Recoupment: Definition, Example and Related Terms

Recoupment is a legal right that allows a party to recover or 'take back' money they have paid out when they were not the primary party responsible for the payment. It's like getting reimbursed for covering someone else's debt or obligation. This concept is particularly important in commercial contracts where parties might need to pay on behalf of others.

In contract law, recoupment often comes into play when one party has to step in and fulfill another party's obligations. For example, if a guarantor has to pay a debt because the primary borrower defaulted, the guarantor has the right of recoupment against the borrower for the amount paid.

It's worth noting that recoupment is different from a counterclaim. Recoupment is specifically about recovering money paid out when fulfilling someone else's obligation, while a counterclaim can be about any type of claim against the opposing party.

Understanding recoupment rights is crucial for contract managers and parties entering into agreements where they might become secondarily liable for payments or obligations. It provides a legal safety net for recovering funds that you've had to pay on behalf of another party.