Set-Off, Discharge and Extinguishing Obligations
Articles 318 to 330 and 425 to 427 of Federal Decree-Law No. 25 of 2025

Set-off is the cheapest recovery there is: no proceedings, no enforcement, no counterparty cooperation. The Civil Transactions Law governs it at Articles 319 to 327 of Federal Decree-Law No. 25 of 2025, alongside merger of liabilities (328–330) and voluntary discharge (425–427).

Two provisions are worth knowing before any insolvency or enforcement contest. Article 325 allows set-off against a time-barred debt, provided the period had not expired when set-off first became possible. Article 328 does the opposite: once a third party has attached funds, the debtor cannot use set-off to defeat the attacher.

1. Three kinds of set-off, and only one happens by itself

Article 319 defines set-off as the fulfilment of a debt owed to a creditor by a debt owed by that creditor to their debtor, and identifies three routes:

The distinction is not academic. Legal set-off extinguishes the debts automatically, so a party relying on it is describing what the law has already done. Voluntary set-off requires an agreement that the counterparty may refuse, and judicial set-off requires a court. In an insolvency, the difference between "already extinguished" and "requires a judgment" is usually the difference between recovering and proving.

2. Article 320 — the four conditions for automatic set-off

The second condition is where most claims to automatic set-off fail, because it imposes four separate identities:

• Kind — money against money, not money against goods or services.
• Description — which in practice reaches currency. Debts in different currencies are not identical in description, so cross-currency positions generally require agreement or a court.
• Maturity — a debt due now does not set off automatically against one falling due later.
• Legal strength — enforceability. A disputed or unliquidated claim does not have the same legal strength as an admitted liquidated debt, which is why a cross-claim for damages rarely produces automatic set-off against an invoice.

Where any of them fails, Article 322 provides the answer: agree it. A contractual set-off clause is not decoration in a UAE facility or supply agreement — it is what converts a position that would not qualify for legal set-off into one the parties have agreed.

Article 321 — where set-off is excluded entirely

Mandatory set-off does not occur where one of the debts is:

• a thing unlawfully dispossessed from its owner, restitution of which is required;
• a thing deposited (bailment) or lent for use (ariya); or
• a right that is immune from attachment.

The second limb is the commercially important one. A bank or warehouseman holding goods or funds on deposit cannot automatically set off against them — the deposit relationship is excluded by the Law, whatever the account terms say about combination of accounts.

3. The two provisions that decide contested cases

Article 325 — a time-barred debt can still be set off

This is a valuable and under-used provision. A creditor whose own claim is now time-barred under Articles 429 to 432 may still deploy it defensively by way of set-off, so long as the two debts were capable of being set off against each other before the period ran out.

The practical discipline is to date the moment set-off first became possible and keep it on the file, because that date — not the date of the demand — is what makes the defence available. Given the short periods in this Law for professional fees (three years) and for supplies to non-traders (two years), this will arise more often than it did.

Article 328 — attachment beats set-off

Where a third party has placed an attachment on funds held by the debtor, and the debtor subsequently becomes a creditor of his own creditor, the debtor may not rely on set-off to the prejudice of the attacher.

Timing is everything. A set-off position that matured before the attachment stands; one acquired after it does not. For an enforcing creditor, this makes the date of attachment a decisive fact worth establishing precisely. For a party holding funds, it means the window for creating a set-off position closes on attachment.

This dovetails with Article 320(3), under which mandatory set-off must not prejudice third-party rights at all.

4. Merger of liabilities: Articles 329 and 330

Article 329 provides that where the capacities of creditor and debtor in a single debt are united in one person, the debt is extinguished by merger.

Article 330 then supplies the reversal: if the cause that led to the merger ceases to exist, and its cessation has retroactive effect, the debt and its accessories are reinstated with respect to all concerned parties.

