Set-off is the power of a debtor who is also a creditor of the same party to cancel the two debts against each other. The obligations are then extinguished up to their common amount.
Legal basis
Article 6:127 of the Dutch Civil Code confers the power and imposes three requirements: mutual debtorship, obligations of the same kind, and the power to pay one’s own debt and to enforce one’s own claim. Set-off operates by declaration, with retroactive effect to the moment the power arose, under Article 6:129. Article 6:136 allows the court to disregard a set-off defence where the merits of the counterclaim cannot easily be established; in debt-collection cases that provision is much used. Article 6:135 excludes set-off for, among others, a claim in damages for intentional damage. In bankruptcy Article 53 of the Bankruptcy Act in fact widens the power, provided both obligations arose before the declaration of bankruptcy.
How it works in practice
In commercial relationships set-off is often excluded contractually for the customer and granted broadly to the supplier; that asymmetry is permitted between professional parties. A party wishing to set off should do so in writing and with reasons, stating the counterclaim and the amount. In bankruptcy, set-off is often the only way for a bank or supplier to recover anything.
Where it goes wrong
Parties withhold payment without declaring that they are setting off; that is suspension, with different consequences. A second error is setting off against a disputed counterclaim that cannot easily be established, after which the court disregards the defence and orders payment. Third, a contractual prohibition on set-off is overlooked.
Related terms
Set-off sits alongside the right of suspension, connects to assignment and to bankruptcy.
Would you like to know whether you may set off? Our civil law specialists test the requirements and the contract.
