Q&As

Why are set-off clauses included in finance documents?

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Produced in partnership with Thomas Samuels of Gough Square Chambers
Published on LexisPSL on 02/05/2017

The following Banking & Finance Q&A produced in partnership with Thomas Samuels of Gough Square Chambers provides comprehensive and up to date legal information covering:

  • Why are set-off clauses included in finance documents?
  • Set-off defined
  • Reasons for contractual set-off

Why are set-off clauses included in finance documents?

Parties’ rights are often defined, restricted or excluded by a specific contractual clauses agreed between the parties at the outset of their relationship. A set-off clause is an example of such a provision. The benefits of including such clauses are commercial certainty, convenience and equity.

This Q&A provides a brief overview of why express set-off clauses are included in finance documents with links to more detailed information. For detailed information on the reasons for contractual set-off, see Practice Note: Contractual set-off.

Set-off defined

Where ‘A’ has a claim for a sum of money against ‘B’ and ‘B’ has a cross-claim for a sum of money against ‘A’, and ‘B’, to the extent of his cross-claim, is absolved from payment to ‘A’, B is said to have a right of ‘set-off’.

Under English law there are five main kinds of set-off:

  1. Legal set-off: this is the basis of a ‘set-off’ defence in civil proceedings, whereby a counterclaim is used to reduce liability under a claim. It derives not from the common law but from two 18th century statutes, the ‘Statutes of Set-Off’. For detailed information on legal set-off, see Practice Note: Types of set-off

  2. Equitable set-off: outside of litigation, this allows for two mutual claims arising out of the same matter to be set-off against each another in equity. The

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