Two situations make this practical rather than theoretical:

• Intra-group restructuring. Where an intercompany debt is extinguished by merger on an amalgamation, and the amalgamation is later set aside with retroactive effect, the debt revives — together with its accessories, which includes security and guarantees.
• Inheritance. Where a creditor inherits the debtor's estate, or vice versa, and the succession is subsequently unwound.

The word that matters is "accessories". The reinstatement is not of a bare debt but of the secured position, which is why a guarantor or security provider cannot treat a merger as the end of its exposure where the merging cause is itself vulnerable.

5. Voluntary discharge: Articles 425 to 427

Discharge is the creditor giving up the debt, and the Law treats it as a species of donation.

• 425 — an obligation is extinguished if the creditor voluntarily discharges the debtor. The discharge is effective once it comes to the debtor's knowledge, but it is revoked if the debtor rejects it. If the debtor dies before acceptance, the debt is not recovered from the estate.
• 426 — a discharge is valid only in respect of an existing debt; it may not be granted for a future debt.
• 427(1) — the substantive provisions applicable to all donations (tabarru') apply to a discharge. 427(2) — no specific form is required.

Three practical points follow:

No form is required, so a discharge can be given inadvertently in correspondence. A "we will not pursue this" written to close a difficult conversation may do more than intended, and it takes effect the moment the debtor knows of it.

The debtor can refuse it. Rejection revokes the discharge, which occasionally matters where a debtor would rather pay and preserve a counterclaim or a commercial position than accept a gratuitous release.

Donation rules apply, which brings capacity back into play — the same authority question as Article 672(2) for settlements and Article 989 for guarantees. A manager with authority to contract does not necessarily have authority to give debts away.

Article 318 completes the picture from the other direction: on "giving in payment", the original debt and its securities are extinguished, and the creditor's right transfers to the consideration. Accepting an asset in satisfaction therefore releases the security that stood behind the original debt — a point that interacts directly with Article 1005, under which losing security discharges a guarantor pro tanto.

6. Checklists

Asserting set-off

• Test the four identities in Article 320(2) — kind, description, maturity, legal strength — before claiming automatic set-off. Different currencies, different maturities and disputed cross-claims generally fail.
• Where any condition fails, rely on the contractual set-off clause (Art 322) or seek judicial set-off (Art 323).
• If your own claim is time-barred, check Article 325: set-off may still be available if the debts were capable of set-off before the period expired. Date that moment and keep it on file.
• Confirm no deposit or bailment relationship is involved — Article 321(2) excludes it.
• Confirm no third-party attachment predates your set-off position (Arts 320(3) and 328).

Resisting set-off

• Attack identity of description — currency is the usual gap — and identity of legal strength where the cross-claim is unliquidated or disputed.
• If you are an attaching creditor, establish the date of attachment precisely; Article 328 defeats any set-off position acquired after it.
• Check whether the debts arise from a deposit or loan for use, which Article 321 excludes outright.

Drafting

• Include an express set-off clause. Article 322 is what rescues positions that fail Article 320, and the clause is the agreement it requires.
• Be careful with concessionary language in correspondence: Article 427(2) requires no form for a discharge, and Article 425 makes it effective on the debtor's knowledge.
• Before accepting an asset in satisfaction, note that Article 318 extinguishes the original debt and its securities.

Primary sources

Every provision quoted above is taken from the instruments below. Links go to the official consolidated text, not to secondary commentary.

• Federal Decree-Law No. 25 of 2025 issuing the Civil Transactions Law — set-off 319–327, merger 328–330, discharge 425–427, giving in payment 318
• UAE Ministry of Justice — laws and legislation — consolidated Arabic text, which governs over any English rendering
• UAE Government Portal — justice, safety and the law — federal legislation and the Official Gazette

Questions we are asked

Related guides in the library

• Priority Rights and Security Ranking
• Writs of Debt (Payment Orders)
• Limitation, Hardship and Impossibility

Published 2026-10-03. General information only — not legal advice. Contact us for matter-specific advice.