Reviewing a set-off clause

A set-off clause decides whether a party can deduct what it is owed from what it owes. Without one, the general law allows a party to withhold payment of a sum against a closely connected cross-claim, so a customer can hold back an invoice against a claim for defective goods. Suppliers' terms exclude set-off, so that invoices are paid in full and disputes are pursued separately; customers' terms widen it, so that any sum owed under any contract with any group company can be deducted. Both versions are enforceable within limits the law sets. I review the clause from whichever side instructs me and return it marked up with a written explanation of what it permits or excludes, whether it is enforceable, and the changes the other side will accept, for a fixed fee of £495 in three working days.

Who this is for

Suppliers wanting to be paid in full while a dispute is resolved, and customers wanting to withhold payment against claims, in supply, services, construction and outsourcing contracts in England and Wales. Both parties are businesses; consumer contracts are subject to the fairness rules on terms that restrict a consumer's remedies.

What to look for in a set-off clause

Set-off at law and in equity, and what the clause changes

Where two parties owe each other liquidated sums, or where a cross-claim is closely connected with the claim, the law allows the sums to be set against each other so that only the balance is paid, and a party sued for a debt can rely on the set-off as a defence. The clause changes that position in one direction or the other: excluding the paying party's right to deduct, or extending it to sums that the general law would not allow to be set off. The review identifies what the clause does to the general law position and what each party gains or loses.

No set-off clauses and the reasonableness test

A term requiring payment in full without deduction, set-off or counterclaim is common in suppliers' terms and is enforceable between businesses, subject to one control: where the term is in the supplier's written standard terms, it restricts the customer's remedy for breach and is treated as an exemption clause under section 13 of the Unfair Contract Terms Act 1977, subject to the reasonableness test in section 3. The review checks whether the clause is likely to pass the test, which turns on the parties' bargaining strength and whether the customer keeps a workable route to recover its cross-claim, and drafts it so that it does.

Widened set-off: group companies and other contracts

Customers' terms let the customer deduct any sum due from the supplier to the customer or any of its group companies under any contract, which turns a single supply relationship into a running account across the group. The review narrows the clause for a supplier to sums due under the same contract that have been agreed or determined, and, for a customer that wants the wider right, drafts it with the notice and evidence obligations that make it defensible, and checks that group companies not party to the contract can rely on it.

Construction contracts: the pay less notice replaces withholding

In a construction contract, a paying party may not withhold or set off against a sum due without giving a pay less notice within the period the contract or the Scheme for Construction Contracts (England and Wales) Regulations 1998 provides, under sections 110A and 111 of the Housing Grants, Construction and Regeneration Act 1996. A set-off clause in a construction contract cannot override that, and the review checks that the clause and the payment provisions comply, so that a customer's deduction is made through a valid notice and a contractor's claim for the notified sum is preserved.

Insolvency set-off: the rule the parties cannot change

When a company enters liquidation or administration with a distribution, mutual dealings between it and a creditor are set off under rule 14.25 of the Insolvency (England and Wales) Rules 2016 and the corresponding administration rule, so that only the balance is provable or payable, and the parties cannot contract out of that set-off. The review explains the consequence for each side: a supplier's no set-off clause stops protecting it on the customer's insolvency, and a customer that owes the insolvent supplier money can set its claims against the debt whatever the contract says.

Cash flow, disputed invoices and the drafting that works

For a supplier, the review drafts a clause requiring payment in full of undisputed sums, with a procedure for disputing part of an invoice within a period and paying the rest, so that the clause protects cash flow without denying the customer a route for genuine claims and stands a better chance under the reasonableness test. For a customer, it drafts a right to withhold sums that are the subject of a notified dispute, with interest under the Late Payment of Commercial Debts (Interest) Act 1998 running on the balance if the dispute is resolved in the supplier's favour, and no right to withhold undisputed sums.

What it costs

Standard review, £495. Marked-up document and a written explanation of the changes. Three working days.

Buying online forms the engagement on payment. The scope is what the contract review page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• Your own contract returned with my amendments as tracked changes, plus a clean version with every change accepted, ready to send to the other side
• Comments in the document where a point needs explaining
• A written explanation of what I have changed and why, by email or as an attachment if it is lengthy, marking the points I would hold firm on and the ones that are negotiable
• A view on what is normal market practice and what is the other side pushing their luck
• One round of follow-up questions by email, included

What is not included

• Negotiating directly with the other side, which I quote separately once I know who is on the other side. Where the other side is willing to share a live document, I can work in that document directly
• Drafting a replacement contract from scratch
• Advice on the law of any jurisdiction other than England and Wales
• Tax, accounting or regulatory advice
• Disputes about a contract that is already signed

Questions I am often asked

Our terms say the customer must pay without set-off. Can it still withhold payment for faulty goods?

If the clause is in your standard terms it has to be reasonable to be enforced, and a court may decline to enforce it where it leaves the customer no practical remedy. The review drafts a clause that requires payment of undisputed sums with a procedure for disputing the rest, which is more likely to hold.

The customer deducted a sum it says another company in its group is owed by us. Can it?

Only if the contract allows set-off of group companies' claims, and customers' terms often do. The review checks the clause, whether the group company's claim is established, and what notice and evidence the clause requires before a deduction.

Does a no set-off clause protect us if the customer goes bust?

Not against insolvency set-off, which applies under the Insolvency Rules whatever the contract says: mutual dealings are set off and only the balance is provable. The review explains what you can recover and how the clause protects you before insolvency.

Related guidance and services

• Contract review, £495, the service this page describes
• Terms and conditions drafting, £995
• Reviewing a purchase order with terms on the back
• Reviewing a construction subcontract from a main contractor

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: September 2026. Email geoffrey@caesar.co.uk.