Where two parties owe each other money, it often makes sense for one of the parties to employ the concept of ‘set-off’ to reduce or eliminate its liability to the other party.
For example, assume that Party A owes OMR 100 to Party B under a loan agreement; but that Party B also owes OMR 60 to Party A under a separate (and perhaps unrelated) arrangement. In this scenario, Party A could in theory ‘set-off’ the OMR 60 that Party B owes to him against the OMR 100 that he owes to Party B – with the result that Party A now owes OMR 40 to Party B (original debt of OMR 100 minus set-off of OMR 60 equals remaining debt of OMR 40) and Party B no longer owes anything to Party A (original debt of OMR 60 minus set-off of OMR 60 equals zero).
Of course, for this to work in practice, Party A also must have the legal right to employ such a set-off mechanism. Such a right can arise by force of law, or by contract.
In England and Wales, and in certain other jurisdictions, there is detailed legislation and case law specifying various types of set-off available, for example:
- Legal set-off – a defence to a court action where more than one claim and cross-claim is being contested;
- Banker’s set-off – where a customer has more than one account with a bank, at least one of which is in debit and one in credit;
- Equitable set-off – available to a debtor where his cross-claim arises from the same or a closely related transaction;
- Insolvency set-off – often triggered by a party’s entry into liquidation; and
- Contractual set-off – where set-off is included as a provision of a contract.
In Oman, while the Law of Commerce (Sultani Decree 55/90) does contemplate the set-off concept, as a practical matter set-off rights frequently arise as contractual rights – e.g., via set-off clauses in loan agreements governed by English law, or by the laws of another foreign jurisdiction.
The contractual set-off rights often found in loan agreements typically will allow the lender to set off a matured obligation due from a borrower against any matured obligation owed by the lender to that borrower, regardless of the place of payment or currency of either obligation. If the obligations are in different currencies, the lender often may negotiate the right to convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.
The result of exercising a contractual right of set-off is similar to enforcing security. However, set-off is a personal right rather than a proprietary right; unlike a security right, it does not grant an interest in the counterparty’s property.
It should also be noted the Omani courts are unlikely to apply a set-off unless a contractual set-off scenario exists.
Finally, it is important to note that set-off provisions in loan agreements often favour the lender over the borrower. While set-off clauses in commercial contracts often will apply symmetrically (e.g., permit or prohibit set-off altogether), in many loan agreements the right of set-off is accorded only the lender, with the borrower prohibited from setting off any amounts owed to it by the lender.
