Civil Law and UAE: Set-Off and Counterclaim Rules

1. Introduction

Set-off and counterclaim are closely related but legally distinct concepts.

A set-off allows a defendant who is also a creditor of the claimant to reduce or extinguish the claimant's monetary claim by the amount owed by the claimant to the defendant.

A counterclaim is an independent claim brought by the defendant against the claimant within the same proceedings.

The distinction is particularly important in the UAE because the current Federal Decree by Law No. 25 of 2025 Promulgating the Civil Transactions Law, effective from 1 June 2026, expressly regulates three forms of set-off:

legal set-off;

contractual set-off; and

judicial set-off. (UAE Legislation)

The procedural treatment can differ significantly between mainland UAE courts and specialised jurisdictions such as the DIFC Courts.

2. Meaning of Set-Off

The current Civil Transactions Law defines set-off as the extinguishment of one party's debt to another by using a debt owed by the latter to the former.

The current Article 319 recognises:

legal set-off;

contractual set-off; and

judicial set-off. (UAE Legislation)

Simple example

A owes B:

AED 1,000,000

But B owes A:

AED 300,000

If the legal requirements for set-off are satisfied:

AED 1,000,000 − AED 300,000 = AED 700,000

The parties' debts are extinguished to the extent of the smaller debt.

3. Set-Off Is Not the Same as Counterclaim

This distinction is fundamental.

Example

A sues B for AED 1 million.

B says:

"I owe A nothing because A owes me AED 1 million."

That may constitute a set-off defence.

But if B says:

"A owes me AED 1.5 million, and I want judgment for the AED 500,000 balance."

That involves an affirmative counterclaim.

4. Current UAE Law: Legal Set-Off

Article 320 of the new Civil Transactions Law establishes the conditions for legal set-off.

The principal requirements are:

1. Mutual debts

Both parties must simultaneously be:

creditor; and

debtor

of the other.

2. Same kind and description

The two debts must correspond in kind and description.

3. Same maturity

The debts must be due in the legally relevant sense.

4. Equivalent legal strength

They must be of equal strength or weakness.

5. No prejudice to third parties

The set-off cannot unlawfully prejudice third-party rights.

These conditions may apply whether the underlying debts arise from the same transaction or different transactions. (UAE Legislation)

5. When Legal Set-Off Does Not Operate

Article 321 identifies circumstances in which legal set-off does not operate automatically.

These include circumstances where one debt concerns:

property unlawfully taken from its owner and required to be returned;

property deposited or lent for use;

a right that is not subject to attachment;

compensation for bodily injury. (UAE Legislation)

The purpose is to prevent the set-off mechanism from undermining rights that receive special legal protection.

6. Contractual Set-Off

Article 322 provides that parties may agree to set-off even where one or more conditions for legal set-off are absent. (UAE Legislation)

This reflects the principle of freedom of contract, subject to mandatory law and public policy.

For example:

A owes B AED 1 million, payable in 60 days.

B owes A AED 700,000, payable in 90 days.

The ordinary legal set-off requirements may not yet be satisfied.

The parties can nevertheless agree:

"All mutual amounts arising under the agreement shall be set off against each other."

That agreement can establish contractual set-off, subject to its wording and legal validity.

7. Judicial Set-Off

Article 323 provides that judicial set-off occurs through a judgment or court order when its conditions are satisfied and upon an original or incidental claim. (UAE Legislation)

Article 324 further provides that:

judicial set-off operates upon the request of the interested party;

it cannot validly be waived before the right is established;

once effective, the debts are extinguished to the extent of the lesser debt;

the effect is calculated from the point at which the debts became eligible for set-off. (UAE Legislation)

This is particularly important in litigation.

A defendant should therefore distinguish between:

"I have a defence because the claimant owes me money"

and:

"I formally seek judicial set-off against the claimant's claim."

The procedural form can matter.

8. Effect of Set-Off

Suppose:

Claimant's debt = AED 2 million

Defendant's debt = AED 750,000

If set-off is valid:

AED 2,000,000 − AED 750,000 = AED 1,250,000

The claimant can potentially recover the remaining:

AED 1.25 million.

If the defendant's debt is greater:

Claimant = AED 500,000

Defendant = AED 800,000

Set-off extinguishes AED 500,000.

The remaining AED 300,000 may require an affirmative counterclaim or other appropriate claim for recovery.

