Set-Off

As with the law of equity and later statutory developments in English law, Islamic contract law contains the law of set-off under which mutual obligations may be counted against one another with the result that one or both parties’ obligations or debts will be deemed discharged.

At Islamic law set-off is either automatic or by agreement.

Automatic Set-Off is possible only when:

  • the parties have claims against one other at the same time
  • the obligations or debts are of the same type — the same currency, date of maturity, etc.
  • rights of third parties are not thereby  prejudiced
  • it does not have the effect of circumventing other Islamic legal prohibitions

Set-Off by Agreement differs from Automatic Set-Off only in that:

  • demand or request from one of the parties/mutual agreement is a condition precedent
  • the obligations or debts may be of different types (different currencies, which must be exchanged at the daily market rate — a spot exchange)
  • mode of payment may differ (e.g. lump sum or installments, or installments over different durations)

Another voluntary arrangement in Islamic law is the partial or total waiving of a debt or obligation by the creditor. The majority view is that such a waiver must be immediate and unconditional.