Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] EWCA Civ 6 (12 February 1992)

A buyer withheld the final payment for goods, claiming a set-off for the seller's breach of contract. The contract contained a clause prohibiting any set-off. The Court of Appeal held this 'no set-off' clause was unreasonable and therefore void under the Unfair Contract Terms Act 1977.

Facts

The plaintiff (respondent), Stewart Gill Ltd, agreed to supply and install an overhead conveyor system for the defendant (appellant), Horatio Myer & Co Ltd. The contract was based on the plaintiff’s standard terms of business. The purchase price was to be paid in instalments, with the final 10% due 30 days after completion. The defendant paid all but the final 10% instalment, refusing to pay on the grounds that they had a claim for damages against the plaintiff for alleged breaches of the contract, which they sought to set off against the outstanding amount. The plaintiff sued for the unpaid sum and applied for summary judgment under Order 14, relying on clause 12.4 of their standard conditions. This clause stated:

The Customer shall not be entitled to withhold payment of any amount due to the company under the contract by reason of any payment credit set-off counterclaim allegation of incorrect or defective goods or for any other reason whatsoever which the Customer may allege excuses him from performing his obligations hereunder.

The defendant argued that this clause was void under the Unfair Contract Terms Act 1977 (UCTA).

Issues

The primary legal issue before the Court of Appeal was whether clause 12.4 was subject to the provisions of the Unfair Contract Terms Act 1977 and, if so, whether it satisfied the requirement of reasonableness prescribed by the Act. A secondary procedural issue was whether the question of reasonableness could be properly determined in an application for summary judgment or if it necessitated a full trial.

Judgment

The Court of Appeal unanimously allowed the defendant’s appeal, holding that the clause was unreasonable and therefore unenforceable. The application for summary judgment was dismissed.

Lord Donaldson of Lymington M.R.

Lord Donaldson M.R. held that clause 12.4 was subject to UCTA 1977. He reasoned that a right of set-off is a type of remedy available to a party. Section 13(1)(b) of UCTA extends the Act’s scope to cover any term that excludes or restricts a right or remedy. He concluded:

A right of set-off is a remedy… Condition 12.4 does, in my judgment, seek to exclude that remedy.

On the central issue of reasonableness, Lord Donaldson M.R. emphasised that the test must be applied not to the circumstances of the actual breach, but to the term as a whole at the time the contract was made. He found the clause to be unreasonably wide because it could foreseeably operate in an unreasonable manner. For example, it would prevent the buyer from setting off a claim even where the seller had committed a fundamental breach or acted in bad faith. The court could not sever the unreasonable applications of the clause from the reasonable ones. He stated:

What is complained of is that clause 12.4 is so wide that it could be used by the plaintiffs to exclude a right of set-off in circumstances in which it would be wholly unreasonable so to do… But if the clause is itself unreasonable, the court is not entitled to ignore it or to re-write it, so that it becomes reasonable.

Stuart-Smith L.J.

Stuart-Smith L.J. concurred, reinforcing the principle that the reasonableness of the term itself is what is assessed, not the reasonableness of relying on it in a specific situation. He highlighted the extensive scope of the clause, particularly the phrase ‘for any other reason whatsoever’. He illustrated its unreasonableness with a hypothetical scenario:

Take a case where the plaintiffs tender a crate of useless metal which bears no resemblance to the goods ordered which are rejected by the defendants. It seems to me that it would be unreasonable to require the defendants to pay 90% of the price in such circumstances, leaving them to their remedy in damages.

He concluded that because the clause was capable of producing such an unreasonable result, it failed the reasonableness test in its entirety.

Implications

This case is a landmark judgment on the application of the Unfair Contract Terms Act 1977 to ‘no set-off’ clauses in contracts made on standard terms. It establishes that such clauses are considered to be clauses which exclude or restrict a remedy, bringing them within the ambit of UCTA and subjecting them to the reasonableness test. The critical implication is that the court will assess the reasonableness of the clause as a whole at the time of contracting. If a clause is drafted so broadly that it could be used unreasonably in hypothetical circumstances, it will be found unreasonable and void, even if its application in the particular case might seem fair. This decision significantly impacts commercial contract drafting, obliging businesses to draft their standard terms, especially those relating to payment and remedies, more narrowly and fairly to ensure they are enforceable.

Verdict: The appeal was allowed. The plaintiff’s application for summary judgment was dismissed.

Source: Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] EWCA Civ 6 (12 February 1992)