Set-off Agreement

SHORT ANSWER TO THE MAIN QUESTION

Set-off allows two mutual claims to extinguish each other to the extent that they overlap.

Under Czech law, set-off may occur unilaterally if the statutory conditions are met, or by agreement between the parties.

In a set-off agreement, the key is to identify both claims precisely, state their amounts, and define the extent to which they are to be extinguished.

Not every claim can automatically be set off, so a simple statement that “the parties shall set off their claims” may not be enough for a safe and effective settlement.

YOU MAY BE THINKING…

“If we owe each other money, surely we do not need to send payments back and forth?”

“Do both claims have to be due?”

“Can a disputed claim be set off?”

“What if the claims are for different amounts?”

“What is the difference between unilateral set-off and set-off by agreement?”

“And what if the other party later says that no set-off ever happened?”

This is why it is useful to record clearly what was settled, in what amount, and with what legal effect.

THE REAL PROBLEM IN PRACTICE: THEORY VS REALITY

In theory, the principle is very simple.

Party A has a claim against Party B.

Party B has a claim against Party A.

Instead of making two separate payments, the claims are set off against each other.

In practice, however, you need to know:

• what legal relationship each claim arises from,
• whether each claim actually exists,
• its current amount,
• whether it is due,
• whether it is disputed,
• whether part of it has already ceased to exist in another way,
• whether the particular type of claim is legally eligible for set-off,
• whether principal, interest or other ancillary claims are included,
• when the set-off is intended to take effect,
• what amount, if any, remains outstanding after the set-off.

There is also one important distinction:

Set-off is not the same as debt forgiveness.

If one party owes CZK 200,000 and the other owes CZK 150,000, the result is not automatically that “nobody owes anything”.

The claims may extinguish each other to the overlapping extent, while the difference remains payable.

BIGGEST RISKS AND COMMON MISTAKES

With set-off agreements, I would pay particular attention to:

• inaccurate identification of the claims,
• incorrect current amounts,
• overlooking partial payments,
• unclear treatment of ancillary claims,
• trying to set off a claim whose existence is disputed,
• assuming that every type of claim may be set off,
• unclear timing of the legal effect,
• incorrect calculation of the remaining balance,
• confusing set-off with settlement or debt forgiveness,
• failing to address other claims between the same parties,
• relying only on an internal accounting entry without clear legal documentation.

A typical mistake?

“It works in our accounting.”

That does not necessarily mean:

“We have legally settled exactly what we intended to settle.”

HOW TO APPROACH IT: REALITY, NOT THEORY

With a set-off agreement, I recommend starting very practically.

1. List both claims

Who owes whom?

What is the legal basis of each claim?

What is the principal amount?

Are there also ancillary claims?

2. Verify their current status

Has either claim been partly paid?

Was a credit note issued?

Is either claim disputed?

3. Determine the amount to be set off

If the claims are equal, they may extinguish each other entirely to the agreed extent.

If they are different, the remaining balance needs to be calculated precisely.

4. Distinguish set-off from a broader settlement

Do you simply want to offset two invoices?

Or are you also trying to resolve a dispute over their amount or existence?

In the second case, a broader agreement, such as a settlement agreement, may be more appropriate.

5. Define the legal effect

After signing, the document should make it clear which claims have ceased to exist and which claims, if any, remain outstanding.

PRACTICAL EXAMPLES

👉 Two invoices, one balance

Company A owes Company B CZK 300,000.

Company B owes Company A CZK 220,000.

The parties agree on set-off.

The result is not that “nothing remains payable”.

After the set-off, Company B still has a claim for CZK 80,000.

That remaining balance should be clearly stated in the agreement.

👉 One claim is disputed

A supplier claims CZK 250,000 for services provided.

The customer asserts a counterclaim of CZK 100,000 for alleged damage.

The supplier denies that any damage occurred.

If the parties simply say “we will set it off”, they may not actually resolve the dispute.

First, it may be necessary to determine whether the parties want a simple set-off or whether they also need to settle the disputed claim.

👉 An accounting set-off the other party did not expect

One company internally records two mutual claims as having been set off.

The other party still considers its claim outstanding.

The issue is not accounting.

The issue is whether and how the set-off was legally effected and properly documented.

WHY YOU SHOULD BE CAREFUL WITH “I’LL DO IT MYSELF”

A set-off agreement can look extremely simple.

Two claims.

Two amounts.

The difference.

Signatures.

And in a straightforward case, the document really does not need to be long.

But simple does not mean imprecise.

A generic template does not know:

• whether the claims actually exist,
• whether they are due,
• whether they are disputed,
• whether they are legally eligible for set-off,
• whether they include ancillary claims,
• whether part has already been paid,
• whether the parties want only set-off or also a broader settlement.

With set-off, correct identification and calculation are often more important than document length.

LAWYER’S RECOMMENDATION + CHECKLIST

With a set-off agreement, I recommend one simple test:

If I looked at this document two years from now, could I immediately tell which two claims were set off, in what amount, and what remained outstanding afterwards?

If not, the agreement is not precise enough.

Quick checklist

• Both claims are clearly identified.
• The legal basis of each claim is known.
• Their current amounts have been verified.
• Ancillary claims are addressed.
• It has been checked that the claims are eligible for set-off.
• It is clear whether either claim is disputed.
• The exact amount being set off is defined.
• Any remaining balance is calculated correctly.
• It is clear which claims are extinguished.
• It is clear what remains after the set-off.
• Set-off is distinguished from any broader settlement.
• The document matches the actual contractual and accounting position.

FAQ

What is a set-off agreement under Czech law?

It is an agreement under which the parties settle mutual claims by setting them off against each other.

To the extent that the claims overlap, they cease to exist.

Do the claims have to be for the same amount?

No.

If one claim is higher, the claims may be set off up to the amount of the lower claim, while the remaining balance continues to exist.

Is there a difference between unilateral set-off and set-off by agreement?

Yes.

Under Czech law, set-off may occur unilaterally if the statutory conditions are met.

A set-off agreement, by contrast, is based on the mutual agreement of both parties and can be particularly useful where the parties want to document the exact outcome of their mutual settlement.

Can a disputed claim be set off?

This requires caution.

If the parties disagree even on the existence or amount of one of the claims, a simple set-off agreement may not be the most appropriate solution.

Depending on the circumstances, the dispute may first need to be resolved, or the parties may need to use a settlement agreement.

Can any claim be set off?

No.

Czech law sets conditions and certain restrictions on set-off. The particular claims should therefore be checked to ensure that they are legally eligible.

Does a set-off agreement have to be in writing?

Written form is not necessarily a general requirement for every possible set-off.

From a practical and evidentiary perspective, however, a written agreement is highly advisable, especially for significant amounts or commercial relationships.