Commercial Court upholds "no set-off" clause

In a recent decision, the Commercial Court granted summary judgment on a seller's claim for approximately US$12 million as the price due under a commercial supply contract. The court found that a "no set-off" clause in the seller's standard terms and conditions was effective to prevent the buyer relying on a defence of set-off in respect of its claims in excess of US$53 million for the seller's alleged breaches of contract: FG Wilson (Engineering) Limited v John Holt & Company (Liverpool) Limited [2012] EWHC 2477 (Comm).

The decision is of interest for its consideration of when a seller can bring an action for the price and the question of when no set-off clauses are likely to be found reasonable for the purposes of the Unfair Contract Terms Act 1977 (UCTA), as well as its implications for the drafting of no set-off clauses. The buyer has applied for permission to appeal and a decision is awaited.

Could the seller bring an action for the price?

The clause in question stated: "Buyer shall not apply any set-off to the price of Seller's products without prior written agreement by the Seller." The seller admitted that this wording applied only to an action for the price, and not (eg) a claim for damages for non-acceptance of the goods.

The first question was whether the seller was entitled to maintain an action for the price despite the terms of its retention of title clause, which provided that: (a) "title shall not pass to Buyer until Seller has received payment in full"; but (b) "prior to title passing Buyer shall be entitled to resell or use the products in the ordinary course of business and shall account to the Seller for the proceeds of sale".

The question arose because section 49 of the Sale of Goods Act 1979 provides that an action for the price can be brought where (1) property in goods has passed to a buyer or (2) where the contract provides that the price is payable on a particular day irrespective of delivery.  If a seller is unable to bring an action for the price it may bring a claim for damages but will then have to prove that the loss was caused by the buyer, that it is not too remote and that the seller has satisfied his duty to mitigate. The seller argued that section 49 was permissive not exclusive and did not preclude an action for the price in other circumstances, but the judge (Popplewell J) rejected this argument. 

However, the judge held that in this case property in the goods had passed to the buyer, despite the non-payment. He outlined the rationale for section 49(1) being that an action for the price would lie when the seller had delivered the goods to the buyer and conferred on him the ability freely to deal with the goods as his own. Here the goods had been sold on by the buyer in accordance with (b) above and the judge found that the seller had therefore done all that was necessary for the buyer to deal with the goods as his own and transfer property in the goods to the third party.  The rationale of section 49(1) had therefore been fulfilled and the seller was able to bring an action for the price.

It is implicit from the judgment, however, that if the buyer had not resold the goods, then property would not have passed as a result of the retention of title clause. In those circumstances, the seller could not have maintained an action for the price. Instead the seller would have had to bring a claim for damages and could not have relied on the no set-off clause, which it accepted applied only to an action for the price.

Was the no set-off clause reasonable for the purposes of UCTA? 

Where a no set-off clause is included in a party's written standard terms of business, it will be enforceable only in so far as it satisfies the requirement of reasonableness (section 3(2) of UCTA). This requires that the term was "a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made".

The court in this case identified several factors which supported its conclusion that the seller's no set-off clause satisfied the reasonableness test, including:

• The length of the credit terms and high value of the goods supplied meant that the seller had made a large cash outlay in order to supply the goods, and the buyer's payment was a significant aspect of the seller's cashflow. Therefore, it was reasonable and legitimate for the seller to seek to protect that cashflow with a no set-off clause.
• The clause was not unusual in the commercial context. Several of the seller's competitors who sold on credit terms also included no set-off clauses in their contracts.
• The clause was not particularly onerous in its scope as it was confined to the payment of the price for the goods supplied and, because of the extended credit terms, would not bite until many months after delivery of the goods.
• The buyer was a substantial and sophisticated commercial concern and, although the seller was a much larger concern, the court did not regard the parties' bargaining position as unequal.
• The buyer should have been aware of the terms of the seller's terms, including the no set-off clause, and made no attempt to negotiate or object to the clause.

The judge was not persuaded by the buyer's argument that the clause was unreasonably wide because it would preclude set-off of admitted over-payments or credits in the buyer's favour. In testing the reasonableness of the clause, the court should only take into account hypothetical facts to the extent that they would have been contemplated by the parties at the time of entering into the agreement. Here, the judge said, both parties would have assumed that if there were admitted sums due to the buyer, the seller would indeed give credit for them against sums due. The possibility of the clause being used to prevent set-off of admitted claims would have been viewed by the parties as unrealistically remote. Therefore, the clause was not unreasonable on this basis.

This may be seen to contrast with the court's approach in some previous decisions such as Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600. In that case the Court of Appeal found that a no set-off clause was unreasonable where it prevented the defendant from setting off admitted credits owed to it by the claimant. Popplewell J distinguished the present case from Stewart Gill and similar decision on the basis that in those cases the no set-off clauses expressly referred to credits, so it could not be said that the parties did not contemplate that the clause would apply to credits if they arose.

The decision suggests that a no set-off clause will not be struck down on the basis that it could hypothetically be used to preclude set-off of admitted liabilities if this would not have been contemplated by the parties when they entered into the agreement. Nonetheless, in light of the scope for argument on this point, commercial parties may wish to carve out admitted over-payments or credits expressly from the scope of their no set-off clauses.

Drafting implications for no set-off clauses

As a result of this decision, commercial parties may wish to consider:  

• drafting a no set-off clause widely enough to cover any payments due under or in connection with the agreement (although the scope of the clause may be one factor the court will consider in determining the reasonableness of the clause under UCTA);
• expressly carving out admitted over-payments or credits from the scope of any no set-off clause; and
• providing that payment for goods should be made at a particular time irrespective of whether property in the goods has passed.

Note: The Court of Appeal has overturned this decision, finding (by a majority) that title to the goods had not passed to the buyer under the terms of the retention of title clause, and therefore the seller could not maintain an action for the price – see Caterpillar (NI) Limited (formerly known as FG Wilson (Engineering) Limited) v John Holt & Company (Liverpool) Limited [2013] EWCA Civ 1232.