to the detailed discussion of the operation of insolvency set-off by Gleeson J in Re Force Corp Pty Ltd (in liq);
• equitable set-off (sometimes referred to as “transaction set-off”) if certain requirements are satisfied; and
• common law set-off, where the debts to be set off against each other are liquidated debts or money demands that meet certain requirements.