Navigating setoff in contractual agreements can simplify financial transactions, especially in construction projects. Setoff allows a party to balance mutual debts by deducting the amount owed from the amount they owe, ensuring only the net difference is paid. Consider a scenario where an EPC contractor faces liquidated damages (LDs) and variation claims from subcontractors. Through setoff, the contractor can offset these LDs against payments due, streamlining financial management and reducing administrative burden. Key points to remember: 1. Understand the specific setoff provisions in your contract. 2. Ensure compliance with relevant laws. 3. Maintain thorough documentation to support your setoff actions.
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Today’s contract tip is about setoff provisions. A typical setoff provision in a commercial contract authorizes the customer to deduct from its payments any amount that the vendor owes it. You may be wondering, “How much can the customer deduct?” “From what kinds of payments?” and “What qualifies as being owed?” These provisions often don't address those details, leaving it for the parties to hash out later. When representing customers, I fight hard to get these provisions in my contracts. This authorization provides customers the ability to adjust payments to reflect losses suffered because of the vendor. Why should the customer pay $30 when the vendor owes it $10? The customer prefers to pay the net amount that it owes, which in this example is $20. When I represent vendors, I fight hard against setoff. I consider it one of the most dangerous provisions for a vendor in a contract for the same reasons that customers favor them. These provisions give the customers the contractual authority to make unfettered deductions at their discretion. Whether you have setoff in your contract depends heavily on the bargaining power of the parties. One important note on spelling. You'll see it written as set off, setoff, and set-off. Here's the scoop based on my extensive research (cough - ChatGPT prompt): - Setoff/Set-off (Noun): - In the US, "setoff" is common. In the UK, "set-off" is more common, but "setoff" is also used. Refers to the legal counterclaim or offset. - Set Off (Verb) - Used similarly in both the US and UK. Describes the action of offsetting or beginning a process. What's your approach to setoff provisions? #HowToContract #lawyers #contract
