Recoupment in Contracts: What It Means and Why It Matters
What Is Recoupment?
Recoupment is a legal right that allows a party to reduce the amount it owes by asserting a claim arising from the same transaction. Unlike set-off, which can involve debts from separate dealings, recoupment is limited to claims that are directly connected to the contract or transaction at issue.
For example, if a contractor bills you $50,000 for a renovation but the work has $8,000 worth of defects, recoupment lets you pay $42,000, deducting the cost of fixing the defective work from the amount owed on that same project.
Recoupment vs. Set-Off
The distinction matters, especially in bankruptcy:
- Recoupment: Claims from the same transaction; generally survives bankruptcy because it is not considered a separate claim
- Set-off: Claims from different transactions; subject to the automatic stay in bankruptcy proceedings
Courts have recognized this distinction in cases like In re Holford and University Medical Center v. Sullivan, where recoupment was permitted even when set-off was stayed.
Where Recoupment Appears
- Government contracts: Agencies recoup overpayments from future invoices on the same contract
- Healthcare agreements: Insurers recoup overpayments from subsequent claims under the same provider agreement
- Construction contracts: Owners deduct remediation costs from unpaid balances
- Publishing and entertainment deals: Advances recouped from future royalties under the same agreement
What to Watch For
- Broad recoupment language that could be applied to loosely related transactions
- No cap on recoupment amounts, which could zero out your payments
- Missing dispute resolution process for contested recoupment claims
When to Consult a Lawyer
If your contract allows the other party to recoup amounts from your payments, consider having an attorney review whether the recoupment rights are properly scoped and whether adequate protections exist for disputed claims.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.