Setting off, offset and netting all refer to the legal mechanism of applying one outstanding amount against another. The net amount (if any) is then payable to the relevant party after the application of the offset.
A set-off clause in a contract will entitle one or both parties to apply any debts they are owed against any payments due to the other party. By using contractual set-off, only the net amount (after applying the set-off), if any, will be payable by one party to the other.
If you don't have an express right under a contract to set-off, then you may be able to rely upon the law of equity.
In this guide, we'll step you through set-off under contract, as well as equitable set-off.
Author: Farrah Motley, Legal Principal of Prosper Law.
What is an example of a set-off clause?
Below is an example of a set-off clause:
Party A may set-off and apply against any amounts due to Party B, any amount, claim, loss, damage, cost or expense that is or may be owed by Party B to Party A. If, after applying the set-off, an amount is still due to Party A, Party A may recover that amount from Party B. Nothing in this clause limits or reduces Party A's rights at law to recover an amount owed by Party B.
What is an example of a set-off?
As an example:
Party A owes $100 to Party B for services performed by Party B. At the same time, Party B has caused a loss to Party A and the claim is worth $50. Party A uses the set-off clause under the contract and applies the $50 against the $100 owed to Party B. As a consequence, Party A pays the net amount of $50 to Party B.
Can you set off without a set-off clause?
If there is no set-off clause in a contract, a party may be able to rely upon a right to set-off in the law of equity. However, this is not available in every instance and the party seeking to set off needs to use this right carefully.
When is equitable set-off available?
If a contract doesn't contain a set-off clause, a party may be able to rely on the law of equity (this is a different area of law to contract law) to lawfully effect a set-off.
The law of equitable may be able to be relied upon if it would be unconscionable to allow one party to insist on its legal right without first taking into account the other party's legal right.
Goldsmith v AMP Life Limited
In Goldsmith v AMP Life Limited, a dispute between a landlord and tenant led to the restatement of some of the relevant principles to be applied when determining whether equitable set-off is available.
The Court found that the claim for compensation under the first lease could be set-off against the unpaid rent under the second lease.
The Court noted that, in substance, both claims arose out of ‘one continuing relationship affected by the [landlord’s] renovation of the shopping centre’.
Those principles are:
there must be a sufficient connection between the two claims
to be sufficiently connected, one claim must be said to ‘impeach’ or ‘go to the root of’ the other claim, such that it would be unfair for one claim to be allowed without accounting for the other
a set-off can arise where the claims are based on different legal instruments between the same parties
Hawes v Dean
In the case of Hawes v Dean [2014] NSWCA 380, Justice Barrett noted that the "...two wrongs or defaults were so closely connected that a net position or result ought in equity to prevail between the parties because it would be unconscionable to allow one of them to insist on its legal right without first accommodating the other's countervailing legal right."
Justice Barrett concluded that: "It is the existence of that unconscionability that causes the first party's claim to be "impeached" (that is, undermined and defeated) by the second party's claim".
You can read more about set-off here.
How can Prosper Law help?
Before taking steps to exercise a right of set-off, it is important to ensure that you have correctly identified the right that is relied upon. The best way to do this is to engage an Australian contracts lawyer.
Contact the team at Prosper Law today for a fixed-fee quote and first-class legal advice.
Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121
A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane, Queensland Australia 4000
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