(1) Set-off discharges the obligations.
(2) If obligations differ in amount, set-off discharges the obligations up to the amount of the lesser obligation.
(3) Set-off takes effect as from the time of notice.
1. Discharge by set-off
If the conditions of set-off specified in Article 8.1 are satisfied, the obligations of both parties are discharged to the extent of the set-off, as if two reciprocal payments had been made.
1. A owes USD 100,000 to B and B owes USD 100,000 to A. B asks for the payment of its obligation. A by notice declares to B that it sets off its own obligation. After set-off takes effect, the two obligations are discharged.
If the two obligations differ in their amount, set-off will discharge the obligations, but only up to the amount of the lesser obligation.
2. B owes USD 100,000 to A, who in turn owes B USD 70,000. A asks for the payment of the USD 100,000 it is owed, B declares that it wants to set off A’s obligation of USD 70,000. If the condi¬tions for set-off are met, A is no longer the obligor of B, as its obligation has been entirely discharged, but A is still the obligee of B for USD 30,000, corresponding to the part of the obligation not paid by set-off.
2. Set-off effective at the time of notice
The obligations are discharged at the time of notice if at that time the conditions required for set-off are fulfilled. Set-off does not operate retroactively. It has prospective effect only.
The date of effectiveness of set-off is consistent with the necessity to declare set-off by notice, and in practice the date when set-off is effective will be easy to know.
The situation has to be evaluated as if both obligations were paid at the time of notice. Two consequences derive from this rule. Firstly, interest on the obligations runs until the time of notice. A party who may and wants to set off its obligation, must declare set-off as soon as possible if it wishes to stop the accrual of interest. Secondly, if an undue payment has been made after set-off has been declared, restitution will take place, as the payment has no legal grounds. If the payment had been made before the notice, it is an effective payment and restitution cannot be required.
3. A owes B USD 100,000 dollars for goods sold by B. A’s obligation is ascertained and payment is due on 20 November. By a judgement dated 30 November, B is ordered to pay A USD 80,000 in damages. The obligation to pay USD 80,000 is due and ascertained at the date of the judgement, i.e. on 30 November. Set-off is exercised by A by notice on 10 December. The set-off will take place at the time of notice as all the conditions required have been satisfied before this date. The two obligations are discharged up to the amount of the lesser obligation. A will remain the obligee of B for USD 20,000. After 10 December, interest no longer accrues, except on the amount of USD 20,000.
At the time when the conditions for set-off are satisfied and notice has been given, not only are the principal obligations discharged but also related rights, e.g. rights securing an obligation, are discharged accordingly.
4. A, a banker, had lent architect B EUR 100,000 and has obtained a personal security for the payment from B’s wife. B is the obligee of A for EUR 120,000, which is money that B holds on its account in A’s bank. A asks B for the payment of the EUR 100,000. B declares set-off by notice on 12 December. The conditions required for A’s obligation and B’s obligation were fulfilled on 10 December. At the date of notice on 12 December, A’s and B’s obligations are discharged, as is the personal security given by B’s wife.