Are “no set-off” clauses unreasonable and unenforceable under the Unfair Contract Terms Act (Cap. 396) (UCTA)? The Singapore High Court1 has made diametrically opposing findings on this issue. The matter has now been cleared by the Court of Appeal in Kok Lin Yee v Terrestrial Pte Ltd and another appeal  SGCA 6 (Kok Lin Yee (CA)) which, while holding that “no set-off” clauses are subject to the UCTA, it is unlikely (save for very unique factual circumstances) that they would be unreasonable.
UCTA AND SET-OFF
Before delving into the facts of the case, some background into the UCTA, as well as “no set-off” clauses is required.
The UCTA aims to protect consumers or parties who contract on standard terms from unfair contractual terms such as exemption clauses which seek to restrict the liability of the contracting party. The law will only enforce exemption clauses if they are deemed to be reasonable. If they are unreasonable, the UCTA would render such clauses unenforceable.
Set-off refers to the situation where parties take into account their mutual debt obligations and only one party pays the remaining debt to the other party. Parties employ “no set-off” clauses so that the receiving party always receives the full contractually agreed amount without the paying party unilaterally reducing the amount due to cross-claims. Thus, these clauses are commonly used in loan facilities to protect the lenders’ position against claims of breach by the borrower.
KOH LIN YEE (CA) IN A NUTSHELL
The facts of Kok Lin Yee (CA) are relatively straightforward. The Plaintiffs, Terrestrial Pte Ltd (Terrestrial) entered into two loan agreements with the first Defendant Allgo Marine Pte Ltd (Allgo Marine), whereby Terrestrial would loan Allgo Marine some monies to discharge its outstanding debts. The second Defendant, Mr Kok, was the sole director of Allgo Marine and also the guarantor under one of the loan agreements.
The first loan agreement included a “no set-off” clause at clause 12.2, which stated:
“All payments to be made by [Allgo Marine] or [Mr Kok Lin Yee] to [Terrestrial] under this Agreement shall be made:
- Without set-off, counterclaim or condition, […]”
Subsequently, both Defendants defaulted on payments. The Plaintiffs applied for summary judgment. The Defendants did not dispute liability but sought to resist the summary judgment on essentially the argument that Terrestrial was itself in breach of the loan agreements and a separate contract. On this basis it was argued that the “no set- off” clause should be struck down as an unfair contract term pursuant to the UCTA.
The Court of Appeal dismissed these arguments. Though the legal status of “no set-off” clauses was not a live issue in the proceedings, the Court of Appeal decided to clarify this confusion and made observations on whether “no set-off” clauses fell under the ambit of the UCTA and whether such clauses would be subject to the test of reasonableness.
THE LEGAL STATUS OF “NO SET-OFF” CLAUSES UNDER THE UCTA
The Court of Appeal analysed the issue in three parts.
- whether a “no set-off” clause is an exemption clause that falls within the scope of the UCTA;
- does such a clause fall within one of the specific provisions of the UCTA; and
- in what circumstances will the law deem “no set-off” clauses to be reasonable and consequently enforceable.
The Court of Appeal held that “no set-off” clauses were exemption clauses as they excluded the paying party’s remedy to enforce their claims against the receiving party for cross-claims by means of set-off against the sums owed to the receiving party (falling within Section 13(1)(b) of the UCTA). The clause would also exclude the procedural rules relating to set-off (falling within Section 13(1)(c) of the UCTA).
The Court of Appeal then proceeded to set out some non-exhaustive factors in deciding the reasonableness of such clauses. These included:
- the commercial purpose of the clause – e.g. receiving party may want prompt payment under a contract for cash flow reasons;
- whether the clause was in common use;
- whether the parties had the opportunity to negotiate on the clause;
- whether the parties had legal advice; and
- the factors listed in the Second Schedule of the UCTA:
- the bargaining position of the parties;
- whether the customer received an inducement to agree to the clause, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar clause;
- whether the customer knew or ought to have known of the clause; and
- whether it was reasonable at the time of contract to expect compliance with the clause.
The Court then indicated how these factors would play out in reality. It held that the “no set-off” clause in the present case would be reasonable because:
- the bargaining position of the parties were fairly balanced,
- the Defendants knew or ought to have known of the clause which was commonly used in loan agreements,
- the terms of the loan agreement were drafted specifically for the circumstances; and
- the commercial purpose of the clause was to ensure that the Plaintiff received prompt payment and the Defendants could always bring their cross-claim in an independent cause of action.2
If the “no set-off” clause fails the reasonableness test, would there be any way to save the clause? The Court noted that in Stewart Gill the English Court of Appeal found that the offending parts of the clause could not be severed, thus the whole clause was unenforceable. The Court of Appeal did not go so far as to decide whether this English approach would be adopted in Singapore.3
There are several important points to take away.
- Companies should continue to include “no set-off” clauses in their standard term contracts as they provide protection against non- payment by counterparties on the basis of other related or unrelated cross-claims.
- Care must be given to ensure that such clauses are reasonable and meet the requirements of the UCTA.
- It would be helpful to:
- describe the commercial purpose of the contract and the “no set-off” clause in the recitals of the contract;
- specifically draw the consumer’s/contracting party’s attention to the “no set-off” clause; and
- including clauses which may raise an evidential estoppel, such as those relating to confirmations that the counterparty has had the opportunity to take legal advice.