Setoff Law and Legal Definition

A setoff is a claim by a defendant in a lawsuit that the plaintiff owes the defendant money which should be subtracted from the amount of damages claimed by plaintiff. Set-off takes place only in actions on contracts for the payment of money. The matters which may be set off, may be mutual liquidated debts or damages, but unliquidated damages cannot be set off.

The defendant claiming a setoff argues that the debt claimed to be owed to the plaintiff should be reduced by an amount owed to defendant by plaintiff in a separate transaction. A setoff is not a dispute of the amount claimed in the transaction creating the debt sued upon by the plaintiff. A setoff is different from a counterclaim, which may deny liability, in that it only seeks a reduction in the amount awarded.

The following is an example of a state statute dealing with setoff:

"One who deals with an agent without knowing or having reason to believe that the agent acts as such in the transaction may set off against any claim of the principal arising out of the same all claims which he might have set off against the agent before notice of the agency."