Action on the price under S49 of the Sale of Goods Act, excluding the right to set-off, retention of title and the Unfair Contract Terms Act 1977 – F G Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [September 2012]

The facts

The seller (F) manufactured and sold generator sets to the buyer, Holt Liverpool (H) who ordered the sets online for resale to Holt Nigeria. The sales to H were subject to F’s terms and conditions which contained the following clause:

“Buyer shall not apply any set-off to the price of Seller’s products without prior written agreement by the Seller.”; and

“…title shall not pass to Buyer until Seller has received payment in full…Prior to title passing Buyer shall be entitled to resell… and shall account to the Seller for the proceeds…”

When H failed to pay some invoices, a repayment plan was negotiated (but never agreed) with F. H never paid the outstanding sum. F brought proceedings claiming US$12.6 million in unpaid invoices plus other charges. In separate legal proceedings, H claimed about US$53 million in damages for breach of an exclusivity obligation under a distributor agreement made with F relating to the import of generators into Nigeria. H sought to set this off against the US$12.6 million claim.

Various issues arose. Whether:

  1. An action on the price under S49 of the Sale of Goods Act 1979 was inapplicable to F because the retention of title clause made S49 inoperative;
  2. The no set-off clause was incorporated into the terms and conditions;
  3. The no set-off clause ceased to be applicable through the alleged repayment agreement; and
  4. The no set-off clause was unenforceable because it was unreasonable under the Unfair Contract Terms Act 1977 (“UCTA”).

The decision

The no set-off clause prevented H from setting off its claim against the claim by F on the price under S49 SGA.

  1. S49 SGA 1979 sets out when an action may be brought on the price: (a) under S49 (1) when property has passed to the buyer who then fails to pay; and (b) under S49 (2) when the price is payable on a certain day irrespective of delivery and the buyer refuses to pay. S 49 provided an exclusive remedy and a claim for the price could not be brought outside S49.

The trading history of F and H was such that it was always intended that the products were supplied for resale by H and title would pass down the chain upon resale by the Nigerian customers. Although no agency was held to have existed, were an agency relationship to have existed between F and H, property would have passed to a “sub-buyer” through that agency. The retention of title clause was not intended to be an exclusive remedy for non-payment, but allowed F as the seller a form of security permitting it to retain the value of the price, but not in substitution for it.

  1. The no set-off clause excluded any right of set-off against the price. Set-off is a recognised right of abatement to a claim on the price where there is a cross-claim for damages, and the clearest language is required to exclude the application of that right.

Here, that right was excluded, the no set-off clause was incorporated into the terms and conditions and the clause was not of such an onerous type so as to require special notice. Such clauses are common place now and reasonable notice of the clause was given.

  1. No alleged repayment agreement was made and no estoppel by convention could be relied upon by H that prevented the application of the no set-off clause.
  2. The no set off clause did fall within within S3 (2) UCTA. To be relied upon it was required to satisfy the test of reasonableness under S11 UCTA. The Court considered it not unreasonable under S11. The relevant factors considered under S11 included the following:
    •  F had given reasonable notice of its terms and conditions,
    •  the clause was not particularly unusual or onerous,
    •  the bargaining power of the parties was equal, and
    •  it was not unreasonable to require a buyer to pay the price for the products in full without any deduction for something which was, at that stage, a mere unproven claim.

Under S26 UCTA, S11 would not have applied to an “international supply contract”, and would therefore not have applied had the sale been direct from F to Holt Nigeria.

Comments

  1. Aside from being aware of what terms are actually incorporated into a contract during negotiations, the enforceability of remedial and exclusion clauses such as no set-off clauses need to be checked during negotiations. If the right of set off is to be excluded, the clearest contract language is required.
  2. The effect, if any, of retention of title clauses on an action on the price needs to be checked.
  3. The decision is important in determining the exclusive nature of Section 49 SGA; if a claim for the price of the goods falls outside of these circumstances, it will not be maintainable.
  4. Having regard to the widespread use of no set-off clauses in commercial contracts, the view of the Court that they are not unreasonable should come as little surprise.