UK: Getting What You Bargained For

The importance of due diligence for purchasers cannot be overstated, including for companies purchasing debts. A recent Court of Appeal decision in Bibby Factors Northwest Ltd v HFD Ltd and another provides a salutary reminder that due diligence needs to be undertaken before, not after, purchase and that the legal concept of buyer beware is still very much alive.

The factual background

Bibby Factors Northwest Ltd (Bibby), as the name suggests, is a factoring company. In March 2000, it entered into a factoring agreement under which it purchased existing and future debts owing to a company (the Assignor) by its customers (the Customers), including HFD Ltd.

In July 2013, the Assignor went into administration. In October 2013, Bibby commenced proceedings against the Customers for over £280,000 allegedly due for supplies received from the Assignor. The Customers defended the claim and counterclaimed, alleging they were entitled to a 10% rebate for each supply made in a given calendar year (payable in January of the following year). They could set this off against future unpaid invoices and receive a 2.5% discount if payment was made in accordance with the Assignor's terms. They also sought credits in relation to faulty goods against which they had raised debit notes. The sum counterclaimed was similar to that claimed by Bibby.

At the time it entered into the factoring agreement, Bibby sent the Customers 'take-on letters' advising the Customers that it had taken on the Assignor's debts and that repayment of the debt should be made to it in future. The letters also provided that any right of set-off was not permitted and that Customers should advise Bibby immediately of any dispute likely to defer payment beyond the terms of sale. Bibby argued that these letters triggered the Customers' obligations to tell it about the rebate and set-off arrangements.

The issues

Was it inequitable or unconscionable for the Customers to have the benefit of any set-off in relation to the rebate? Were the Customers estopped from claiming the rebate and set-off when, for 13 years, they had been in communication with Bibby about the balance of the debt outstanding from time to time and had not mentioned the rebate arrangement.

Each party sought summary judgment on its own claim or counterclaim.

First instance decision

At first instance the judge found in favour of the Customers on the rebate and debit note claims but found the early settlement discount issue would need to be determined at trial. Bibby appealed.

The Court of Appeal decision

The Court of Appeal agreed with the first instance judge and dismissed the appeal.

It held that Bibby could be in no better position than the Assignor. If the Assignor could not demand payment without giving credit for the rebate that it had promised the Customers (if it had accrued due), then neither could Bibby.

It did not matter that the cross-claim arose after the debts had been assigned as an assignment of future debts was effective in equity.

The court reiterated that the test for an equitable set-off is whether a cross-claim is so closely connected with the claim that it would be manifestly unjust to allow a claimant to enforce payment without taking into account the cross-claim.

The Court of Appeal found there was such a connection in this case and that it would be unjust to the Customers not to take account of the cross-claims. The action, or in-action, of the Customers in not providing information to Bibby did not sever that connection as argued by Bibby.

Bibby could have contracted with the Assignor on terms that there should be no rebate but had not done so. Neither did Bibby ask the Assignor or Customers in clear and specific terms whether there were any rebate arrangements. The wording of the take-on letter was insufficiently wide.

Bibby had no contract with the Customers. Its attempt to exclude the right of set-off in the take-on letter was ineffective without the Customers' agreement. The take-on letter did not give rise to any obligation on the Customers to either tell Bibby it could not impose that exclusion or trigger any duty to inform Bibby of the contractual arrangements they had with the Assignor.

There were no grounds to suggest that the Customers knew that Bibby had been deceived as to the existence or otherwise of a rebate because it did not feature on the invoices and there was no suggestion that the Customers had been fraudulent in any way. That being so, it was not incumbent on the Customers to volunteer information about the position between themselves and the Assignor. As there was no duty to speak, a failure to do so could not stop the Customers from relying on the set-off.

There was nothing in the conduct of, or communications from, the Customers that could be said to be clear representations as to the absence of any rebate. Although the Customers supplied monthly balance information to Bibby that made no reference to any rebate, as there was no obligation on the Customers to volunteer that information, no representation could be implied by its omission that the Customers would not rely on any rebate by way of set-off. There was no estoppel.


An assignee of debts should, as part of its due diligence when entering into the agreement, make adequate enquiries of the assignor of all contractual agreements that may affect the value of the debt prior to purchasing it. As in this case, restricting the request for information on known or anticipated disputes that may delay payment or affect the recoverable amount can lead to an assignee not getting what it thought it had bargained for.

This article was originally published in Leasing Life in February 2016.

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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