The Court of Appeal held that a supplier’s standard clause preventing a customer from withholding payment was subject to the Unfair Contract Terms Act 1977. The clause had to be assessed as a whole and was unreasonable. The customer therefore retained the right to defend the supplier’s payment claim by relying on a set-off.
Court: Court of Appeal. Judgment: 12 February 1992. Citations: [1992] EWCA Civ 6; [1992] QB 600; [1992] 2 WLR 721; [1992] 2 All ER 257.
The payment claim and the alleged breaches
Horatio Myer & Co Ltd, a bed manufacturer, contracted with Stewart Gill Ltd in about October 1988 for delivery, installation and testing of an overhead conveyor system. The price was £266,400 plus VAT, with additional charges for extra work and equipment. Payments were staged, with the final 10% due on completion of installation and 30 days afterwards.
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Stewart Gill claimed that final portion of the price. Myer alleged breaches of contract giving rise to cross-claims exceeding the amount demanded. It sought to set those claims against its liability to pay. Stewart Gill disputed the alleged breaches but accepted that, without clause 12.4 of its standard conditions, Myer would be entitled to unconditional leave to defend.
Clause 12.4 prohibited withholding amounts due by reason of a payment, credit, set-off, counterclaim, allegation of incorrect or defective goods, or any other reason said to excuse contractual performance. Myer accepted that an effective clause would entitle Stewart Gill to summary judgment, although Myer could pursue a counterclaim separately and the court could, where appropriate, stay enforcement.
Why the Act applied to a restriction on set-off
The issue was not simply whether the Unfair Contract Terms Act 1977 applied between companies. It was whether its controls extended to a term restricting a remedy for breach, even though the term did not directly exclude liability for that breach.
Section 3 applied to dealings on the other party’s written standard terms of business. Its controls included exclusions or restrictions of liability for breach. The contract was governed by the Supply of Goods and Services Act 1982 rather than the law of sale of goods or hire-purchase. Lord Donaldson MR also considered section 7 of the 1977 Act, concerning goods transferred otherwise than by sale or hire-purchase.
Clause 12.4 did not directly eliminate Stewart Gill’s liability: Myer could still bring a separate claim. That did not take the clause outside the Act. Section 13 extended its protection to restrictions on rights or remedies relating to a liability, and to restrictions on procedural rules.
Lord Donaldson held that the clause excluded both Myer’s right to set off its claims against the price and the remedy of enforcing them through set-off. It also restricted the procedural rules governing set-off. Stuart-Smith LJ similarly held that section 13(1)(b) extended section 3: the clause removed the equitable right to set a damages claim for Stewart Gill’s alleged breach against its demand for payment.
The whole clause had to be reasonable
Stewart Gill bore the burden of showing that the term was reasonable. Under section 11(1), the question was whether it was fair and reasonable to include the term in light of the circumstances known, or reasonably within the parties’ contemplation, when they contracted.
The clause went beyond excluding disputed cross-claims. Its prohibition also covered payments and credits. Lord Donaldson understood these, in context, to include overpayments under another contract and credit notes or admitted liabilities arising under another contract. Preventing Myer from relying even on such amounts was plainly unreasonable.
Stewart Gill argued that Myer was not relying on a payment or credit, so those parts of the clause could be ignored. The court rejected that approach. Reasonableness concerned the term included in the contract as a whole, assessed at the time of agreement. It did not depend on which words the supplier later needed in a particular dispute.
Stuart-Smith LJ emphasised the unlimited concluding language, which would extend even to a defence based on fraud. A supplier could not impose a wholly unreasonable term and then rescue it by striking out its most objectionable parts when challenged.
He also referred to Schedule 2’s guidelines. Although not directly applicable on his analysis, their considerations were generally useful when assessing reasonableness. Questions about an inducement to accept a term, alternative suppliers, and the customer’s knowledge of its extent could not sensibly depend on guessing which part would later be invoked. Those considerations supported examining the whole clause.
The procedural decision
Judge Loyd QC had given Myer unconditional leave to defend because he considered the evidence insufficient to establish reasonableness. Lord Donaldson criticised leaving the question unresolved. A clause of this kind needed to be considered at the summary judgment stage or on a preliminary issue: after a final trial, the distinction between set-off and separate judgments on claim and counterclaim would no longer give it the intended effect.
The Court of Appeal itself concluded that clause 12.4 was unreasonable. Balcombe LJ agreed with the judgments of Lord Donaldson and Stuart-Smith LJ. The court dismissed Stewart Gill’s appeal with costs and refused leave to appeal to the House of Lords. The order allowing Myer to defend remained in place.
What the decision established
The court did not decide that the conveyor was defective, determine the cross-claims, or establish the final balance payable. Those matters remained contested. Nor did it hold that every restriction on set-off was necessarily unreasonable. It was unnecessary to decide whether the narrower restriction Stewart Gill wished to rely on would have been reasonable by itself. The operative ruling concerned this broadly drafted clause as a whole.
Source: Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] EWCA Civ 6.