9. Timing of Set-Off

Article 324 is significant because it states that set-off extinguishes the debts to the extent of the lesser amount from the time the debts become eligible for set-off. (UAE Legislation)

This can affect:

interest;

limitation;

security;

enforcement;

accounting;

insolvency;

calculation of outstanding balances.

Therefore, determining when the mutual debts became eligible for set-off can be as important as determining their amounts.

10. Time-Barred Debt

Article 325 provides an important rule.

A debt being time-barred when set-off is invoked does not necessarily prevent set-off if the limitation period had not yet expired when the set-off first became possible. (UAE Legislation)

This prevents a party from potentially defeating an already-accrued set-off merely by waiting until the limitation period expires.

11. Protection of Third Parties

Set-off cannot be used to prejudice rights acquired by third parties.

Article 327 expressly provides that a set-off may not take effect to the detriment of third-party rights. Article 328 addresses attachment situations and prevents a debtor from subsequently creating a set-off to the detriment of the attaching party. (UAE Legislation)

This is particularly important in:

execution;

insolvency;

secured lending;

assignment;

garnishment;

attachment proceedings.

12. Anti-Set-Off Clauses

Commercial contracts sometimes state:

"All payments shall be made without set-off or counterclaim."

Such provisions can be commercially significant.

The leading UAE-related authority is:

Investment Group Private Limited v Standard Chartered Bank [2018] DIFC CA 002

This case concerned loans containing anti-set-off provisions and required the DIFC Court of Appeal to consider the UAE Civil Code's set-off provisions.

The Court noted that the relevant contractual anti-set-off provisions were clear and that the first-instance court had treated them as enforceable. The Court also considered whether judicial set-off required an independent claim or counterclaim. (DIFC Courts)

The case is particularly important because it examined the relationship between:

contractual anti-set-off provisions;

legal set-off;

judicial set-off;

counterclaims;

UAE Civil Code Articles 369–372 under the former 1985 Code.

Important: the case applied the former UAE Civil Code, so its statutory references should now be read alongside the corresponding provisions of the 2025 Civil Transactions Law.

13. Judicial Set-Off and Counterclaim: Investment Group Case

The Court of Appeal held under the then-applicable UAE Civil Code that judicial set-off required an independent claim or counterclaim. The defendant had failed to file the necessary counterclaim.

The Court distinguished this from the DIFC procedural rule, RDC 17.33, which permits a defendant to rely on set-off in its defence whether or not it is also pleaded as a counterclaim. (DIFC Courts)

This distinction is extremely important:

UAE substantive law

Judicial set-off under the former UAE Civil Code required an original or interlocutory claim.

DIFC procedure

RDC 17.33 expressly permits set-off to be included in a defence without necessarily being a counterclaim. (DIFC Courts)

The current mainland UAE statutory position should be analysed under Articles 323–324 of the 2025 Civil Transactions Law.

14. Case Law

Case 1: Investment Group Private Limited v Standard Chartered Bank [2018] DIFC CA 002

Main issue

Set-off, counterclaim and anti-set-off clauses.

Principle

Under the former UAE Civil Code, judicial set-off required an independent claim or counterclaim.

The Court also examined the requirements for legal set-off, including whether the cross-claim was sufficiently established and quantified. (DIFC Courts)

Importance

This is the principal UAE-related appellate authority for distinguishing:

legal set-off → contractual set-off → judicial set-off → counterclaim.

Case 2: Standard Chartered Bank v Investment Group Private Limited [2014] DIFC CFI 026

At first instance, the Court considered an alleged AED 200 million cross-claim and the effect of anti-set-off provisions contained in loan agreements.

The Court concluded that, in the absence of a liquidated debt, legal set-off was unavailable and that the unquantified cross-claim did not establish equitable set-off. It also treated the anti-set-off clause as clear and enforceable. (DIFC Courts)

Principle

A disputed, unquantified damages claim is not necessarily equivalent to a presently enforceable debt capable of automatic set-off.

Case 3: Ajay Sethi v NS Investments Limited [2020] DIFC CFI 055

This case is particularly useful because it illustrates the difference between UAE-law set-off and DIFC procedural set-off.

The Court explained that under DIFC RDC 17.33, a defendant may include a set-off in its defence even where it has not filed a separate counterclaim.

However, the alleged claims still had to be supported by evidence. The Court rejected the asserted set-off because the claims were unevidenced. (DIFC Courts)

Principle

Procedural permission to plead set-off does not mean the alleged debt is automatically proved.

Case 4: NS Investments Limited v Ajay Sethi [2021] DIFC CA 010

The Court of Appeal considered the defendant's pleading, which contained:

defence;

counterclaim; and

set-off.

