Set-off provisions are frequently included in commercial contracts to enable a party to postpone payment in the event it has its own cross-claims. They are increasingly important in an era where cash flow is king.
A recent decision of the Court of Appeal emphasises the need to use clear and concise wording if rights of set-off are to be excluded. Companies would be well advised to check the nature of any set-off provisions in their contracts before seeking to rely on them as a means of delaying or avoiding payment.
- The case involved a contract which involved the provision of services by a port operator to a Nordic importer and distributor of paper for newspapers
- It was agreed that the port operator was entitled to payment according to the tonnage of paper handled at the port, subject to a minimum annual tonnage. The contract had a "take or pay" provision, which entitled the port operator to a minimum annual payment
- The contract contemplated the port operator billing on a monthly basis for services provided. The Nordic importer and distributor was required to pay each of these monthly bills "without any claim, deduction, counterclaim or set-off", unless the amount billed was disputed on a genuine and bona fide basis
- The Nordic importer and distributor refused to pay the full amount billed by the port operator, on the basis that the services of the port operator had been deficient, and caused the Nordic importer and distributor to suffer a loss
The court had to decide whether, under the terms of the contract, payment had to be made to the port operator for the amount billed, irrespective of whether there was otherwise a right of set-off or counterclaim. The argument for the Nordic companies was that because they genuinely disputed the amounts billed, they were entitled under the contract to withhold payment.
However, the Court of Appeal disagreed. It held that, given the express exclusion in the contract of rights of set-off and counterclaim against amounts billed, the contractual intention was that rights of set-off could not be introduced through the back door by the payer simply saying that it disputed a monthly bill. To do so, the court said, would be to turn on its head the apparent primary position under the contract that set-offs were not permitted.
The decision is consistent with that in the case of Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd (on which both parties relied in the present case for different reasons) where Lord Diplock held that in construing a contract “one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption”.
Implications:
- Clear and concise wording is required if rights of set-off are to be excluded
- However, where the wording is clear, clauses such as the one in this case which require an invoiced sum to be paid upfront in full without set-off will be honoured by the courts
- In practical terms, this case was purely about cash flow. The payment mechanism in the contract in question is a common one which is used in a number of different types of commercial agreement. Companies with similar payment clauses should ensure that they have adequate flexibility in their financial models to operate on the basis of “pay now, dispute later”
Reference: Port of Tilbury (London) Limited v Stora Enso Transport & Distribution Limited
