In law, set-offs are legal techniques used between persons with mutual rights and liabilities, replacing gross positions with net positions.   It allows the rights to be used to discharge liabilities if there are counterclaims between a plaintiff and a defendant. As a result, the gross claims of mutual debts give rise to a single net receivable.  Net receivable is called net item. In other words, set-off is the right of a debtor to settle mutual debts with a creditor. (b) When do claims arise? Claims “arise” for bankruptcy purposes when (1) all “transactions” or actions necessary for liability take place, and for state claims (2) there is a prior relationship, “such as contact, exposure, effect, or privacy,” between the United States and the debtor, so the government is able to “fairly believe” that it might have a claim against the debtor. See Epstein v. Official Committee of Unsecured Creditors, 58 F.3d 1573 (11th Cir. 1995) (application of this Standard to non-governmental claims); Lemelle v.
Universal Mfg. Corp., 18 F.3d 1268, 1274-77 (5 Cir. 1994); With respect to Jensen, 995 F.2d 925 (9th Cir. 1993) (9th Circuit introduces the “fair contemplation test” instead of the “underlying transaction test” used by the BAP); In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991); Firestone Case, 179 B.R. 148, 148-49 (Bankr. D. Neb. 1995) (the claim for a tax refund against the United States “occurs at the end of the taxation year, the time of filing the tax return is only a procedural requirement to claim the amount already due”); As for Midway Indus. Contractors, Inc., 167 B.R. 139, 142-43 (Bankr.
N.A. Ill. 1994) (ibid.), rev`d for other reasons, 178 B.R. 734 (N.A. Ill. 1995); In re Finley, Kumble, Wagner, Heine, 160 B.R. 882, 891-92 (Bankr. S.D.N.Y. 1993) (if the obligation arises from a contractual obligation, even a breach after the application will be treated as a cause of liability for dismissal if the contract was performed before the request); In re Houbigant, 188 B.R. 347, 355 (Bankr. S.D.N.Y.
1995) (ibid.); In re Chateaugay Corp., 115 B.R. 760, 773-74 (Bankr. S.D.N.Y. 1990) (idem). This is true regardless of law enforcement efforts (i.e., future dispute) or if the claim is conditional, unresolved or immature at the time the claim is filed. See In re Buckenmaier, 127 B.R. 233 (Bankr. 9th Cir. 1991); Sherman v First City Bank, 99 B.R. 333 (N.D. Tex.
1989), aff`d, 893 F.2d 720 (5th Cir. 1990); Braniff Airways v. Exxon, 814 F.2d 1030, 1036 (5th Cir. 1987) (“the debt to the debtor does not need to be calculated [pre-application] for a creditor to offset”; Thompson v. Board of Directors, 182 B.R. 140 (Bankr. E.D. Va. 1995) (contingent assets still recoverable); With respect to Metco Mining and Minerals, Inc., 171 BC 210, 216-17 (Bankr. W.D. Pa. 1994) (“If the parties agree in advance that one party will compensate the other in the event of a particular event, there is a “right to payment”, albeit subject to the signing of the agreement.”; In Express Freight Lines, 130 B.R.
288 (Bankr. D. Certainly. 1991) (unpaid debts); Referring to Fred Sanders, 33 B.R. 310 (Bankr. E.D. Me. 1983) (unliquidated debt); In re Wilson, 29 B.R. 54 (Bankr. W.D. Ark.1982) (inchoate tax refunds); 4 Bankrupt collars ¶ 553.01; see also In re Remington Rand Corp., 836 F.2d 825 (3d Cir. 1988) (the claim was filed for bankruptcy purposes where the government was aware of the debtor`s liability, despite federal law requiring the decision of a federal contract employee before a claim arose); see Mazama Timber Prods., Inc.c.
United States, 6 Cl. Ct. 87, 88-89 (1984) (The exercise of the United States right to set-off does not require that the right to judgment be reduced; set-off may take place until the controversy is resolved). Therefore, set-off is permitted if, at the time of the filing of insolvency, the debt is absolutely due but is not currently due, or if a definitive liability has arisen but has not yet been liquidated. In re Young, 144 B.R. 45, 46-47 (Bankr. N.D. Tex. 1992).
The timing of a claim should be determined under the Bankruptcy Act and not under State law. Butler v. NationsBank, N.A., 58 F.3d 1022, 1029 (4 Cir. 1995); Grady v. A.H. Robins Co., 839 F.2d 198 (4th Cir. 1988); In re Piper Aircraft Corp., 162 B.R. 619, 624 (Bankr. S.D. Fla.
