This 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 thinking, “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 I represent 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.
I’ll cover more nuances and negotiating approaches for these provisions in another post.
What’s your view of setoff provisions? Do you see them frequently in the contracts you handle?
By the way, this word has different spellings. I used the handy-dandy Google word use tool, which shows a slight edge to setoff over set-off in U.S. usage (which is how I've always seen it), while the British usage shows set-off as the clear winner.
