UK: Commercial Law Updates - An Analysis of Cases from June 2010

Last Updated: 12 August 2010
Article by Mark Alsop

Set Off Permitted for Sums Due Under Separate Contracts

Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667

Simon Carves was the main contractor for the construction of a bioethanol plant. It subcontracted the supply of pressure vessels and installation of storage tanks to Geldof under separate contracts signed 6 months apart. The installation works ran into difficulty and the installation contract was terminated before completion of the works. At one stage, Geldof insisted on payment of the supply contract invoices as a condition of continuing to work on the installation contract. Geldof brought a claim for the price of pressure vessels supplied under the supply contract. Simon Carves sought to set off damages arising out of repudiation of the installation contract both by way of equitable set off and under a clause in the supply contract which provided that Simon Carves could set off "any amounts lawfully due whether under this [contract] or otherwise".

There are a number of types of set off as follows:

  • Legal set off. This provides a defence to a court action – this is available where two claims are liquidated and are both due and payable at the commencement of the action. The two claims do not have to arise from the same or closely connected transactions.
  • Equitable set off. This is available to a debtor even if litigation is not pending where the cross claim arises from the same or closely related transaction as the debt owed. A debtor can simply deduct the amount of his cross claim from his debt he owes and tender the balance. However the sums in question must be due and payable or, in the case of unliquidated damages, must be a reasonable assessment of the loss made in good faith.

There are other types of set off such as contractual set off, banker's set off and insolvency set off.

Equitable set off. The Court of Appeal stated that the best and most useful formulation of the test for equitable set-off was " closely connected with [the claimant's] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim". There are two elements for equitable set off, the "formal" element (close connection) and the "functional" element (manifestly unjust). It held that Geldof's conduct (insisting on payment of the supply contract invoices as a condition of continuing to work on the installation contract) had brought the two contracts into "intimate relationship with one another" and it would be manifestly unjust to allow Geldof to enforce payment without taking into account Simon Carves' counterclaim. Other factors that indicated a link between the two contracts were that both were dedicated to the same bioethanol plant project, the goods supplied by Geldof were of no use to SCL unless the installation was properly performed and the warranty under the supply contract was linked to completion of the plant, which would not happen if installation of the storage tanks was not completed properly.

There has been some uncertainty recently as to the scope of equitable set off and this judgment helps to clarify the test. In last month's bulletin there was a note on the Supreme Court decision in Inveresk v Tullis Russell which involved claims under separate agreements entered into as part of an asset purchase. Again, the Supreme Court permitted withholding – although the case was decided under the Scottish law of retention, rather than equitable set off.

Contractual set off. Even if the equitable claim had failed, Simon Carves would have been allowed to exercise a right of set off under the contractual provision as the wording went beyond the common law right, so there was no need to satisfy the two elements for equitable set off. The arguments centred mainly on whether "all amounts lawfully due" meant that the actual amounts due had to be ascertained before they could be set off. It was held that this was not the case.

Note that Geldof had conceded that the amount claimed fell within the set off clause, so it may be that the result would have been different had the point not been conceded.. Thus, it would be as well to make it clear in set off clauses that all claims (which are reasonable and made in good faith?) can be set off, not just those that are ascertained.

Restrictions in an Industry-Standard IP Licence Applied Not Just to IP in the Products, But Also to the Products Themselves

Global Coal Limited v London Commodity Brokers [2010] EWHC 1347 (Ch)

In 2005 some 6 billion tons of coal was mined, of which all but 10% was consumed in its country of origin. Historically, trading in coal between countries was difficult because of widely differing qualities and the absence of standard terms, making contracting difficult and complex. The major coal producers established Global Coal in 2001 to facilitate trading in both physical coal products and in their associated financial derivatives with the aim of establishing a liquid, commoditised market in such products. To facilitate trading, Global Coal developed the Standard Coal Trading Agreement ("SCoTA") which, by 2005, had become the only standard term contract in which coal was traded internationally in significant volumes. The development of the SCoTA contract, trading platform, trading data etc gave rise to a variety of IP. Any trader or broker intending to use Global Contract's contracts had to enter into a standard form of IP licence, known as the PLA. Under the licence, licensees agreed that they would only trade or facilitate trading using Global Coal's products with other Global Coal licensees. The question which arose was whether it was permissible for a licensee (LCB) to engage in a trade on SCoTA terms with an unlicensed person, the argument being that no breach of copyright was involved. Global Coal claimed straightforward breach of contract. LCB maintained that the PLA did not confer on Global Coal an absolute right to control use of the SCoTA contract, but was rather the right to control use of its IP rights in those products, i.e. there would only be a breach of the PLA if use was made of Global Coal's IP. Global Coal argued that if licensees could trade with unlicensed third parties, the PLA would fail in its objective of being an instrument for the creation of a trading club. It also argued that the restrictions would be extremely difficult to police if they were limited to IP.

