Set-Off Clause
Also called: Right of Set-Off · Offset Clause
A set-off clause allows one party to deduct amounts the other party owes them against amounts they owe the other party, rather than paying in full and separately chasing what's owed back. It converts two separate payment obligations into a single net amount.
In more detail
Without a set-off right, a party may be contractually required to pay an invoice in full even while a legitimate dispute or counterclaim against the other party is unresolved — set-off avoids that one-directional cash flow risk.
Set-off rights are commonly restricted to sums that are undisputed and due, rather than any amount either party claims — an overly broad set-off right can be used aggressively to withhold payment over disputed or speculative claims.
This clause matters most in ongoing commercial relationships with regular mutual payments — a vendor who is also a customer, for example — where amounts owed can flow in both directions simultaneously.
A company owes a vendor ₹5,00,000 for services, but the vendor separately owes the company ₹1,00,000 in agreed damages for a missed deadline. Under a set-off clause, the company can pay the net ₹4,00,000 rather than paying the full invoice and separately pursuing the damages.
What our lawyers check
- Whether a set-off right exists, and for which party or parties
- Whether it's limited to undisputed, due amounts or drafted more broadly
- Whether set-off requires advance notice before being exercised
- How it interacts with the payment terms and late-payment interest clauses
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
All glossary terms