Compensation of mutual obligations and receivables

Mutual transactions - that is, transactions where entrepreneurs are both sellers and buyers for each other - are a frequent phenomenon in economic turnover. Counterparties can take advantage of the great facility which is the offsetting of mutual obligations. To find out more about this solution, see the Civil Code that regulates it.

What is the offsetting of mutual obligations?

Compensation of mutual obligations is a non-cash settlement, which is not a barter or a form of payment - therefore it cannot generally be included on invoices as a payment method. Entrepreneurs have the right to such a settlement when they have bilateral obligations - that is, if they are both creditors and debtors to each other. Compensation of mutual liabilities is a parallel amortization of receivables - but only up to the amount of receivables of a lower value.

Entrepreneurs can use two solutions: contractual or statutory deduction of receivables. Contractual netting of mutual obligations is based on assumptions agreed by the parties on the principle of freedom of contract. The statutory version should be based on the provisions of the Civil Code.

Art. 498 of the Civil Code
§ 1. When two persons are both debtors and creditors to each other, each of them may set off their claim against the claims of the other party, if the subject of both claims is money or things of the same quality, marked only as to the species, and both claims are due and may be be brought before a court or other state authority.
§ 2. As a result of the set-off, both claims redeem each other up to the amount of the lower claim.

Form of offsetting mutual obligations

The compensation of mutual obligations is therefore allowed by the Civil Code, which contains the rules for using this method of settlements. Section 499 says that "the deduction shall be made by a declaration to the other party".

However, there is no strictly defined form of declaration in the law, which leaves entrepreneurs a free hand. You can choose the written or oral form - the most important thing is that the other party receives such information. For the security of the transaction, it is recommended to use a written statement. In this way, a proof is created for each of the parties, crucial in the event of receiving a reminder to pay for a transaction that was originally to be settled according to the offsetting of mutual obligations.

What is the offsetting of mutual obligations?

Art. 498 of the Civil Code stipulates that the statutory compensation of mutual obligations may only apply to mutual claims that are due - i.e. the set-off may cover claims arising after the expiry of the repayment deadlines specified in the contract. If notice is terminated before the deadline, the notice period is valid.

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What is not included in the offsetting of mutual obligations?

The following is a list of claims which (except for unmatured claims) cannot be covered by the statutory set-off of mutual obligations:

overdue, if the set-off was not possible before their expiry (Art.502 of the Civil Code), seized, if the debtor has become the creditor of his creditor after the attachment (Civil Code Art.504), non-seizure, for the provision of means of subsistence, resulting from tort, for which set-off is excluded on the basis of special provisions.

Example 1.

The companies ANNA and JULIA cooperate with each other. The company ANNA owes the company JULIA a debt of PLN 3,000, while the company JULIA owes to the company ANNA PLN 2,000. Both claims meet the maturity condition. The JULIA company applied to ANNA with a statement on the statutory set-off of receivables. After compensation for mutual receivables, the debt of ANNA towards JULIA amounts to PLN 1,000 and should be settled on the payment date.