Setoff is a legal term that has many applications in business transactions, and is best understood in context of dealings between two parties. The idea of setoff allows these parties to “setoff” their mutual debts and obligations, meaning that each party agrees to forgive the other debts and obligations in order to both reach a “zero” balance.
Put simply, setoff refers to the action of deducting an item or debt from another item or debt so that both end up in balance with each other. For example, imagine that Sally had borrowed $10 from Peter but then subsequently lent $5 to Peter. In this case, Peter could exercise the right of setoff by deducting the $5 owed to him from the $10 that Sally owes him, meaning that his debt to Sally would be canceled and both would owe nothing to each other.
While the concept of setoff may seem simple, it can have far reaching application in many business transactions. From contract disputes to collective bargaining agreements – understanding the law of setoff can be of significant help in achieving an agreeable balance between two parties.
Before entering into any business transaction, it is important to make sure that both parties are on the same page, and that they understand the implications of the setoff and any other legal terms and principles that may come into play.