Exclusion of set-off rights
WILSON v HOLT [2012]
In this case the Court had to decide whether the exclusion of a right of set-off in a contract satisfied the UCTA reasonableness test and whether it had been properly incorporated into the contract.
A right of set-off is effectively a self-help remedy which provides a possible defence against a contractual claim. It is the right for one contractual party to off-set a claim that it has against a claim which is brought by the other party. If a contractual claim is made, by exercising this right validly, the original claim may be reduced or extinguished entirely and it can be a very successful tool. For that reason, many contracting parties routinely try to contractually exclude or prohibit any right of set-off that might otherwise be available to the other party. However, such an exclusion will, in certain circumstances, have to satisfy the ‘reasonableness test’ under the Unfair Contract Terms Act (‘UCTA’) to be enforceable.
Facts:
- W supplied generators and spare parts to H. The sales were subject to W's standard terms and conditions, which included a ‘no set-off’ clause: “The Buyer shall not apply any set-off to the price of Seller's products without prior written agreement by the Seller”.
- When H failed to pay W's invoices and W brought proceedings against H claiming US$12.6 million, H separately claimed damages of $53million against W for alleged breaches of exclusivity by W under other agreements.
Decision:
- The Court was asked to determine whether the exclusion of the right of set-off satisfied the UCTA reasonableness test and concluded that it did. The Judge held that the ‘no set-off’ clause prevented H from relying on a defence of set-off based on its separate claim against W.
- Amongst the factors which contributed to the finding of reasonableness were:
- the length of the credit terms granted (around 5 months) which increased the importance of prompt payment when payment was due: “It is reasonable and legitimate for [the seller] to seek to protect that cashflow with a no set-off clause”;
- such clauses are common in many commercial contexts;
- there was nothing essentially unreasonable or unfair in the clause requiring H to pay in full, leaving any disputed cross claim to be resolved by subsequent negotiation or proceedings;
- both parties were reasonably substantial commercial entities of broadly equal bargaining power.
- On the question of whether the no set-off provision had been properly incorporated into the contract and adequately brought to the attention of H, the Judge commented that 'no set-off' clauses are not unusual in standard terms and conditions and that W's no set-off clause was not particularly unusual or onerous. On that basis it was held to be validly incorporated and no additional steps needed to be taken to bring this particular clause to H’s attention.
Points to Note:
- Even without the extended credit terms, it is likely that clauses prohibiting set-off in contracts between commercial entities will be upheld as being reasonable and enforceable.
- Such clauses can be very useful. Contracting parties need to consider whether they are prepared to accept an exclusion of set-off since it could significantly impact upon a party’s bargaining strength if it has to pay up and then seek to recover money later (‘possession being nine tenths of the law’).