Set-Off Clauses: The Right to Deduct What You Are Owed

A set-off clause lets one party deduct what the other owes it from what it must pay, instead of paying in full and chasing the other debt separately. If you owe your vendor Rs 10 lakh under an invoice and the vendor owes you Rs 3 lakh in refunds or penalties, a set-off clause lets you pay Rs 7 lakh and treat the rest as settled, rather than paying the full Rs 10 lakh and suing for Rs 3 lakh back. The one thing most people get wrong: they assume a general right to set off exists automatically in every contract and survives every situation, including the other side's insolvency. It does not. Indian law recognises several kinds of set-off, each with its own conditions, and one of them (insolvency set-off) is available only in liquidation, not while a company is going through resolution under the Insolvency and Bankruptcy Code. This guide is published by Adira, which makes contract review and CLM software, so we have a commercial interest in you understanding this clause well, but it is written to stand on its own regardless of what you buy.

Plain meaning

Set-off is sometimes called netting: instead of two separate cash flows (I pay you, you pay me), the smaller sum is cancelled out and only the net difference actually moves. A set-off clause in a commercial contract usually does one of two things. Either it gives a party an express contractual right to deduct sums owed to it before paying an invoice, or it does the opposite, it expressly takes that right away (a "no set-off" clause), forcing a party to pay in full and pursue any counter-claim as a separate matter. Both versions are common, and which one you are looking at changes who holds the cash while a dispute is unresolved, which is often the real fight.

Who it protects and what triggers it

Indian law and practice recognise four broad categories, and a well-drafted contract should be clear about which one it is dealing with:

• Contractual set-off. Whatever the parties actually agree to. The broadest category, since it is not bound by the technical conditions of the other three: parties can set off debts under related agreements, across group entities, or on a timeline they choose, as long as the clause says so clearly.
• Legal (statutory) set-off. A procedural right in litigation. Under Order VIII Rule 6 of the Code of Civil Procedure, 1908, a defendant sued for money can claim a set-off against the plaintiff's demand for any ascertained, legally recoverable sum, within the court's pecuniary jurisdiction, between the same parties in the same capacity.
• Equitable set-off. A right courts recognise independent of Order VIII Rule 6, where cross-claims arise from the same transaction, or connected transactions, such that it would be unjust to make one party pay in full while its own claim waits for a separate suit. It can apply even where the counter-claim is unliquidated (not yet a fixed number), unlike legal set-off.
• Insolvency set-off. A right that applies when the counterparty is insolvent, so a creditor is not forced to pay 100% of what it owes the insolvent estate while recovering only cents on the rupee for what the estate owes it. Under Indian law this exists in a defined form in liquidation, and does not automatically carry over to the resolution process that happens before liquidation.

The trigger for all four is the same underlying situation, mutual debts between the same two parties, but the mechanics, timing and even the arithmetic differ sharply depending on which category applies.

What to look for

Three things decide whether a set-off clause is fair, dangerous, or simply absent when you need it:

1. Scope: which debts, between which entities. Does the clause let you set off only sums due under this contract, or also sums due under other agreements, or sums owed by affiliates and group companies? A narrow scope (this contract only, same two legal entities) is standard. A broad scope needs to be deliberate, not accidental.
2. Notice. Does the clause require the party exercising set-off to notify the other side before deducting, stating the amount and the basis? Silent clauses often get read as permitting set-off without notice, which makes reconciliation and audit harder and invites disputes about what was actually deducted and why.
3. Is set-off allowed at all, or expressly barred? Many customer-side contracts, especially in services, licensing and outsourcing, include a "no set-off" clause: the vendor (or the paying party) must pay invoices in full, on time, "without set-off, counterclaim or deduction," and pursue any dispute separately. This is not unusual, and is not automatically unfair, but it does shift working-capital risk onto whoever has to pay first and litigate later.

The Indian position: Order VIII Rule 6, CPC, and Regulation 29 of the Liquidation Regulations

Legal set-off is a creature of civil procedure, not the Contract Act. Order VIII Rule 6(1) of the Code of Civil Procedure, 1908 says:

"Where in a suit for the recovery of money the defendant claims to set-off against the plaintiff's demand any ascertained sum of money legally recoverable by him from the plaintiff, not exceeding the pecuniary limits of the jurisdiction of the Court, and both parties fill the same character as they fill in the plaintiff's suit, the defendant may, at the first hearing of the suit, but not afterwards unless permitted by the Court, present a written statement containing the particulars of the debt sought to be set-off." Source: Code of Civil Procedure, 1908, India Code

That sets a high bar: the counter-sum must be "ascertained" (a fixed, definite figure, not a contested or unliquidated claim), it must be legally recoverable, and both parties must be suing and being sued in the same capacity. This is why courts separately recognise equitable set-off for cross-claims that are connected but not yet quantified, and why most commercial parties do not rely on Order VIII Rule 6 at all, they write their own set-off mechanics into the contract instead.