The case illustrates the importance of properly identifying what a defendant is actually asking the court to determine. (DIFC Courts)

Principle

A pleading can contain multiple forms of response, but the legal character of each must be clear.

This is particularly important when distinguishing:

denial of liability

from

set-off

from

affirmative counterclaim.

Case 5: Tarig H.A.G. Rahamtalla v Expresso Telecom Group Ltd [2020] DIFC CFI 069

The defendant advanced a counterclaim against sums otherwise payable to the claimant.

The Court held that, to the extent the counterclaim was well-founded, it could be set off against amounts otherwise due to the claimant. However, the Court rejected the argument that the counterclaim automatically stopped the running of a separate penalty claim merely because the counterclaim existed. (DIFC Courts)

Principle

A counterclaim can operate as a set-off once established, but it does not necessarily alter every other legal consequence associated with the underlying claim.

Case 6: Rada Trading LLC FZC v Arya Petroleum FZE [2020] DIFC CFI 112

Arya brought a counterclaim for unpaid contractual amounts.

RaDa attempted to rely upon its own claims as a set-off.

The Court rejected the underlying claims and consequently found no set-off available against Arya's counterclaim. Judgment was entered for AED 220,901 plus interest. (DIFC Courts)

Principle

A party cannot establish set-off merely by asserting a cross-claim.

The underlying cross-claim must itself be legally established.

Case 7: Alistair James Company Ltd v Sakson Drilling & Oil Services [2017] DIFC CFI 003

The case involved contractual wording providing for payment:

"without deduction for or on account of any set-off or counterclaim."

The Court considered the distinction between contractual payment obligations and the defendant's asserted cross-claims. (DIFC Courts)

Principle

Contractual payment provisions and anti-set-off language can materially affect whether a party may reduce its payment obligation by asserting a counterclaim.

This is especially important in:

construction contracts;

settlement agreements;

financing agreements;

supply contracts.

Case 8: Five Real Estate Development LLC v Reem Emirates Aluminium LLC [2020] DIFC TCD 009

This construction dispute involved a counterclaim by the defendant and required the Court to deal with the procedural management of the counterclaim.

The Court records show that leave was granted for the defendant to file its counterclaim. (DIFC Courts)

Principle

A counterclaim is not merely an informal complaint included in correspondence. It must be properly introduced and managed within the applicable procedural framework.

Case 9: Global Advocacy and Legal Counsel v The Industrial Group [2019] DIFC CFI 037

The claimant sought approximately AED 1.17 million in unpaid legal fees, while the defendant counterclaimed approximately AED 1.68 million for alleged negligence and breach of fiduciary duty.

The Court ultimately entered judgment for the claimant and dismissed the counterclaim. (DIFC Courts)

Principle

A counterclaim is an independent cause of action. Its success depends on proving the underlying elements of that claim; merely pleading it against the claimant's monetary demand does not establish a set-off.

15. Mainland UAE Authorities Mentioned in the Set-Off Jurisprudence

The DIFC Court of Appeal in Investment Group v Standard Chartered referred to two Dubai Court of Cassation authorities:

Dubai Court of Cassation, Petition No. 80/2010

The authority was cited for the proposition that judicial set-off must be requested through an appropriate original or interlocutory application.

Dubai Court of Cassation, Petition No. 129/2009 (Labour), 7 June 2010

This authority was discussed concerning the conditions for judicial set-off and the relationship between the parties as mutual creditor and debtor. (DIFC Courts)

These are particularly useful historical mainland UAE authorities, but they should be read together with the new Articles 319–324 rather than treated as if the 1985 Code remains the current statutory text.

16. Counterclaim: Meaning

A counterclaim is a claim brought by the defendant against the claimant in the same proceedings.

Suppose:

A sues B for AED 1 million.

B alleges that A breached the contract and caused AED 2 million in damages.

B may counterclaim for:

AED 2 million.

If B succeeds:

A's original claim may fail;

B may obtain judgment on the counterclaim;

the two monetary claims may be accounted for against each other where legally appropriate.

A counterclaim is therefore broader than a defensive set-off.

17. Counterclaim Versus Defence

Defence

"I do not owe the claimant the amount claimed."

Set-off

"Even if I owe the claimant, the claimant owes me an amount that should reduce or extinguish the claim."

Counterclaim

"The claimant is itself liable to me and I seek affirmative judgment against it."

Combined pleading

A defendant can potentially plead:

primary defence — no liability;

alternative set-off — if liability exists, deduct the amount owed to defendant;

counterclaim — defendant separately seeks damages.