1994); In re Finley, Kumble, Wagner, Heine, 160 B.R. 882, 892 (Bankr. S.D.N.Y. 1993); see, however, In re Public Serv. Co., 884 F.2d 11 (1st Cir. 1989) (any damage resulting from an undisclosed performance contract cannot be set off against the criminal liability owed to the debtor, since the claim under the law of the State of N.H. is not due); With respect to Patterson, 967 F.2d 505 (11th Cir. 1992) (set-off only against claims owed under the law of the State ala. despite the wording of the Code); In re Aquasport, Inc., 115 B.R.
720, 723 (Bankr. S.D. Fla. 1990) (credit “not available for set-off because contingent and awkward claims under Florida law cannot be used as set-off”), aff`d, 155 B.R. 245 (S.D. Fla. 1993). B. Character of the claim. The debt and the receivable do not necessarily have to come from the same company and must not be of the same type. See e.B.
In re Bevill, Bresler & Schulman Asset Mgmt., 896 F.2d 54 (3d Cir. 1990) (contractual obligations are debts for offsetting purposes); Braniff Airways v. Exxon, 814 F.2d 1030 (5th Cir. 1987); In re Bay State York Co., 140 B.R. 608 (Bankr. D. Mass. 1992) (obligations arising from different guarantee relationships meet the requirement of reciprocity); In re Thurston, 139 B.R. 14 (Bankr.
W.D. Mo. 1992) (contractual claims may be offset by tortious claims); In re Denby Stores, 86 B.R. 768, 777 (Bankr. S.D.N.Y. 1988); In re Elsinore Shore Assoc., 67 B.R. 926 (Bankr. D. N.J. 1986). However, if the creditor`s debt to the debtor is based on the recovery of a fraudulent transfer pursuant to 11 U.S.C§ 544(b), set-off is generally rejected. In re Acequia, Inc., 34 F.3d 800, 817 (9.
Cir. 1994). This applies only to closely related claims where it would be manifestly unfair to assert the claim without regard to the counterclaim (subject to any contractual exclusion). In our example above, suppose that both contacts relate to the same project, but no contractual right of compensation is provided for and is not excluded. In this scenario, it may be possible for a right to reasonable compensation to occur, even if both contracts are silent on the issue. Current case law on fair compensation principles stems from geldof Metaalconstructie NV v. Simon Carves Ltd  EWCA Civ 667, in which the Court of Appeal provided guidance on fair compensation rules. Fair set-off is more difficult to apply in practice than contractual set-off, as the claims to be set off must be of the same nature (i.e. both contractual) and must be so closely related that it would be “manifestly unfair” to assert one without taking into account the other. See e.B. United States v. Munsey Trust Co., 332 U.S.
234, 239, 67 pp.c. 1599, 1601, 91 L.Ed. 2022 (1947) (“The government has the same right” “which belongs to any creditor to use the undeposited funds of his debtor in his hands to repay the debts owed to him” (cited by Gratiot v. United States, 40 U.S. (15 pet.) 336, 370, 10 L.Ed. 759 (1841)); see also Tatelbaum v. United States, 10 Cl.Ct. 207, 210 (1986) (The set-off Act is inherent in the United States Government and is based on the common law right of each creditor to settle its debts). Mathematics is simple, but the most difficult area is usually the question of when (under what circumstances) and whether the right to compensation arises. Employers and developers typically execute multiple construction projects at the same time, and typically, after establishing a successful working relationship and track record with a good professional team or selection of contractors, they will deploy the same team for the majority of their projects and engage them in several different projects or for multiple elements of the same project.
In this sense, we discuss here how customers can benefit from the use of the right to “set-off” or the use of the exclusion from set-off. In certain circumstances, where two parties have monetary debts to each other, the right to set-off may arise. A right of set-off allows a person (“Part 1”) to take into account the amount owed to him by The Second Party (“Part 2”) against any amount owed by Part 1 Part 2, each party being a debtor and creditor. If such a right applies under PI 16, it cannot be limited or extinguished by agreement. The common law provisions on set-off can be significantly improved by including a contractual right of set-off (explained below), so that set-off is applicable in a wider range of situations. If you believe that compensation is a useful right, it is not advisable to rely on the implied ability to use it (through customary law or fair compensation). The common law and fair compensation are subject to various conditions and restrictions, however, a contractual right of set-off may be formulated to ensure that the parties can agree exactly on how and when the set-off is to be made. .