Insolvency set-off has its own, narrower rule, and it applies only in liquidation, not during the earlier Corporate Insolvency Resolution Process (CIRP). Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 provides:

"Where there are mutual dealings between the corporate debtor and another party, the sums due from one party shall be set off against the sums due from the other to arrive at the net amount payable to the corporate debtor or to the other party." Source: Regulation 29, IBBI (Liquidation Process) Regulations, 2016, IBBI

This matters because it is easy to assume set-off "just happens" once a counterparty is in financial trouble. It does not, not automatically, and not at every stage. During CIRP, Section 14 of the Insolvency and Bankruptcy Code, 2016 imposes a moratorium prohibiting, among other things, "the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority." Source: Section 14, Insolvency and Bankruptcy Code, 2016, India Code. Regulation 29's insolvency set-off is drafted for liquidation, a later, different stage, and does not by its terms apply during CIRP. Whether any set-off can be exercised while a corporate debtor is under CIRP, and if so what kind, became the exact question the Supreme Court had to answer.

A named Indian case: Bharti Airtel v Vijaykumar V Iyer

In Bharti Airtel Limited and Another v Vijaykumar V Iyer and Others, Civil Appeal Nos. 3088-3089 of 2020, decided by the Supreme Court on 3 January 2024, Bharti Airtel and Bharti Hexacom had made advance payments to Aircel group entities under spectrum-trading agreements that never completed, then sought to set those advances off against amounts they separately owed Aircel, after Aircel entered CIRP and the resolution professional took custody of its assets.

The Supreme Court held that insolvency set-off (Regulation 29) and statutory set-off (Order VIII Rule 6) are not available during CIRP, only during liquidation, because permitting either during resolution would undermine the moratorium and the pari passu treatment the IBC is built on. But the Court did not close the door entirely. It recognised that a contractual set-off, if the underlying contract itself provided for it before insolvency began, can still be given effect, and it carved out equitable (transactional) set-off for claims so closely linked to the same transaction that treating them separately would be manifestly unjust, provided there is no real dispute over the debt itself. See the full judgment on Indian Kanoon.

Why this matters practically: never assume set-off survives your counterparty's insolvency by default. If you want the ability to net your dues against theirs when they go under, you need an explicit, well-drafted contractual set-off clause agreed before insolvency starts, because generic set-off rights that exist under procedural law or liquidation regulations either do not apply at the CIRP stage at all, or apply only in the much narrower, fact-specific equitable category the Court left open.

Red flags

Normal	Red flag	Why it matters
Set-off limited to sums due under this contract, between the same two parties	Set-off extended across unrelated contracts, or to affiliates and group companies not party to this agreement	Lets one side offset an unrelated dispute against your unrelated payment, turning every invoice into a hostage for every other disagreement
Set-off clause is mutual, either party may exercise it on the same terms	Only one party (usually the customer or the larger party) has a set-off right; the other must pay in full	A one-sided right signals a one-sided negotiation, and concentrates working-capital risk on the weaker party
Notice required before set-off, stating the amount and basis of the deduction	Set-off permitted silently, discovered only when payment arrives short	Makes reconciliation and dispute resolution far harder, and can look like unilateral self-help rather than an agreed mechanism
No-set-off clause is narrow and paired with a fast, defined dispute-resolution or refund process	Broad "no set-off, counterclaim or deduction of any kind" clause with no fast track for genuine, undisputed credits	Forces you to fund the other side in full even for amounts they plainly owe you, then chase a separate claim, often for months
Set-off right is scoped to sums that are due, undisputed or contractually agreed	Set-off assumed to apply automatically the moment the counterparty shows financial distress or enters insolvency	As Bharti Airtel confirms, insolvency and statutory set-off do not apply during CIRP; assuming they do can leave you paying in full anyway
Set-off clause states which currency, exchange rate and date governs the deduction for cross-border dues	Silent on currency/rate when dues are in different currencies	Creates room for dispute over the exact net amount, especially with currency movement between invoice and payment dates

Bad clause vs. better clause

Bad (one-sided, no-set-off): "Customer shall pay all invoices in full, without any set-off, counterclaim, deduction or withholding of any kind, for any reason whatsoever."

What is wrong: absolute and one-directional, no carve-out even for amounts the vendor has already admitted it owes (agreed credit notes, confirmed refunds, agreed service credits), and no fast alternative route to recover those sums.

