Each party shall be entitled to set off any liability owed by the other party to it against any liability it owes to the other party.
Here is a plain English explanation of the Setoff clause:
- This clause allows each party to deduct or cancel out debts they owe to the other party.
- For example, if Party A owes Party B £1000 under the contract, but Party B also owes Party A £500 in a separate debt, Party A can subtract the £500 from the £1000 it owes Party B.
- So Party A would only need to pay Party B the difference of £500. This is called a "setoff."
- The clause permits each party to do this type of setoff between any debts owed under the contract.
- The debts don't have to relate to each other - any liability can be setoff against any other.
- This prevents parties paying debts when an offsetting amount is owed to them by the other side.
It allows convenient settlement of mutual debts and liabilities.
The right of setoff has its roots in ancient Roman law, which recognized the efficiency of offsetting mutual debts.
This principle was later adopted in medieval England to streamline commerce. However, exercise of setoff was initially limited to related transactions.
In the 17th century, the common law expanded setoff rights between parties regardless of debt relationships. Legal scholars like Lord Mansfield further developed setoff doctrine through the 18th century. Statutory reforms in the 19th century consolidated and standardized setoff rules.
By the late 1800s, setoff clauses became routinely included in contracts to expressly authorize debt cancellation. Earlier case law established an implicit setoff right, but contractual provisions made this convenient right explicit. Over the 20th century, setoff clauses were increasingly standardized in common templates and precedent books.
Today, setoff is universally accepted as an efficient means of resolving countervailing debts and liabilities. While setoff rights likely exist by default, express contractual authorization reinforces parties’ ability to conveniently settle mutual obligations.
The modern setoff clause codifies a longstanding reconciliation mechanism whose origins trace back thousands of years.