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

Stewart Gill sued Horatio Myer for unpaid contract sums. Myer sought to set off cross-claims for alleged breaches. Stewart Gill relied on a clause excluding set-off rights. The Court of Appeal held the entire clause must satisfy the reasonableness test under the Unfair Contract Terms Act 1977, and found it unreasonable.

Facts

In October 1988, the defendants (Horatio Myer & Co. Ltd), manufacturers of beds, contracted with the plaintiffs (Stewart Gill Ltd) for the delivery, installation and testing of a conveyor system at a price of £266,400 plus VAT. Payment terms included staged payments with final instalments due on and after completion. The plaintiffs claimed the outstanding 10% of the price. The defendants sought to set off cross-claims arising from alleged breaches of contract by the plaintiffs.

The plaintiffs relied upon clause 12.4 of their General Conditions of Sale, which 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.

Issues

The key issues were:

1. Did section 13(1)(b) of the Unfair Contract Terms Act 1977 apply to clause 12.4?

2. If so, did the clause satisfy the requirement of reasonableness?

3. Could only part of the clause be considered for reasonableness, or must the entire clause be assessed?

Judgment

The Court of Appeal dismissed the appeal. The Master of the Rolls (Lord Donaldson) held that clause 12.4 fell within section 13 of the Act because it excluded the defendants’ right to set off claims against the price and excluded the procedural rules as to set-off.

On the question of whether only part of the clause could be considered reasonable, the Master of the Rolls referred to section 11(1) of the Act:

In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act, … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

Lord Donaldson stated that it was impossible to contend that only part of the clause should be examined. The issue was whether the whole term was fair and reasonable to be included.

Stuart-Smith LJ agreed, holding that the clause as a whole was plainly unreasonable. He noted there could be no justification for preventing a payment or credit being set off against the price, and the width of the concluding words was unlimited, extending even to a defence based on fraud.

Stuart-Smith LJ also observed that the guidelines in Schedule 2, though not directly applicable, were of general application. He noted that paragraphs (b) and (c) of Schedule 2 would be unworkable unless the whole term was being considered, as customers could not divine which part a vendor might ultimately rely upon.

Implications

This case established important principles regarding the application of the Unfair Contract Terms Act 1977:

Whole Clause Assessment

When assessing reasonableness under the Act, courts must consider the entire contractual term, not merely the part being relied upon. A party cannot rely on a blue pencil approach to sever unreasonable parts whilst enforcing the remainder.

Section 13 Scope

Section 13 extends the Act’s protection to clauses that exclude or restrict rights of set-off and procedural remedies, not just clauses that directly exclude liability.

Practical Significance

The decision emphasises that businesses drafting exclusion or limitation clauses must ensure the entire clause is reasonable, as overly broad or unreasonable provisions will render the whole clause unenforceable.

Verdict: Appeal dismissed. The clause excluding the right of set-off was held unreasonable under the Unfair Contract Terms Act 1977 because the entire clause, not just the part relied upon, must satisfy the reasonableness test, and the clause as a whole was plainly unreasonable.

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