Better: "Customer shall pay all invoices in full without set-off, except that Customer may deduct (a) any amount the Vendor has confirmed in writing is owed to Customer, including agreed service credits and credit notes, and (b) any amount awarded to Customer by a court, arbitral tribunal or agreed dispute-resolution process. For any deduction under (a), Customer shall give Vendor 10 business days' written notice stating the amount and basis before deducting it from the next invoice."

What changed and why: the no-set-off principle is kept for disputed or unascertained amounts (protecting cash flow and avoiding unilateral deductions), but a narrow, evidence-based carve-out lets a party actually use money the other side has already agreed it owes, with notice, instead of paying it out and separately chasing a refund.

How it interacts with related clauses

• Payment terms. A strict "pay within 30 days" clause combined with a broad no-set-off clause means you always pay first and argue later, regardless of what the other side owes you.
• Termination on insolvency. If you are relying on set-off as protection against a counterparty's insolvency, check whether your termination right crystallises your claim in time, and remember Bharti Airtel: you cannot assume statutory or insolvency set-off will bail you out once CIRP has begun.
• Indemnity and limitation of liability. If a set-off clause is silent on whether indemnity payments can be set off against ordinary invoices, you end up with two uncoordinated cash flows for what is really one dispute. Read indemnity and set-off together when both exist in the same contract.

You can flag and comment on how a set-off clause interacts with payment terms and termination directly in a document, for free, using Weave, before you send the contract back for negotiation.

US and global contrast

US contract and bankruptcy law draw a broadly similar line, but reach it differently. Outside insolvency, US commercial contracts routinely include "no setoff/no recoupment" clauses much like their Indian equivalents, enforceable as ordinary contract freedom. Inside insolvency, Section 553 of the US Bankruptcy Code expressly preserves a creditor's right of setoff for mutual, pre-petition debts, subject to the automatic stay, so a creditor generally needs court permission to exercise it once a case begins, but the underlying right is written directly into the bankruptcy statute. India's position is more fragmented: there is no equivalent express "setoff survives the moratorium" line in the IBC's CIRP chapter, which is exactly why the question had to be litigated up to the Supreme Court in Bharti Airtel rather than answered by reading a single section. The practical lesson is the same either way: do not treat set-off as a self-executing safety net once insolvency risk shows up. Write it into the contract, and expect to argue about scope if it is ever tested.

FAQ

Is a set-off clause the same as a right to withhold payment for a breach? No. Withholding for the other side's own breach of the same contract is usually a separate right. Set-off specifically means netting two distinct, mutual debts against each other, and often needs an express clause or one of the recognised legal categories to apply.

Can I set off amounts owed under a different contract with the same counterparty? Only if your set-off clause expressly says so, or a court finds the claims are so connected that equitable set-off applies. Do not assume cross-contract set-off is available by default; most standard clauses limit set-off to the same agreement.

If my customer's vendor enters insolvency, can I automatically deduct what they owe me from what I owe them? Not automatically. As Bharti Airtel confirms, insolvency set-off under Regulation 29 applies in liquidation, and statutory set-off under Order VIII Rule 6 CPC does not apply during CIRP at all. A pre-existing contractual set-off right, or a genuinely connected equitable claim, are your main routes, and both need careful evidence.

Does a "no set-off" clause mean I can never deduct anything, ever? As typically drafted, yes, it bars any deduction, even for amounts you believe are owed to you, until you pursue them separately. If you are the party likely to be owed money, negotiate a narrow carve-out for confirmed, undisputed amounts rather than accepting a blanket bar.

What counts as "ascertained" for legal set-off under Order VIII Rule 6? A fixed, definite, legally recoverable sum, not a claim still being disputed or calculated. This is why most commercial set-off runs on contractual or equitable grounds rather than Order VIII Rule 6, which was written for litigation, not negotiated deductions.

Should set-off rights be mutual, or is one-sided normal? Mutual is the fairer default and what most negotiated contracts land on. A one-sided right, usually favouring the larger party, is a common negotiation point and, left unchallenged, shifts working-capital and litigation risk onto the smaller party.

This guide gets you to understanding what a set-off clause does and where Indian law draws the line between contractual, statutory, equitable and insolvency set-off. It does not tell you whether a specific clause in your contract is enforceable, or whether a specific deduction you want to make would hold up, that depends on the exact facts, the wording of your contract, and the stage your counterparty's insolvency (if any) has reached, and is not legal advice. Talk to a lawyer before you rely on a set-off right, or accept a broad no-set-off clause, in a live negotiation.