This layered pleading is often strategically important.

18. DIFC Rule 17.33

The DIFC Rules of Court expressly provide:

Where the defendant contends that the claimant owes the defendant money and relies on it to defend the whole or part of the claim, the contention can be included in the defence and set off against the claim whether or not it is also a counterclaim. (DIFC Courts)

This is a major procedural distinction from the UAE Civil Code approach considered in Investment Group.

Therefore:

Never automatically apply DIFC procedural rules to a mainland UAE case.

19. Equitable Set-Off in the DIFC

The DIFC also recognises equitable set-off principles.

In Ward Holdings Ltd v Meshico Corporation [2025] DIFC CFI 015, the Court stated that equitable set-off remained available and referred to the requirement for a close connection between the cross-claim and the principal claim, such that it would be manifestly unjust to enforce the principal claim without taking the cross-claim into account. (DIFC Courts)

The Court referred to:

Investment Group Private Ltd v Standard Chartered Bank [2018] DIFC CA 002

as authority concerning equitable set-off. (DIFC Courts)

Again, this is a DIFC-law principle, not automatically a rule of mainland UAE civil law.

20. Set-Off in Construction Disputes

Construction disputes frequently involve:

unpaid progress payments;

liquidated damages;

delay damages;

defects;

variations;

retention;

prolongation costs;

employer counterclaims.

Example:

Contractor claims:

AED 10 million

Employer claims:

AED 3 million delay damages

If the employer's claim is legally established and capable of set-off:

AED 10m − AED 3m = AED 7m

But simply alleging delay does not automatically create an effective set-off.

The employer may need to establish:

contractual entitlement;

breach;

causation;

amount;

due date;

applicable notice requirements;

absence of contractual exclusion.

21. Set-Off in Banking and Finance

Set-off is particularly important in financing agreements.

Banks frequently use clauses stating that the borrower must pay:

without deduction, set-off or counterclaim.

The Standard Chartered v Investment Group litigation demonstrates why such clauses matter.

A financing contract may contain:

anti-set-off clause;

security;

guarantee;

cross-default provision;

acceleration clause.

The existence of a separate dispute does not automatically suspend payment obligations.

22. Set-Off and Unliquidated Damages

A major issue is whether a damages claim that still requires:

expert evidence;

factual investigation;

assessment of causation;

valuation;

can be treated as a presently enforceable set-off.

The Investment Group litigation is important here.

The Court considered the cross-claim insufficiently established and unquantified for the relevant form of set-off. (DIFC Courts)

Practical principle

An alleged claim is not necessarily the same thing as an established debt.

23. Set-Off and Third-Party Rights

Suppose:

A owes B AED 1 million.

B owes A AED 700,000.

But C has already obtained an attachment against A's receivable from B.

A may not necessarily use a subsequent set-off to defeat C's acquired rights.

The current Articles 327–328 specifically protect third-party rights and attachment situations. (UAE Legislation)

This is particularly relevant in:

execution;

insolvency;

creditor attachments;

debt assignments.

24. Set-Off and Insolvency

Set-off becomes especially important when one party becomes insolvent.

Without effective set-off:

Creditor A may owe the insolvent party money while simultaneously being owed money by that party.

Set-off can potentially reduce the parties' mutual exposure.

However, insolvency legislation, creditor priorities and third-party rights may impose additional restrictions.

Therefore, the Civil Transactions Law should not be analysed in isolation where bankruptcy or restructuring proceedings are involved.

25. Procedural Requirements for a Counterclaim

A defendant wishing to counterclaim should ordinarily ensure that the pleading identifies:

legal basis of the claim;

relevant facts;

contractual/statutory obligations;

breach;

causation;

damages;

amount claimed;

supporting documents;

relationship to the original claim;

specific relief requested.

A vague statement such as:

"The claimant also caused us losses."

is normally inadequate as a substitute for a properly pleaded counterclaim.

The DIFC cases illustrate the importance of proper pleading and quantification. (DIFC Courts)

26. Can a Counterclaim Exceed the Original Claim?

Yes, conceptually.

Example:

Claimant:

AED 500,000 claim

Defendant:

AED 2 million counterclaim

The defendant may seek the full counterclaim if supported by law and evidence.

Set-off would extinguish the claimant's claim only to the extent of the legally recognised cross-debt.

The remaining amount of the counterclaim would ordinarily require affirmative judgment.

