When Can Claims Be Set Off
The extinction of claims by set-off represents a form of cashless settlement between debtor and creditor, where no real performance occurs between them, which undoubtedly brings cost savings.
Introduction to Set-Off Issues
The extinction of claims by set-off represents a form of cashless settlement between debtor and creditor, where no real performance occurs between them, which undoubtedly brings cost savings that these parties would otherwise have to incur. It could be said that this is a form of substitute performance of the obligation to the creditor, which satisfies their claim. Given the relative simplicity and efficiency of fulfilling obligations in this way, this is a frequently used institute in practice. However, the legal conditions for its use are not always observed.
Substantive Law Conditions for Set-Off
The basic prerequisite for fulfilling an obligation by set-off is meeting substantive law conditions. These conditions can be divided into general and special. General conditions for set-off capability are:
- mutuality of claims
- same type of performance
- capability for set-off
- parties made a certain manifestation of will aimed at extinction of claims by set-off.
The above-mentioned general conditions for set-off capability arise from provisions of § 580 and § 581 of the Civil Code. These are modified by provisions of § 358 to § 364 of the Commercial Code or other relevant legal regulations.
Mutuality of Claims
We speak of claim mutuality when between the same parties, each party is both creditor and debtor simultaneously. The condition of claim mutuality must be met regardless of whether it concerns unilateral set-off or set-off agreement. The law establishes exceptions to the mutuality condition to regulate cases where there was a change in the creditor's person, e.g., due to claim assignment. In such case, the debtor may set off against the assignee (new creditor) claims they had against the assignor at the time they learned about the claim assignment from assignor to assignee.
Same Type of Performance
Another legal condition is that claims must be of the same type, i.e., their content is the same performance in terms of quantity and type. From the type perspective, these may be monetary claims, where their amount is expressed in money, or non-monetary claims, where their amount is expressed in other units, e.g., kilograms. Most often these are claims for monetary performance, and in commercial-obligation relationships, set-off is not prevented if claims are in different currencies, provided these currencies are freely convertible.
Capability for Set-Off
Claims are capable of set-off when set-off is not excluded by law or agreement of parties. Party agreement on impossibility of set-off of mutual claims represents a legal obstacle. The Civil Code in § 581 para. 1 and 2 regulates exclusions from unilateral set-off. According to § 581 para. 1, unilateral set-off is inadmissible against a claim for compensation for damage to health, unless it concerns a mutual claim for compensation for damage of the same type.
Forms of Set-Off
Set-off itself may occur by unilateral act or agreement of parties. In case of unilateral set-off, all mentioned conditions must be met.
Unilateral Set-Off
Unilateral set-off is effective against the other party from the moment it came into their disposition. On the other hand, in case of party agreement, this agreement is effective from the moment of effectiveness of acceptance of the proposal by the other party, e.g., agreement becomes effective upon signing by participants. However, the actual effects of set-off are not tied to the moment of receipt of notification about unilateral set-off or conclusion of agreement, but to the moment of claims meeting, i.e., the moment when the later of them becomes due.
Set-Off Agreement
The agreement on set-off of claims must be signed by persons authorized to act for the company. This may be, for example, company executives or persons authorized for this, e.g., authorized employee, which results from job description or internal organizational documents.
Special Cases of Set-Off
A claim can be set off even during ongoing court proceedings or execution proceedings. The mere existence of ongoing proceedings has no effect on claim set-off capability. It is important that claims are capable of set-off at the time they met, even if one of the claims would not later be awarded by the court.
In case of passive solidary obligations, where multiple entities appear on the debtor side and the creditor is entitled to assert their claim for performance from any of them, any of the debtors may set off their claim against the creditor's claim, even if the creditor asserted their claim against another co-debtor.
Conclusion
Claims can be set off unilaterally if they are mutual, concern the same type of performance, are capable of set-off, and the set-off party informed the other party of their intention to set off claims. The notification must clearly indicate which claims are being set off and in what amount. If parties agree, it is possible to set off all other claims, provided the mutuality condition is met, and in civil law relationships also the condition of same type of performance, where the legal act was not performed contrary to law or party agreement.