Contractual set off is a legal term that refers to a situation where the parties involved in a contract allow for mutual debts and obligations to be offset against each other. This means that if party A owes party B £100, and party B owes party A £50, the parties can agree to set off their debts so that party A only has to pay party B £50.
The concept of contractual set off is recognized under English law, and it is often included in commercial contracts. The purpose of contractual set off is to simplify and reduce the need for complex transactions and exchanges of funds between parties.
There are a few key principles that apply to contractual set off under English law. Firstly, the parties must have agreed to set off their mutual debts and obligations. This agreement can be included in the contract itself, or it can be implied through the conduct of the parties.
Secondly, the debts and obligations being set off must be of the same nature. For instance, party A cannot set off a debt owed for goods supplied against a debt owed for services provided by party B.
Thirdly, the parties must both have a liquidated claim against each other. This means that the amount owed must be certain and fixed, rather than being subject to dispute or uncertainty.
It is also important to note that contractual set off does not apply in certain circumstances, such as where one party has become insolvent or bankrupt. In these cases, the rules of insolvency law will apply instead.
In conclusion, contractual set off is a useful tool for simplifying transactions between parties under English law. It allows for mutual debts and obligations to be offset against each other, avoiding the need for complex exchanges of funds. However, it is important to ensure that the conditions for set off are met before relying on this mechanism.
