setoffs

Setoff is a legal mechanism by which mutual debts between two parties are offset to produce a net obligation. In practical terms, if A owes B a certain amount and B owes A a different amount, the offset reduces or extinguishes the larger obligation by the amount of the smaller one, leaving a net balance due from one party to the other. Setoff can arise by contract, statute, or operation of law, and is commonly used in commercial and banking transactions as a way to simplify settlements and manage risk.

Most systems require mutuality, meaning the same two parties owe each other debts. The debts are typically required to be currently due and payable and enforceable, though specific rules vary by jurisdiction. The offset may apply to the principal amounts, and in some cases interest and costs may be included. Some claims can be protected from setoff by public policy, contract terms, or insolvency law, such as certain wage, tax, or social benefit claims.

Types of setoff include contractual setoff, where a contract expressly authorizes offset, and statutory or legal setoff, where law provides a right to offset in particular circumstances. In banking and finance, netting arrangements extend the concept across multiple accounts or entities.

Setoff is distinct from a counterclaim filed in litigation; it can reduce a debt without initiating a separate legal claim. In insolvency, setoff rights may be limited or subject to court oversight, depending on the jurisdiction and the relevant statutes.