UK: Commercial Bulletin No. 90

Last Updated: 5 November 2012
Article by Mark Alsop

An analysis of cases and developments from September 2012

No action for price if title retained and "no set-off" clause passes the UCTA reasonableness test

Wilson manufactured and sold generator sets and spare parts worldwide. Its customers included Holt which resold the goods to its subsidiary in Nigeria. Wilson's standard terms applied to the sales. They included the following "no set-off" and retention of title clauses:

  • "Buyers shall not apply any set-off to the price of Seller's products without prior agreement by the Seller".
  • "Notwithstanding delivery... 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.... Until such time as title passes, the Buyer shall hold the products as Seller's fiduciary agent... Prior to title passing the Buyer shall be entitled to re-sell or use the products in the ordinary course of business and shall account to the Seller for the proceeds of sale..."

Holt was permitted extended credit. When it failed to pay invoices, a repayment plan was agreed. Holt failed to meet the repayment terms with the result that Wilson brought proceedings for the price of goods, claiming US$12.6m.

The first point concerned section 49 of the Sale of Goods Act 1979 which provides that an unpaid Seller can bring an action for the price if either title to the goods has passed or the price is expressed to be payable on a certain date [note that this is irrespective of whether delivery is made, title has passed, or the goods have been appropriated to the contract]. Holt claimed that s49 was the only way of claiming for the price, and that the section was not satisfied, since title remained with Wilson under Wilson's terms (and there was no certain date for payment). Holt also sought to apply a set off based on its counterclaim in a separate action against Wilson for more than US$53m for breach of Holt's exclusive distributorship rights in Nigeria. Wilson argued that the "no set-off" clause prevented Holt from setting off its counterclaim; Holt said it was unreasonable under UCTA.

The High Court held, in an application for summary judgment, that Wilson's action for the price complied with Section 49 of the Sale of Goods Act 1979, that the "no set-off" clause prevented Holt from relying on a defence of set-off based on its separate claim and that the clause was reasonable under UCTA:

  • Section 49 sets out the only circumstances in which a seller can bring an action for the price.
  • The judge rejected the retention of title argument because the terms permitted Holt to re-sell the goods, which it had done, so title had passed to its Nigerian subsidiary. To construe the clause otherwise would subvert the parties' commercial intentions. While the goods remained in the hands of the buyer, property would not yet have passed, so an action for the price would not lie because the buyer's freedom to deal with the goods as its own was constrained. Once the goods were sold on, with the consent of the seller, property was transferred.
  • The set-off clause prevented the counterclaim being raised and was reasonable under UCTA. It was thus a complete answer to Holt's defence of set-off. The judge considered various factors in relation to reasonableness, including:
    • The length of the credit terms and the high value of goods meant that Wilson had a substantial outlay before being paid and could reasonably require to be paid in full.
    • A "no set-off" clause was not unusual.
    • The "no set-off" clause was not particularly onerous, not least because the extended credit terms meant that Holt had many months to pay, by which time Holt should itself have been paid by its customers.
    • The parties were of equal bargaining power – Wilson was much larger, but Holt had managed to secure discounts and extended credit.
    • In the circumstances, it would not have been unreasonable for Wilson to have insisted on cash with order.
    • It did not matter that Holt was given no inducement to agree to the clause as, in reality, the clause was really the quid pro quo for the extended credit terms.
    • It did not matter that the "no set-off" clause might operate in inappropriate circumstances, such as where there were admitted credits or overpayments in Holt's favour. Both parties would have assumed that Wilson would give the appropriate credit in those circumstances (as had happened in the past). Similarly, the parties would have considered it a remote possibility that either would act fraudulently towards the other – and in any event the "no set-off" clause would still have been reasonable where an allegation of fraud was at the claim stage.

Comment. The exclusivity point about s 49 is consistent with previous court decisions (although Chitty, Benjamin and Goode take the opposite view). It means that a seller cannot sue for the price whilst a retention of title clause is in operation, even if payment is due. Instead, the remedy is the more uncertain action for damages for breach of contract. Consideration should therefore be given to including a clause that provides for the price to be paid on a certain date, thus complying with the second condition in s 49. Note that the set-off clause was only in respect of the "price of products" and not all sums due, but a wider no set-off clause would probably have been equally enforceable. CR precedents state "payment of invoices shall be made in full and without any deduction or set-off", so they cover all sums due.

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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