(1) The notice must specify the obligations to which it relates.
(2) If the notice does not specify the obligation against which set-off is exercised, the other party may, within a reasonable time, declare to the first party the obligation to which set-off relates. If no such declaration is made, the set-off will relate to all the obligations proportionally.
According to paragraph (1), the notice must specify the obligations of both parties that are to be set off. The other party, receiving the notice, must know the grounds for set-off and the amount of set-off.
1. Declaration by the other party
If the first party has two or more obligations against the other party, and if the first party has not specified the obligations it wants to be paid by set-off, the other party may freely choose which of the first party’s obligations it wants to be discharged (paragraph (2), first part).
1. A regularly sells B cloth. On 30 December B asks A for the payment of USD 50,000 that A owes it. At that date B owes A the payment of the price relating to three different sales contracts, i.e. USD 40,000, USD 35,000 and USD 45,000 respectively. If A wants to set off B’s obligation, it has to indicate in the notice which of the three obligations owed by B it wants to set off. If A does not indicate in the notice which obligation owed by B it wants to set off, B may in a reasonable time indicate to A that its obligation of USD 45,000 will be totally discharged by set off and that the obligation of USD 35,000 will be discharged up to USD 5,000. After set-off has been applied, B remains the obligor of A for USD 70,000.
2. Absence of declaration
If the notice does not specify the obligations that the first party wants to set off, and if the other party does not make any declaration as to which obligation set-off relates within a reasonable time, all the obligations of the other party will be discharged by set-off proportionally, up to the value of the first party’s obligation (paragraph (2), second part).
2. The facts are the same as in Illustration 1, except that B does not declare to which obligation set-off relates. In the absence of such a declaration, set-off will discharge the obligation of USD 40,000 of the first contract up to USD 16,670; the obligation of USD 35,000 of the second contract up to USD 14,580 and the obligation of USD 45,000 of the third contract up to USD 18,750.