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Set-Off Clause

A provision governing whether a party can deduct what it is owed from what it owes the other, or waiving that right so payments must be made in full.

Reviewed by GC AI Solutions Team•Updated August 2026

Definition

A set-off clause governs whether one party can reduce a payment it owes by an amount the other party owes it, settling mutual debts on a net basis. An affirmative set-off right lets a party withhold and apply sums, often across multiple contracts. A no-set-off provision does the opposite, requiring payments to be made in full without deduction, set-off, or counterclaim, which lenders and landlords insist on so cash keeps flowing while disputes are resolved separately. The clause allocates who carries the risk of a disputed cross-claim, and it is frequently one-sided in favor of the stronger party.

  • Lets a party deduct amounts it is owed from amounts it owes, settling debts on a net basis
  • Or waives set-off, requiring payment in full without deduction or counterclaim
  • Sets whether the right runs one way or is mutual
  • Decides whether set-off reaches debts arising under other contracts between the parties
  • Allocates the risk of a disputed cross-claim while the dispute is resolved

No-set-off language is near-standard in credit agreements and commercial leases, where the financed or leased party must pay regardless of disputes.

What It Does

A set-off clause decides who gets to net. When two parties owe each other money, the right to set off lets one collect by simply paying less, and a waiver of that right forces full payment and a separate claim for anything disputed. For in-house counsel, it determines whether you can self-help against a non-performing counterparty or whether you must pay now and fight later. The operative questions are whether set-off runs one way or both, whether it reaches debts under other contracts, and whether disputed amounts are carved out. A practical test: if your customer can withhold fees over an unrelated dispute, your revenue is exposed to every grievance, not only the one in front of you.

When You'll See It

The set-off clause appears in credit and loan agreements, commercial leases, supply and services contracts, construction agreements, and equity and compensation awards. Lenders and landlords draft a no-set-off waiver so payment cannot be held hostage to a dispute, while buyers and owners draft an affirmative right so they can recover from a defaulting counterparty. The wording varies most in finance and construction, where cross-contract set-off and disputed-amount carve-outs are negotiated closely.

It matters most where the parties have continuing money flowing both directions, such as an owner paying a contractor who owes back-charges, or a company paying an employee who owes the company. The more two-way the money, the more the set-off right is worth.

Examples

Barclays Bank PLC

Nationstar Mortgage LLC, Amendment Number Five to the Amended and Restated Loan and Security AgreementNo-set-off (waiver)One-Sided2024
"[…] all accrued and unpaid fees and expenses owed to Lender in accordance with the Facility Documents, in each case, in immediately available funds, and without deduction, set-off or counterclaim[…]"
Source

PotlatchDeltic Manufacturing, LLC

BID Group Construction US Inc., Construction ContractOne-way (Owner) set-offOne-Sided2022
"The Owner shall have the right to set off any amounts which the Contractor may owe to the Owner, whether arising under the Contract Documents or otherwise, against any amounts which may become payable by the Owner to the Contractor under the Contract Documents or otherwise."
Source

Masco Corporation

Participant, 2024 Long Term Stock Incentive Plan Award TermsOne-way (Company) set-offOne-Sided2024
"To the extent permitted under applicable law, the Company shall have the right to set off or withhold any amount owed to you by the Company or any of its subsidiaries or Affiliates for any amount owed to the Company by you under your Award Agreement."
Source

JackieO, LLC

Atara Biotherapeutics, Inc., First Amendment to LeaseOne-way (Tenant) set-off against rentOne-Sided2025
"[…] so long as Tenant is not in Default under this Lease, then Tenant shall have the right to set off against the next monthly payments of Base Rent the amount of the award."
Source

Negotiate

If you want to set off

You want self-help

  • Get an express, broad right to set off amounts owed to you against amounts you owe.
  • Extend the right to debts arising under other contracts between the parties.
  • Allow set-off against disputed and undisputed amounts, with notice.
  • Keep the right exercisable without a court order or prior demand.
  • Make the right survive termination so you can net out final balances.

If you want payment in full

You are the lender, landlord, or vendor

  • Require payment without deduction, set-off, or counterclaim.
  • Limit any set-off to liquidated, undisputed amounts under the same contract.
  • Require advance notice before the other side applies a set-off.
  • Carve out disputed amounts so they are paid and litigated separately.
  • Make any no-set-off obligation mutual only where it genuinely cuts both ways.

Set-off decides who pays first and argues later. Know which side of that you are on before you sign.

Red Flags

  • A no-set-off waiver buried in the payment terms, forcing you to pay in full no matter the dispute.

  • A one-way set-off right that lets only the counterparty net, never you.

  • Set-off that reaches unrelated contracts, exposing one deal to grievances from another.

  • No carve-out for disputed amounts, so a contested charge can be self-collected.

  • Set-off allowed with no notice, so the first sign of it is a short payment.

Set-Off Clause FAQs

What is a set-off clause?
A provision governing whether a party can deduct what it is owed from what it owes the other, or waiving that right so payments must be made in full.
What is the difference between set-off and recoupment?
Set-off nets debts arising from separate transactions. Recoupment nets claims arising from the same transaction. Many contracts address set-off expressly and leave recoupment to common law.
What does without set-off mean in a contract?
It means payments must be made in full, and a party cannot reduce them by amounts the other side allegedly owes. The disputed amount has to be pursued as a separate claim.
Is a set-off right automatic?
Not always. A common-law or banker's right of set-off can exist, but contracts often expand or waive it, so the clause controls between the parties.
Can you set off across different contracts?
Only if the clause allows it. Cross-contract set-off has to be drafted in, otherwise set-off is usually limited to amounts under the same agreement.
Why do lenders require a no-set-off clause?
So loan payments keep flowing regardless of disputes. It shifts the risk of any cross-claim to the borrower, who must pay first and litigate separately.

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This content is for informational purposes only and does not constitute legal advice.