Set-Off Agreement (New Zealand)

A Set-Off Agreement in New Zealand records the set-off arrangement agreed between the parties and the specific obligations each side accepts, forming a binding agreement under the Credit Contracts and Consumer Finance Act 2003.

In New Zealand, Set-Off Agreements are governed by the Contract and Commercial Law Act 2017 (CCLA), which codifies and modernises the general principles of contract law. The right of set-off also exists at common law and in equity in New Zealand, and contractual set-off supplements these rights by providing a clear agreed mechanism for the parties to apply the set-off.

The mechanics of a Set-Off Agreement are straightforward. If Party A owes Party B NZD $30,000 under an invoice for goods supplied, and Party B separately owes Party A NZD $18,500 under an invoice for services rendered, the parties can agree to set off these mutual obligations. The result is that Party A's NZD $30,000 obligation is reduced to NZD $11,500 (the net balance), and Party B's NZD $18,500 obligation is fully extinguished. Party A then pays the net balance of NZD $11,500 to Party B, settling all obligations between the parties.

The template is suitable for any two New Zealand businesses or individuals who have mutual payment obligations arising from a trading relationship, services agreement, construction contract, or any other commercial arrangement. The agreement includes GST provisions to confirm compliance with the Goods and Services Tax Act 1985, representations and warranties that the obligations are valid and not disputed, and a discharge clause confirming that payment of the net balance extinguishes all remaining obligations.

You need a New Zealand Set-Off Agreement whenever two parties owe money to each other and wish to simplify their mutual payment obligations by setting off the amounts against each other and paying only the net balance.

Common situations where a Set-Off Agreement is valuable include: two businesses in an ongoing trading relationship that have accumulated multiple invoices owing in both directions; a contractor and a subcontractor who have mutual claims arising from a construction project; a landlord and a tenant who have mutual financial obligations (such as rent arrears owed by the tenant and damage bond or deposit owed by the landlord); a supplier and a customer who have mutual claims arising from goods supplied and services provided; and two companies in the same corporate group that have intercompany balances they wish to rationalise.

A Set-Off Agreement is also useful as an alternative to a formal financial settlement where the parties do not have a full dispute — they simply have mutual trading debts and want an efficient mechanism to clear them without making two separate bank transfers.

A Set-Off Agreement provides several practical benefits: it reduces bank transaction costs by replacing two payments with one net payment; it improves cash flow by allowing the party with the smaller obligation to avoid making a full payment while waiting for the other party to pay them; it provides a documented record of the set-off that is useful for accounting and GST purposes; and it reduces the risk of one party defaulting on its obligation while still expecting the other party to pay in full.

Without a written Set-Off Agreement, the set-off may still be legally available in court proceedings, but informal set-off arrangements can lead to disputes about the amounts and whether the set-off was properly communicated and agreed.

A legally sound New Zealand Set-Off Agreement should include the following key elements to be effective and enforceable under the Contract and Commercial Law Act 2017 (CCLA): **Party identification.** Full legal names, registered addresses, and New Zealand Business Numbers (NZBN — 13 digits) for all corporate parties. This confirms the obligations and set-off are clearly attributed to the correct legal entities. **Description of mutual obligations.** A clear description of each party's obligation to the other, including the amount, the nature of the obligation (invoice number, contract reference), and the due date. Vague descriptions of the underlying obligations are a common source of dispute. **Net amount calculation.** An express calculation showing the two obligations, the lesser amount to be set off, and the resulting net balance payable by the party with the larger obligation. **Net balance payment terms. A late payment interest rate (typically 10% per annum) should apply to any overdue net balance. **GST provisions.** Specification of whether the obligations are GST-inclusive or exclusive, and each party's obligation to issue valid GST tax invoices under the Goods and Services Tax Act 1985 if required. **Representations and warranties.** Each party's warranty that its obligation is valid, subsisting, due, and not subject to any assignment, charge, or dispute that would affect the set-off. **Discharge of obligations.** A clear statement that upon payment of the net balance, both parties' obligations described in the agreement are fully discharged and extinguished. **Governing law.** Confirmation that the agreement is governed by the laws of New Zealand and subject to the CCLA 2017. The forms-legal.com Set-Off Agreement (New Zealand) provides a ready-to-use template that meets New Zealand legal requirements.