27. Can the Defendant Use a Counterclaim Without Calling It Set-Off?

Yes, but the legal consequences differ.

A counterclaim can establish an independent right to damages.

Set-off, by contrast, operates to reduce or extinguish a debt.

A defendant should therefore be precise in pleading:

"In the alternative, and without prejudice to the foregoing defence, the Defendant counterclaims AED X and seeks to set off any amount found due against the Claimant's claim."

The exact formulation should reflect the applicable procedural rules and governing law.

28. Set-Off and Interest

The timing of set-off can affect interest.

Under current Article 324, legal extinction occurs to the extent of the lesser debt from the time the debts become eligible for set-off. (UAE Legislation)

Therefore, calculations may require determining:

when each debt became due;

when it became sufficiently established;

when set-off became legally possible;

whether interest accrued before or after that date.

29. Current UAE Law: Important Articles

For examination purposes, remember:

These provisions are part of the 2025 Civil Transactions Law, effective from 1 June 2026. (UAE Legislation)

30. Key Case-Law Principles

31. Important Caution on the Case Law

Most of the reported authorities above are DIFC cases.

They are particularly useful for:

comparative analysis;

understanding set-off doctrine;

procedural distinctions;

commercial-contract disputes.

However, the DIFC is a separate legal jurisdiction.

For a mainland UAE dispute, the primary analysis should begin with:

Federal Decree by Law No. 25 of 2025 — Civil Transactions Law

and the applicable federal procedural legislation, together with relevant mainland UAE judicial decisions.

The older Investment Group case is particularly useful because it expressly discussed Dubai Court of Cassation Petition Nos. 80/2010 and 129/2009 and the former UAE Civil Code. (DIFC Courts)

32. Practical Example

Suppose:

Company A sues Company B: AED 5 million.

B claims:

AED 1 million for defective goods;

AED 500,000 delay damages;

AED 300,000 overpayment.

B therefore asserts:

Total cross-claim = AED 1.8 million.

Scenario 1 — Legal set-off

If all statutory conditions are satisfied:

AED 5m − AED 1.8m = AED 3.2m

Scenario 2 — Cross-claims are disputed

If the AED 1.8m requires expert determination and remains unquantified:

Automatic set-off may not be available.

B may need to pursue a counterclaim and seek judicial determination.

Scenario 3 — Contract excludes set-off

If a valid anti-set-off clause applies:

The contractual provision may restrict the ability to use the cross-claim as a payment deduction, subject to applicable mandatory law.

Scenario 4 — DIFC proceedings

RDC 17.33 may allow B to plead set-off directly as part of its defence even without a separate counterclaim, although the substantive cross-claim still has to be established. (DIFC Courts)

33. Difference Between Legal, Contractual and Judicial Set-Off

Legal Set-Off

Law itself produces the set-off when statutory requirements exist.

Contractual Set-Off

Parties agree to set-off, including in circumstances where statutory conditions are not satisfied.

Judicial Set-Off

Court orders set-off following an appropriate claim/application and satisfaction of the applicable conditions.

Counterclaim

Defendant independently seeks judgment against claimant.

Easy Formula

Legal = Law

Contractual = Agreement

Judicial = Court

Counterclaim = Independent Claim

34. Conclusion

UAE set-off law is built around the principle of mutual debts, but the legal consequences depend on the type of set-off being invoked.

The current Civil Transactions Law expressly recognises legal, contractual and judicial set-off. Articles 320–322 establish the substantive framework, while Articles 323–328 address judicial set-off, timing, limitation and third-party protection. (UAE Legislation)

The case law demonstrates that a counterclaim is not automatically a set-off. The cross-claim must satisfy the relevant substantive and procedural requirements. The Investment Group litigation is particularly important for understanding judicial set-off under the former UAE Civil Code, while Ajay Sethi, Tarig Rahamtalla, Rada Trading, Alistair James and Global Advocacy illustrate different aspects of set-off and counterclaim practice in the DIFC. (DIFC Courts)

Exam-Ready Formula

Set-Off = Mutual Debts + Applicable Conditions + Extinguishment to Lesser Amount

Counterclaim = Independent Cause of Action + Proper Pleading + Proof + Affirmative Relief

Legal Set-Off → Article 320

Contractual Set-Off → Article 322

Judicial Set-Off → Articles 323–324

Third-Party Protection → Articles 327–328

Core Principle:
A defendant cannot convert every disputed allegation against the claimant into an automatic set-off; the cross-claim must have a legally recognised basis and satisfy the applicable substantive and procedural requirements.