Set-Off Clause Explained: Six Versions to Check Before You Sign
This page is general information, not legal advice.
A set-off clause, also called an offset clause, lets one party reduce what it pays you by an amount it says you owe it. If a client owes you $5,000 and claims you owe it $1,000, set-off means it pays $4,000 instead of two separate payments going back and forth. That's simple when both amounts are clear and agreed. The risk comes when the clause lets the other side deduct amounts that are disputed, estimated or owed under a different contract. For freelancers, vendors and small businesses waiting to be paid, it can turn a fixed invoice into a partial payment with no warning. It usually sits in the payment section or near the end of the contract, so it's easy to skip. This page covers six versions of the clause that tilt the risk. For each one you get an illustrative example, why it matters, and wording you can propose. How set-off works varies by jurisdiction, and these terms can often be negotiated.
Set-off clauses often work together with payment terms. See payment terms net 30 explained.
The example clauses below are illustrative. They are not taken from any real company's contract.
1. Set-off against any amount claimed, even if disputed
A typical clause might read: "Client may set off against any amount payable to Contractor any amount that Client claims is owed by Contractor, whether liquidated or unliquidated, actual or contingent."
Why it works against you
"Claims" means the other side doesn't have to prove anything first. It can estimate a loss, call it a deduction and pay you less. Unliquidated amounts are ones that haven't been fixed or agreed, such as a claimed cost of delay or an alleged defect. You're then left to chase the difference, which can cost more than it's worth. See indemnification clauses explained for claims that are often used this way.
What to ask for instead
Sample wording to propose: "Client may set off only amounts that are agreed in writing by Contractor or finally determined by a court or arbitrator. Disputed amounts will be handled under Section [X] and do not delay payment of undisputed amounts."
2. They can withhold, but you can't
A typical clause might read: "Company may set off any amounts owed by Supplier against amounts payable to Supplier. Supplier shall pay all amounts due to Company without deduction, set-off or counterclaim."
Why it works against you
This is one-sided. The other side can deduct whatever it says you owe, but you must pay its invoices in full even if it owes you money. If you buy from and sell to the same company, or owe a fee while waiting on a payment, you carry the cash-flow risk in both directions.
What to ask for instead
Sample wording to propose: "Either party may set off undisputed amounts that are due and payable to it under this Agreement, on the same terms and with the same notice."
3. Set-off across every contract with the group
A typical clause might read: "Company and its affiliates may set off any amount owed to Contractor under this Agreement against any amount Contractor owes to Company or any affiliate under any other agreement."
Why it works against you
If you have several contracts with the same group, a problem on one project can cut payments on another. A dispute with one subsidiary may reduce what a different subsidiary pays you, even though your work for it was fine. This makes it hard to know what you'll actually receive and when. See contractor payment terms red flags.
What to ask for instead
Sample wording to propose: "Set-off applies only to amounts arising under this Agreement between the parties named in it. Amounts under other agreements or with affiliates may not be set off."
4. Set-off against wages, retainers, deposits or escrow
A typical clause might read: "Company may apply any retainer, security deposit, escrowed funds or amounts otherwise payable to Contractor toward any obligation of Contractor, without prior notice."
Why it works against you
A retainer or deposit is often meant for a specific purpose, like securing future work or covering damage at the end of a lease. Letting the other side dip into it at any time, without notice, means the money may be gone before you know there's a problem. Some types of payment, such as wages or funds held in escrow, may have extra legal protections, depending on the place. See security deposit clauses explained and personal loan agreement red flags.
What to ask for instead
Sample wording to propose: "Retainers and deposits may be applied only for the purposes stated in Section [X], and only after [10] business days' written notice describing the amount and the reason. Contractor may dispute the deduction during that period."
5. Set-off that delays or reduces a fixed payment
A typical clause might read: "Payment of invoices on Net 30 terms is subject to Client's right to withhold or set off amounts pending resolution of any claim."
Why it works against you
Fixed payment terms look reliable until a clause like this lets the other side hold back money "pending resolution." A claim can stay open for months, and late fees may not run on the amount withheld. Combined with a clawback right, the other side may also reclaim money already paid. See late payment fee clauses explained and clawback clauses explained.
What to ask for instead
Sample wording to propose: "Client may withhold only the disputed portion of an invoice and must pay the undisputed portion on the due date. If a withheld amount is later found to be owed, it bears late interest from the original due date."
6. Set-off that keeps working after the deal ends
A typical clause might read: "Company's rights under this Section shall survive termination or expiration of this Agreement and may be exercised against any amount owed to Contractor at any time thereafter."
Why it works against you
After a contract ends, you may still be owed a final invoice, a holdback or a deposit. A surviving set-off right lets the other side keep reducing those amounts, sometimes for claims that come up long after your work ended. With no time limit, there's little certainty about when you'll be paid in full.
What to ask for instead
Sample wording to propose: "After termination, set-off applies only to amounts agreed or determined under Section [X] that arose before termination, and only for [90] days after the final invoice."
Practical tips when you're owed money
Read the set-off clause together with the payment, dispute and termination sections. When you're paid less than invoiced, ask in writing for a breakdown of each deduction and the clause relied on. Keep separate records for each contract if you work with several companies in the same group. If an amount is disputed, reply promptly and in writing, using the method in the notice clause.
Also worth a look
Check the limitation of liability clause, which may cap what you can claim back, and the audit rights clause, which can lead to deductions after an audit. For a wider checklist, see freelance contract red flags, service agreement red flags and consulting agreement red flags.
Scan your own contract free
A set-off clause can decide how much of an invoice actually reaches your account. Upload your contract to the ScanMyTerms freelance contract review as a PDF, DOCX, TXT or MD file, photograph it (up to 30 pages), or paste the terms. In about a minute you get a list of clauses that work against you, with the risk level, the exact wording, why it hurts and how to change it. The free preview shows the risk count and the first two findings. The full report is $5 per document.
This page is general information, not legal advice. Contract, payment and debt rules vary by jurisdiction, so for decisions about a specific contract, talk to a qualified lawyer where you live.
Sources
- All clause examples on this page are illustrative and written for this guide. They are not quoted from any real company's contract.