UK: Bringing An Action For The Price Of Goods/No Set-Off Means No Set-Off

Last Updated: 23 September 2012
Article by Stuart Shepherd and Reema Shour

FG Wilson (Engineering) Limited v. John Holt & Company (Liverpool) Limited [2012] EWHC 2477 (Comm)

This Commercial Court decision highlights some interesting issues arising in the context of a sale of goods dispute. In particular, it clarifies when an unpaid seller can bring an action for the price of the goods supplied and illustrates how a retention of title ("ROT") clause in the sale contract might affect the position. It also confirms the English courts' policy of upholding no-set off clauses, where they have been negotiated by commercial parties with similar bargaining power and are considered to be reasonable within the meaning of section 11 of the Unfair Contract Terms Act 1977 ("UCTA").

The background facts

FGW supplied generators and spare parts to Holt Liverpool, who then exported them to Nigeria for sale locally to and then by their subsidiary, Holt Nigeria. The relevant provisions in the parties' agreement, which incorporated FGW's standard terms and conditions, were as follows:

PRICES AND PAYMENTS: ...Buyer shall not apply any set-off to the price of Seller's products without prior written agreement by the Seller...

TITLE AND RISK OF LOSS: ............. Notwithstanding delivery and the passing of risk in the products, title shall not pass to Buyer until Seller has received payment in full for the products and all other goods or services agreed to be sold by Seller to Buyer for which payment is then due. Until such time as title passes, Buyer shall hold the products as Seller's fiduciary agent and shall keep them separate from Buyer's other goods. 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. If the Buyer fails to comply with a demand from the Seller to return products to which title has not passed, Seller may forthwith enter any premises where the products are stored and repossess them...

FGW sought summary judgment against Holt Liverpool in the English Commercial Court in respect of various claims for the price of goods supplied to Holt. Holt had various claims against FGW and sought to set those claims off against FGW's claims. We summarise below the most significant aspects of the court's decision.

The Commercial Court decision

Action for the price

Section 49 of the Sale of Goods Act 1979 provides as follows:

  1. Where, under a contract of sale, the property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods.
  2. Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price, although the property in the goods has not passed and the goods have not been appropriated to the contract...

Holt argued as follows: as property in the goods concerned had not, they said, passed to them, FGW could not sue them for the price of those goods because section 49 sets out the only circumstances in which an unpaid seller can bring an action for the goods. FGW argued that a seller can bring such an action whenever the amount a buyer has agreed to pay for the goods has fallen due in accordance with the terms of the contract.

The judge held that section 49 is exclusive, meaning that a seller would have to bring itself within one of the two circumstances specified in section 49 if it wished to maintain an action for the price. He highlighted the distinction between a duty to pay the price, which normally arises when the seller is ready and willing to deliver the goods, and an action for the price, which only becomes available to the seller under section 49 if either the property in the goods has passed to the buyer or the price is payable on a particular day irrespective of delivery.

The ROT clause

The judge then went on to consider whether, applying the ROT provisions in the title and risk of loss clause, Holt were right to say that title in the goods had not passed. Having considered the effect of the clause carefully, he concluded that property in the goods had in fact passed and that, therefore, section 49 did apply. The judge said:

The rationale for s. 49(1) is that an action for the price will lie when the seller has delivered the goods to the buyer and conferred on him the ability freely to deal with the goods as his own. Whilst the goods remain in the hands of the buyer, to whom property has not yet passed by reason of a retention of title clause, an action for the price will not lie because the buyer's freedom to deal with the goods as his own is constrained: the seller is free to retake possession of the goods in which he retains property. But once the goods are sold on, with the consent of the seller conferred by the retention of title clause, the seller has done all that is necessary for the buyer to have dealt with the goods as his own and transfer property in the goods to the third parties. The rationale of s. 49(1) is fulfilled.

No set-off clause

The judge held that the no set-off clause prevented Holt Liverpool setting off any counterclaims it had against the price of the goods. He rejected the suggestion that the no set-off clause should be dealt with differently to other contractual terms. FGW's no set-off clause was not particularly unusual or onerous and was clearly set out in their terms and conditions where Holt Liverpool would have, or could reasonably be expected to have, seen it. It was, therefore, effectively incorporated into the parties' agreement.

Furthermore, so long as the parties used clear and unambiguous language to exclude a right of set-off, that was all that was required; a no set-off clause was not be treated similarly to an exclusion clause, which is construed narrowly because it limits or excludes liability. A no set-off clause did not seek to limit liability. Rather, it had the understandable commercial purpose of protecting a seller's cash-flow which forms the "life-blood of the business". The wording of the clause in this case referred to "any set-off" against the price of the goods and, in the judge's view, that was wide enough to cover all set-offs, including cross-claims by Holt Liverpool arising out of a series of other sales, and was not confined to any particular types.

The judge also held that the no set-off clause complied with section 11 UCTA, which requires a contractual term to be fair and reasonable, 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 parties here had equal bargaining power. The clause itself was not particularly onerous in scope, being confined in its application to the payment of the price for the goods and services supplied. The clause was not unusual: such clauses are common in many commercial contexts and in this particular trade. Furthermore, the length of the credit terms offered to Holt Liverpool, and the high value of the goods supplied, meant that FGW would have made a large cash outlay to supply the goods and would need the cash flow from its customers to be paid promptly and without deduction in order to manufacture further generators and parts for supply on credit terms.

In the circumstances the judge granted FGW's application for summary judgment.

Comment

The ROT clause and the no set-off clause in this case were well-drafted and proved effective in protecting the seller in terms of the business it was conducting. Those wishing to incorporate such clauses into their standard terms and conditions are well-advised to consider carefully what wording might best protect their business and their cash flow from defaulting counterparties who purport to rely on alleged counterclaims to avoid or delay payment.

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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