Set-off in Swiss law

Set-off is a mode of extinguishing obligations provided for in art. 120 to 126 of the Code of Obligations (CO). It allows a party who is simultaneously creditor and debtor of the same person to extinguish both reciprocal claims up to the amount of the lesser claim, without the need for a double actual payment. Set-off thus simplifies the settlement of obligation relationships between two persons who mutually owe each other something.

Conditions for set-off (art. 120 para. 1 CO)

Art. 120 para. 1 CO sets out four cumulative conditions for a valid declaration of set-off:

Reciprocity of claims

Both claims must exist between the same persons, each being simultaneously creditor and debtor of the other. It is not possible, as a rule, to set off a claim held against a third party against a debt owed to one's own creditor. Reciprocity is assessed at the time of the declaration of set-off.

Identity of parties

Each party must simultaneously occupy the position of creditor and debtor towards the other. This condition flows directly from reciprocity: A owes something to B, and B owes something to A. It is precisely because both claims exist between the same subjects that the law authorises their reciprocal extinction without exchange of actual performances.

Same nature of the subject matter

Both claims must have the same subject matter, that is, they must relate to fungible things of the same kind. In practice, set-off concerns almost exclusively monetary claims. Obligations relating to different non-monetary performances cannot in principle be set off, unless the parties agree otherwise.

Maturity of the claim invoked

The claim that the debtor intends to raise by way of set-off must be due and payable at the time of the declaration (art. 120 para. 1 CO). A claim that has not yet fallen due cannot, as a general rule, be invoked in set-off. However, the counterparty's claim need not be due and payable: it suffices that the debtor can discharge it (art. 120 para. 2 CO).

Furthermore, art. 120 para. 3 CO provides a special rule for time-barred claims: a time-barred claim may nevertheless be invoked in set-off, provided it was not yet time-barred at the moment when set-off could have been declared.

Declaration of set-off (art. 124 CO)

Set-off does not operate by operation of law in Switzerland. Unlike certain other legal systems, the CO requires an express manifestation of intent: the debtor must declare to the creditor that it intends to invoke set-off (art. 124 para. 1 CO). This declaration may be made extrajudicially, by letter or any other means, or in the course of proceedings in the form of a plea of set-off raised in written submissions.

No particular form is required for the declaration of set-off. It may be made orally, in writing, or result from conduct clearly indicating the debtor's intention to set off. However, for evidentiary reasons, written form is strongly recommended.

The declaration of set-off is a unilateral act requiring receipt: it takes effect as soon as it comes to the knowledge of the creditor. It is irrevocable once it has reached its addressee.

Effects of set-off (art. 124 para. 2 CO)

Although set-off only operates upon declaration, its effects are retroactive. Art. 124 para. 2 CO provides that both claims are deemed to have been extinguished from the moment when they could have been set off, that is, from the moment when the conditions for set-off were first met.

This retroactivity has important practical consequences:

• Default interest ceases to run retroactively on the amounts set off, from the date on which the conditions were met
• Securities (pledge, surety) attached to the extinguished claims are also released retroactively
• Payments made between the date the conditions were met and the declaration may have to be refunded if the claim was in fact extinguished from that earlier date

Set-off extinguishes the claims up to the amount of the lesser claim. If both claims are of equal amount, they are extinguished entirely. If they are of unequal amounts, the lesser is extinguished in full and the greater subsists for the balance.

Cases where set-off is excluded (art. 125 CO)

Art. 125 CO lists the categories of claims that cannot be extinguished by set-off, by reason of their particular nature or social purpose:

• Restitution of a deposit (art. 125 no. 1 CO): a claim for the restitution of a deposited thing cannot be set off. The depositary cannot retain the thing by invoking a claim it may have against the depositor.
• Restitution of a thing unlawfully taken or withheld (art. 125 no. 1 CO): a claim for restitution of a thing whose possession was unlawfully obtained cannot be the subject of a set-off. This rule is designed to prevent wrongdoers from profiting from their unlawful act.
• Maintenance claims (art. 125 no. 2 CO): unattachable maintenance claims, in particular those arising from family law, cannot be set off. Their purpose is to guarantee the creditor's means of subsistence, which would be defeated by a set-off.
• Claims under public law (art. 125 no. 3 CO): State claims based on public law (taxes, levies, fines) cannot as a rule be set off against private-law claims that the debtor may hold against the State, unless otherwise provided by law.

Beyond the cases provided for in art. 125 CO, the law may provide other restrictions on set-off in specific areas. This is notably the case in employment law, where art. 323b para. 2 CO limits the employer's ability to set off its wage debt against a claim against the employee.

Prior waiver of set-off (art. 126 CO)

Art. 126 CO expressly recognises the validity of a prior waiver of the right to set-off. A party may thus, at the time of conclusion of a contract or subsequently, undertake not to invoke set-off against its counterparty.

This waiver may be total or partial, and may be agreed for a definite or indefinite period. It is subject to no particular formal requirement. Such a clause may be of practical interest in commercial relationships where certainty of actual payment is essential — for example in financing or guarantee contracts.

A waiver of set-off is, however, binding only on the party who gave it. It does not bind creditors or debtors who succeed that party, unless the waiver was expressly transferred.

Set-off in bankruptcy proceedings

Upon the opening of bankruptcy proceedings against a debtor, the situation of creditors is governed by the Federal Act on Debt Collection and Bankruptcy (DEBA). Art. 213 to 215 DEBA provide special rules that partially derogate from the CO provisions on set-off.

The principle established by art. 213 para. 1 DEBA is that a creditor may set off its debt to the bankrupt estate against the claim it holds against the bankrupt, provided the two claims coexisted before the opening of bankruptcy. This possibility of set-off in bankruptcy is an important advantage for the creditor, who thus avoids having to pay its own debt to the estate while only receiving a reduced dividend on its claim.

The DEBA, however, excludes certain abusive cases of set-off, notably where the creditor acquired its claim against the bankrupt with knowledge of the latter's imminent insolvency, with the intention of securing an advantage to the detriment of the other creditors. Such fraudulent acquisitions of claims susceptible to set-off may be challenged by the estate (art. 214 DEBA).

Set-off and assignment of claims (art. 169 CO)

The assignment of claims and set-off are two institutions of the law of obligations that interact in an important manner. Art. 169 para. 1 CO provides that the debtor may raise against the assignee (the person who received the claim by assignment) all defences and pleas that could have been raised against the assignor (the person who transferred the claim), including the plea of set-off.

Thus, if the debtor held a claim against the assignor before being informed of the assignment, the debtor retains the right to raise it in set-off against the assignee. This protection is essential: without it, an assignment of claims could be used to deprive the debtor of the right to set-off.

However, if the assignment has taken place and the debtor has been notified, the debtor may only raise in set-off the claims held against the assignor at the time of notification of the assignment. Claims arising after that notification can no longer be set off against the assignee (art. 169 para. 2 CO).

Practical cases

Frequently asked questions on set-off in Swiss law