The High Court (Briggs J) found in favour of Global Coal on the construction of the PLA, so Global Coal enjoyed complete control over use of its products. He acknowledged that this was not an easy matter to decide and that the contentions of both parties had made commercial sense (in contrast, e.g. to the position in Chartbrook v Persimmon, where one party's position on a formula made commercial nonsense). The reference in the PLA to IP merely established the basis for its right to control use of the products. A reasonable interpretation favoured Global Coal. It was also relevant that enforcement was simplified if the question was whether counterparties were licensed, in contrast to the question of whether a trade with an unlicensed counterparty involved an infringement of Global Coal's rights. It should be noted that no consideration was given to competition law aspects of the control inherent in the PLA – as agreed by Counsel as this is not relevant to interpretation.

The judgement is interesting for its description of the way in which an industry organisation establishes a "trading club" and trading terms to be used between members. From the organisation's point of view, the key is to create licensable intellectual property which can then be used as the foundation to grant permissions and impose restrictions on members.

One Contract in a Package of Transactions Could not be Accepted in Isolation

Destiny 1 Limited v Lloyds Bank Plc [2010] EWHC 1233 (QB)

Lloyds sent Destiny a letter in the course of wider, funding negotiations, stating that it agreed to provide a guarantee to a consortium provided that Destiny accepted certain points. Destiny signed and returned the letter. Lloyds decided not to enter into the guarantee and was sued for damages on the basis that the letter created an offer which Destiny accepted. It argued by Lloyds that the letter should not be looked at in isolation, but as part of a package of transactions under discussion. It was plain that the letter was in the nature of an indication of principle that Lloyds was prepared to enter into the guarantee if the other matters being discussed resulted in the complete package being agreed.

The High Court (Judge Richard Seymour QC) upheld Lloyds' contention. The single letter was only one aspect of a package of transactions. The whole package was under consideration and neither party thought that the component parts might be agreed in separate contracts. Lloyds had not intended to enter into the contract. Furthermore, there was no consideration given for the guarantee.

This was clearly the sensible decision, but it does demonstrate the need to be careful, when issuing documents, to make it clear that no individual document can form a contract in isolation from the others.

Entire Agreement Clause No Bar to Rectification

Surgicraft Limited v Paradigm Biodevices Inc [2010] EWHC 1291 (Ch)

In October 2004, Surgicraft appointed Paradigm as its exclusive distributor in the US. The agreement was amended and restated by a second agreement in March 2005. The second agreement was terminated in November 2008. Both agreements contained the same standard form whole agreement clause and a statement that signing the agreement implied acceptance of all the clauses. Paradigm argued that a mistake had been made in the agreement, in that it was the intention of the parties that if Surgicraft terminated as a result of a change of control in Surgicraft, it would pay compensation. Surgicraft denied that there was such an intention. But even if there was, the whole agreement clause prevented Paradigm from seeking rectification: the clause prevented a party from asserting a previous understanding contrary to the terms of the agreement.

The High Court held, on the facts, that there had indeed been a common intention that Paradigm should receive compensation if the agreement was terminated because Surgicraft underwent a change of control. The Judge rejected Surgicraft's argument as to the entire agreement clause and ordered rectification. The purpose of such a clause was to limit possible contractual terms arising outside the contract, whereas rectification is based on the fact that the parties have made a mistake in the contract itself. The Judge indicated that the outcome might have been different if there had been evidence that the entire agreement clause was considered by the parties as part of the negotiations, but there was no such evidence. Surgicraft had also argued that the entire agreement clause operated as a contractual estoppel preventing Paradigm from raising their mistake but this was dismissed. It was not the purpose of an entire agreement clause to prevent rectification.

