Sale of goods – Passing of property – Set-off – Right of set-off

FG Wilson (Engineering) Ltd v John Holt & Company (Liverpool) Ltd: Queen's Bench Division, Commercial Court (Mr Justice Popplewell): 6 September 2012

The claimant company manufactured and sold generator sets and spare parts, together with associated services. The defendant company purchased generators and spare parts from the claimant for export to Nigeria. The sales in Nigeria were made by the defendant’s majority-owned subsidiary, a company incorporated in Nigeria (the Nigerian company). The originally agreed payment terms were that the invoiced sums were to be paid on the 25th day of the fourth month after the month in which the invoice was dated.

Between October and December 2009, emails referred to the payment period as being the 25th day of the fifth month following the month of invoice. In December 2009, the claimant emailed the defendant to say that invoices were overdue for payment. Invoices due to the claimant in January 2010 were not paid. The claimant notified the defendant that its account had been placed on hold, no further orders would be accepted and existing orders would not be shipped. Trading was resumed following discussions in email exchanges between the parties (the discussions).

In August 2010, the defendant was unable to meet the repayment terms. In January 2011, the claimant purported to exercise its rights under a retention of title clause in its standard terms and conditions (the retention clause). The claimant commenced proceedings for approximately $12m allegedly due in respect of generators and spare parts sold to the defendant, together with associated services, licences and contractual interest for the late payment of invoices. In a separate action, the defendant claimed in excess of $53m from the claimant as damages for breaches of an exclusivity obligation in a distributor agreement (the other action).

The court had previously ordered a trial on the preliminary issue of whether a no set-off clause of the claimant's standard terms and conditions (the no set-off clause) satisfied the requirement of reasonableness for the purposes of the Unfair Contract Terms Act 1977. The instant proceedings concerned the claimant’s application for summary judgment and the trial of the preliminary issue.

The claimant contended that section 49 of the Sale of Goods Act 1979 (the 1979 act) did not preclude an action for the price in circumstances outside those covered by section 49(1) and (2) of the 1979 act. It alternatively contended that the claims fell within section 49(1) of the 1979 act because property had passed when the goods were sold on to the Nigerian company, despite the retention clause. The defendant contended that property had never passed to it because the retention clause provided that it was to sell as fiduciary agent for the claimant and account for the proceeds of sale.

The defendant contended that the discussions had resulted in a binding repayment agreement (the repayment agreement) under which the claimant was bound to supply identified minimum quantities of product month by month, which the claimant had breached. It alternatively contended that there was an estoppel by convention which had the same effect. The claimant contended that the no set-off clause was a complete answer to the defendant’s defences.

The defendant contended that the no set-off clause was so onerous that it was required to be specifically and separately drawn to its attention. It further contended that the obligation to pay should have been expressed to be one which applied without reference to set-off.

The defendant contended that the credit terms were for payment on the 25th day of the fifth month after the month of invoice. It fell to be determined: (i) whether the claimant could maintain an action on the price; (ii) whether the defendant had an arguable claim for damages for breach of the repayment agreement; (iii) whether the contracts sued upon incorporated the no set-off clause; (iv) whether the no set-off clause applied as a matter of construction; (v) whether the no set-off clause satisfied the requirement for reasonableness; and (vi) whether the due date for payment of invoices was 25th day of the fourth or fifth month.

The court ruled: (1) It was a settled principle of law that the remedy of an action on the price would be confined to circumstances in which property had passed (in the absence of express agreement as envisaged by section 49(2) of the 1979 act) because, generally in contracts for the sale of goods, the obligation to pay the price would be dependent on performance of the obligation to transfer title, not merely the promise of performance of that obligation. Save in the circumstances identified in section 49(2) of the 1979 act, an action for the price might only be maintained when property had been transferred (see [40] of the judgment).

In the instant case, the circumstances in which an action for the price might be maintained should be confined to those set out in the codifying provisions of section 49 of the 1979 act. Accordingly, the claimant could not maintain an action for the price without bringing itself within section 49 of the 1979 act. However, property had passed to the defendant under section 49(1) of the 1979 act as the effect of the retention of title clause had not been to treat the defendant as the claimant’s agent in reselling the products (see [41], [53], [59] of the judgment).

The claimant could maintain an action for the price by reason of section 49(1) of the 1979 act (see [65] of the judgment).

(2) The email exchanges relied on clearly did not create or evidence an agreement in which the claimant had agreed to provide the minimum quantities alleged or any minimum quantities, and there was no real prospect of the defendant establishing such an agreement. Further, there was no relevant communicated assumption which had been shared by the parties or in which the claimant had acquiesced to establish an estoppel (see [70], [73] of the judgment).  

(3) It was an established principle that, where a party sought to incorporate standard terms and conditions into a contract by reference, they would be incorporated if that party had taken such steps as were sufficient to give reasonable notice of the terms. Further, a judge could find from their own experience that clauses requiring payment of invoices without set-off were common in commercial contracts of many different kinds (see [75], [79] of the judgment).

In the circumstances, between two substantial commercial trading concerns, the circumstances amply constituted reasonable notice of the terms and conditions. Further, no set-off clauses were not unusual in standard terms and conditions and the claimant’s no set-off clause had not been particularly unusual or onerous. If the defendant had not been aware of the no set-off clause, it ought reasonably to have been (see [77], [79], [80] of the judgment). The no set-off clause had been incorporated into all of the contracts pursuant to which the claimant pursued its claims (see [81] of the judgment).

Circle Freight International Ltd v Medeast Gulf Exports Ltd [1988] 2 Lloyd's Rep 427 applied; Rohlig UK Ltd v Rock Unique Ltd [2011] 2 All ER (Comm) 1161 applied.

(4) It was settled law that a right of set-off might be excluded by agreement of the parties. If set-off was to be excluded by contract, clear and unambiguous language would be required. However, no more than that would be required. Further, there was no principle of construction that a no set-off clause could not be effective unless it had been expressed in terms to qualify the payment obligation (see [83], [85] of the judgment).

On the facts, the no set-off clause referred expressly to set-off and, so far as the price was concerned, it had qualified the payment obligation. Further, the no set-off clause had been wide enough to cover all set-offs. It had not been confined to any particular types (see [86], [88] of the judgment). As a matter of construction, the no set-off clause had prevented the defendant from relying on the other action as a defence to the claimant’s action in the instant proceedings (see [92] of the judgment)

(5) The no set-off clause had satisfied the requirement of reasonableness given that, inter alia: (i) it had been reasonable and legitimate for the claimant to have sought to protect its cash flow with a no set-off clause; (ii) the set-off clause had not been unusual or onerous in its scope; (iii) the defendant was a substantial and sophisticated commercial concern; and (iv) the relative size of the parties in corporate terms was not a significant factor (see [99], [109] of the judgment).

(6) The defendant had, at the lowest, an arguable case that the relevant credit terms had been the fifth month after invoice and the claimant would not be entitled to summary judgment save to the extent that its claims for interest and late payment were calculated on that basis (see [116] of the judgment). The claimant would be entitled to summary judgment recalculated on the basis that the agreed credit terms had been for payment on the 25th day of the fifth month after invoice (see [118] of the judgment).

Charles Hollander QC and Jasbir Dhillon (instructed by Walker Morris) for the claimant; Stephen Cogley QC and Jeremy Richmond (instructed by DLA Piper UK LLP) for the defendant.