Koh Lin Yee v Terrestrial Pte Ltd and another appeal  SGCA 6
The Singapore Court of Appeal in Koh Lin Yee v Terrestrial Pte Ltd and another appeal considered the point of law of whether a contractual clause excluding a right of set-off falls within the ambit of the Singapore Unfair Contract Terms Act (the “UCTA”) and therefore potentially subject to the reasonableness test contained therein. The Court of Appeal was of the view that a clause which excludes set-off does indeed fall within the ambit of the UCTA.
The dispute before the Court of Appeal involved Koh Lin Yee (“Koh”) and Allgo Marine Pte Ltd (“Allgo”) (collectively, the “appellants”) and the respondent Terrestrial Pte Ltd (“Terrestrial”).
On 25 May 2009, Allgo agreed to sell a flat top barge to Terrestrial for S$1.2 million. Although Terrestrial paid Allgo in full, Allgo failed to deliver the barge as it was short of funds to pay the builders of the barge. Subsequently, Terrestrial made three loans to Allgo (the “Loans”), two of which were guaranteed by Koh. The Loans had become due and payable, but Allgo failed to make any repayments.
Terrestrial commenced proceedings against the appellants in relation to the Loans and applied for summary judgment.
The appellants’ defence was that Terrestrial had failed to pay monies owed under a separate contract with Allgo for the purchase of a tug (the “Tug Contract”) and that the failure to pay this sum put the appellants out of cash to repay the Loans. The appellants argued that they were entitled to set-off the monies due under the Loans against the sum owed by Terrestrial to the appellants under the Tug Contract. However, the main difficulty with this argument was a “no set-off” clause in the loan agreement (“Clause 12.2”), which provided as follows:
“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, […]”
The High Court found in favour of Terrestrial and the appellants appealed.
The Court of Appeal dismissed the appeal, focusing its written judgment on the appellants’ argument that Clause 12.2 was an unfair contract term within the meaning of the UCTA and Terrestrial therefore could not rely on Clause 12.2 to preclude the appellants’ defence of equitable set-off.
Whether the exclusion of set-off falls within the ambit of the UCTA
There were two opposing views.
On one view, as set out by the English Court of Appeal in Stewart Gill Ltd v Horatio Myer & Co Ltd 1 QB 600 (“Stewart Gill”), such clauses restrict the rights and remedies of the party who would otherwise have been entitled to rely on the set-off and therefore fall within the ambit of the UK UCTA and subject to the reasonableness test therein. It was held by the English Court of Appeal that such a clause came within section 3 of the UK UCTA because it came within the varieties of exemption clauses set out in section 13 covered by section 3. The relevant provisions of the UK UCTA are in pari materia with the UCTA.
On the other view, a no set-off clause did not exclude or restrict the liability in the claim that the other party was seeking to rely on to set-off part of the claim - it did not restrict the other party from bringing a separate claim, but merely defined the payment obligation under the contract. On this view, a no set-off clause did not constitute an exclusion of liability clause within the ambit of the UCTA.
The Singapore High Court in Gao Bin v OCBC Securities Pte Ltd  1 SLR(R) 500 (“Gao Bin”) preferred the latter view. In Gao Bin, the plaintiff claimed that the defendant brokerage company breached its contract and was negligent in the handling of the plaintiff’s securities accounts. The defendant brokerage counterclaimed and applied for summary judgment for outstanding amounts due on the accounts. The plaintiff argued that he had an equitable set-off against the defendant, and that the no set-off clause in the defendant brokerage’s standard terms and conditions was unenforceable.
Faced with two competing views, the Court of Appeal found that Stewart Gill remains good law in Singapore in so far as it holds that a clause which excludes a set-off falls within the ambit of the UCTA and is therefore potentially subject to the reasonableness test. The Court of Appeal stated that section 13 of the UCTA extends the scope of section 3 to cover no set-off clauses inasmuch as the no set-off clause in the contract excludes or restricts any right or remedy in respect of the liability and/or excludes or restricts the procedural rules as to set-off.
In the event, the Court of Appeal reiterated that the appellants had not met the threshold requirements of section 3 of the UCTA that were applicable to Clause 12.2. Section 3 of the UCTAapplies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business. The court did not accept that the appellants were dealing with Terrestrial as consumer. The court also found that the terms of the loan agreement were not part of Terrestrial’s standard terms of business.
However, for the sake of completeness, the Court of Appeal noted that if this threshold requirement had been met, Clause 12.2 would be caught by section 13 of the UCTA and be considered an exemption clause which would have to be proven to be reasonable in the circumstances, per Stewart Gill. In these circumstances, the Court of Appeal noted that Clause 12.2 would appear to be reasonable in accordance with the UCTA.
No set-off clauses are included in the standard terms and conditions of many financing transaction documents. Where the counterparty is a consumer, users of such terms and conditions must be alive to the possibility that the no set-off clause may be unenforceable pursuant to the UCTA. In particular, the party relying on the standard terms and conditions should take care to bring the no set-off clause to the attention of the consumer (which is listed under the Second Schedule of the UCTA as one of the matters taken into consideration when determining if the clause is reasonable).