One wonders if an entire agreement clause could be drafted to prevent rectification claims – not that would necessarily be in the interests of the parties.

No Breach of a Duty of Good Faith to Refuse to Consider Changes to Agreed Revenue Share

Gold Group Properties Limited v BDW Trading Limited [2010] EWHC 1632 (TCC)

Gold Group entered into an agreement with BDW (formerly Barratt Homes) under which BDW was to construct dwellings on land owned by Gold Group. The proceeds of sale of the dwellings were to be the subject of a revenue share between the parties. Minimum sale prices were set out in a schedule. Each party was to act in good faith. In the event, the property market fell and BDW failed to undertake its obligations under the contract to proceed with construction. Instead, it requested Gold Group to delay the development or to review the minimum prices and payment terms. Gold Group refused to contemplate any change. BDW claimed the contract was at an end and unenforceable. One of the arguments raised by BDW was that Gold was in breach of its duty of good faith by refusing to renegotiate the agreement to address the difficulties caused by a drop in the property market.

The TCC, Judge Stephen Furst QC, rejected BDW's argument. The duty of good faith did not require Gold Group to give up a freely negotiated financial advantage clearly embedded in the contract, nor even to enter into negotiations for changes.

It would appear, thus, that the duty of good faith applies only where there is some element of discretion to be exercised.

Time Not of the Essence Where There Was Provision for Interest on Late Payment

Dominion Corporate Trustees Limited and Others v Debenhams Properties Limited [2010] EWHC 1193

Dominion owned a shopping centre. It entered into an agreement for lease with Debenhams under which Dominion was to construct an extension to be occupied by Debenhams. Dominion were to make Debenhams a number of payments, the second of which was to be within ten days after completion of construction. Dominion failed to make the payment on time and Debenhams served notice that it was terminating the agreement. It argued, amongst other things, that time was of the essence, relying on the statement in Bunge v Tradax that: "broadly speaking time will be considered of the essence in mercantile contracts." The payment date was tied to the date on which Debenhams was obliged to commence fitting out works, so the close linkage between the dates showed it was the intention of the parties that Dominion should comply precisely with the date for payment.

The High Court rejected the claim that time was of the essence, so failure to pay on time was not a repudiatory breach. The payment was an inducement to Debenhams by way of a capital contribution, but it was not calculated by reference to the amount which Debenhams was to spend on fitting out works – indeed Debenhams was not under an obligation to carry out any particular fitting out works. Failure to pay punctually would not deprive Debenhams of substantially the whole benefit of the agreement or leave it unable to perform its obligations. Furthermore, the agreement provided for interest on late payment, so there was an express remedy in an agreed amount for breach of the obligation.

As ever, it is always wise to state in relation to an obligation to do something by a date whether time is of the essence.

"Terms and Conditions Available on Request" Sufficient to Incorporate Terms

Rooney and Another v CSE Bournemouth Limited, Court of Appeal

CSE is an aircraft maintenance company whose practice was to carry out maintenance works on a work order form containing the statement: "terms and conditions available on request". CSE was negligent and sought to rely on the exclusion clause in its terms. Rooney brought a claim for summary judgment that CSE had no real prospect showing that the order form was a contractual document or that it incorporated CSE's terms. At first instance, it was held that it was reasonably arguable that the work order was a document intended to have contractual effect, but that it did not incorporate CSE's standard terms of trading, since the words conveyed no more than that there were terms and conditions available and did not purport to incorporate them.

The Court of Appeal reversed the decision. The Judge was correct in using the test of what a reasonable person would have understood the words as referring to, but was wrong in finding that the words could not be said to have incorporated the standard terms of trading. The work order form was a contractual document. In a business context, it would be odd if a contractually binding order such as the work order form contained no commercial terms but left them only for inclusion at the customers request. It was at least arguable that a reasonable person would have understood the words used as referring to the contractual terms on which CSE agreed to work on the aircraft.

This decision appears to shift the position on incorporation of terms towards the supplier - if no other terms are referred to then, those that are referred to may be incorporated, even if a copy is never provided to the customer. Note that "Conditions overleaf" was held in another recent case (Murphy v Johnston Precast, a High Court decision) not to be sufficient. Clearly, it is always important both to give a copy of the terms and to make it clear that they form the basis of the contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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