Cash flow is important to all businesses. No more so than during times of uncertainty like those we are facing now amid the disruption caused by the Covid-19 pandemic. Whether you are looking to negotiate out of existing contractual arrangements, maximise cash collections or limit payments out by setting off debts owed to you, this note aims to help guide you in the right direction.
In the current climate, prudent businesses are taking a close look at their contractual obligations and their current financial position. You may be looking at how to extricate your business from contractual commitments and entering negotiations over the amount of financial compensation payable and to whom. You are also likely to be thinking about how to maximise cash collections and limit outgoings in order to put your business in the best possible position.
The ability to set-off debts and potential claims against one another will be pertinent to these and other commercial challenges facing businesses at this time. Where both parties claim that sums are due to them by the other, a form of set-off would seem a logical approach and will be attractive to the party facing the larger claim. However, the availability of set-off is dependent upon the way in which the debts have arisen and what has been agreed between the parties.
Broadly speaking the circumstances in which set off will be available are as follows:
- Where payments are due from both parties and the parties had agreed that instead of making separate payments, the party due to make the larger payment would pay the difference between the two amounts due. This is known as contractual set-off.
- Where the sums arise from the same transaction (or are very closely connected) and are either due and payable or, in the case of unliquidated damages, are a reasonable assessment of the loss made in good faith. This is known as equitable or transactional set-off.
- Where a claim and a counterclaim in a court action are both liquidated sums, or ascertainable with certainty, and are both due and payable at the commencement of the action. The two claims do not have to arise from the same transaction or closely connected transactions. This is known as legal set off.
It is also possible, however, for the parties to a contract to exclude the right to set-off. Whether you are seeking to enforce your right to set-off or are faced with a party who is wishing to do so, it is important to review the terms agreed between you to check this point.
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