A set-off clause allows one party to collect a debt owed by another party by withholding money or property. It is commonly used in financial situations, such as between banks and debtors, employers and employees, and in the construction sector. The amount owed must be clearly defined or in cash form.
A set-off clause is a term used extensively in financial situations where money owed to one party is withheld by another in the other party’s quest to collect an outstanding debt owed. This means that in a contractual arrangement between parties involving money an offsetting clause could be included in the wording of the contract to allow one party to collect any debt owed by the other party. Usually these are cases where a clear amount is indicated in the contractual agreement or in any dispute between the debtor and the creditor.
An example of the application of a set-off clause is the one that occurs in the relationship between banks and debtors, whereby a bank can use this type of clause to collect any debt owed to the bank by the debtor through the appropriation of money or property of the defaulting borrower held by the banks. For example, if Company ABC borrows $100,000 US Dollars (USD) from a bank and has deposits of $50,000 USD, the bank could apply such a clause to recover some of the money if ABC defaults on the loan. As such, the bank would seize the $50,000 USD deposited in the bank by ABC, while engaging in other methods to recover the remaining $50,000 USD, plus any interest.
Employers can also apply a compensation clause in the relationship with their employees using the same parameters as the one between the bank and the ABC company. Assuming an employee borrows money from an employer with a promise to repay the money in installments over a specified period and fails to make those repayments, the employer could withdraw the money owed by the employee from the employee’s paycheck through an offsetting clause. The employer may decide to withhold a certain percentage of the employee’s net pay until the money is paid.
In the construction sector, the application of this clause is widely used in the various relationships between declared subjects. For example, the clause could be used by an architect in his dealings with the contractor. Similarly, the contractor could use the set-off clause when dealing with subcontractors in terms of outstanding financial payments. Also, any money that can be misappropriated under this type of clause, which can be claimed by one of these individuals, must be clearly defined or must be in cash form.
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