What set-off means
Set-off is the netting of mutual obligations.
Two parties each owe the other. Rather than each paying in full, the smaller obligation is deducted from the larger and only the balance is paid.
It is not simply refusing to pay because you have a grievance. Set-off in the legal sense arises in defined circumstances.
Contractual set-off is created by the agreement. The contract expressly permits a party to deduct sums owed to it, and the scope is whatever the clause provides.
Legal set-off applies where both claims are for liquidated sums, meaning ascertained amounts, and are mutual, meaning between the same parties in the same capacity. It is available as a defence in proceedings.
Equitable set-off is broader in one respect and narrower in another. It applies where the claims are so closely connected that it would be manifestly unjust to enforce one without taking account of the other, and it can cover unliquidated claims.
How it is used
The commercial situations are familiar.
A supplier owes a customer for defective goods and the customer withholds part of a later invoice.
A contractor owes the employer liquidated damages for delay and the employer deducts them from the next certificate.
A bank exercises set-off across a customer's accounts, applying a credit balance in one against a debit in another.
A landlord owes a tenant for works the tenant carried out and the tenant deducts from rent.
That last one is the riskiest. A tenant who deducts from rent without a clear right of set-off is in arrears, whatever the merits of their claim, and arrears are a ground for recovery of premises.
The practical rule is to establish the right before exercising it. Where the contract expressly permits set-off, exercise it and say so in writing. Where it does not, and the claims are not clearly liquidated and mutual, paying and claiming separately is usually safer than withholding and defending.
Key features
- Netting of mutual obligations so only the balance is paid
- Contractual set-off arises from an express clause
- Legal set-off requires liquidated and mutual claims
- Equitable set-off requires closely connected claims
- Banks commonly reserve a contractual right across accounts
- Many contracts exclude set-off entirely by a no set-off clause
How this works in Nigeria
The no set-off clause is the point most Nigerian businesses miss.
Supply agreements, service contracts and loan documents commonly provide that payments must be made in full without deduction, set-off or counterclaim. Where such a clause exists, a party that withholds is in breach, and its cross claim has to be pursued separately.
That is a deliberate allocation. A supplier wants to be paid and to argue about quality afterwards, rather than having every dispute become a reason not to pay.
So the first question before deducting anything is whether the contract permits it.
Bank set-off is the second area worth understanding. Banking terms commonly reserve a right to combine accounts and to apply a credit balance against a debit, and it is exercised. A business that keeps a healthy balance in one account and is in arrears on a facility should not assume the credit balance is untouchable.
The third is the tenancy situation, which is genuinely dangerous. A tenant who spent money on repairs the landlord should have done, and deducts it from rent without a right of set-off, has created arrears. The safer route is to pay, demand reimbursement in writing, and claim if it is refused.
And where set-off is exercised, do it transparently. A written notice identifying the amounts, the invoices and the basis is what turns a deduction into a documented set-off rather than a partial payment nobody can explain.
Set-off vs counterclaim vs lien
Three ways a party responds to a claim by pointing at what the other side owes or holds.
Set-off is a defence that extinguishes or reduces the claim. Where it applies, the claimant is only entitled to the balance, and it can be raised without commencing separate proceedings.
A counterclaim is a separate claim brought in the same proceedings. It does not automatically reduce the claimant's claim; it stands on its own and is decided alongside. A defendant with a cross claim that does not qualify as set-off brings it as a counterclaim.
A lien is a right to retain possession of property until payment. It does not reduce the debt; it gives leverage by withholding something the other party wants.
A party facing a demand should establish which of the three it actually has, because withholding payment on a cross claim that is only a counterclaim, in a contract with a no set-off clause, is a breach.
Limits and risks
A no set-off clause defeats the right entirely in that contract, and such clauses are common and enforceable between businesses.
Legal set-off requires liquidated and mutual claims, which excludes many commercial grievances that are not for ascertained sums.
Equitable set-off depends on a close connection between the claims, which is a matter of judgment rather than a bright line.
And exercising set-off wrongly converts a party with a valid cross claim into a party in breach, which is a materially worse position.
Worth knowing
Check for a no set-off clause before you deduct anything. Nigerian supply and loan agreements routinely require payment in full without deduction or counterclaim, and a business that withholds against a genuine cross claim becomes the party in breach.
Questions people ask
What is set-off?
Netting mutual obligations so that the smaller is deducted from the larger and only the balance is paid. It arises contractually, or at law where claims are liquidated and mutual, or in equity where claims are closely connected.
Can I just withhold payment because I have a claim?
Not without a right of set-off. Where the contract contains a no set-off clause, or the claims are not liquidated and mutual and not closely connected, withholding puts you in breach.
What is a no set-off clause?
A term requiring payments to be made in full without deduction, set-off or counterclaim. It is common in supply agreements and loan documents and it is enforceable between businesses.
Can my bank take money from one account to cover another?
Banking terms commonly reserve a contractual right to combine accounts and apply a credit balance against a debit, and it is exercised. Read the terms rather than assuming a credit balance is untouchable.
Can a tenant deduct repair costs from rent?
Only with a clear right of set-off. Without one, the deduction creates arrears, which is a ground for recovery of premises. The safer route is to pay, demand reimbursement in writing, and claim if refused.
What is the difference between set-off and a counterclaim?
Set-off reduces or extinguishes the claim as a defence. A counterclaim is a separate claim decided alongside, which does not by itself justify withholding payment.