CONTRACTS - 31.05.2011

Pay up - there’s a “no set-off” clause!

Our standard wording

Commercial contracts often contain a no set-off clause. They’re usually worded as follows: “In the event of a dispute, the customer is obliged to pay their bill promptly, and without any deductions”. Sometimes, they also impose a specific time limit for bringing a claim; this is often much less than the six years allowed by the Limitation Act 1980. But just because an exclusion like this is mentioned in a contract, it’s still wide open to challenge under the Unfair Contract Terms Act 1977 (UCTA).

What is UCTA?

UCTA says that any exclusion clause must satisfy a reasonableness test. What is, or isn’t, reasonable depends on the circumstances of each case. The main factors the courts will consider include the bargaining position of the parties and whether:

• any inducement, e.g. a discount, was offered to enter into the contract
• the exclusion clause was known about
• the contract involved a special order.

An UCTA of a case

In the recent case of Rohlig UK Limited v Rock Unique Limited 2011, the Court of Appeal considered the reasonableness of a no set-off clause. Rock (R) operated a garden centre and sold sandstone paving imported from India. Between 2002 and 2008 it engaged Rohlig to provide freight forwarding services to transport these materials to England. The contract between them was verbal.

On to the dispute

A dispute about over-payments arose and R refused to pay Rohlig’s invoices, arguing it was entitled to deduct these from Rohlig’s further charges. Rohlig claimed their verbal contract incorporated the standard trading conditions of the British Freight Association. They require payment of all sums due without any set-off and a clause that excludes a supplier’s liability unless they’re notified of a claim within nine months.

UCTA guidance

Interestingly, the court decided in Rohlig’s favour. Helpful guidance on how UCTA should be interpreted in a commercial context was also provided. It said that unless there’s good reason, e.g. the other party didn’t know about it, a no-set off clause is likely to be reasonable. But why did it reach this decision?

Keeping the cash flowing

Basically, the ruling is designed to support businesses by ensuring that they have much-needed cash flow. However, in a consumer setting the application of UCTA would probably be quite different, i.e. this type of clause would probably be deemed unenforceable.

Tip. Although a party’s bargaining power is one of the criteria the court will consider under UCTA claims, it’s likely to be disregarded if a small but commercially experienced buyer has a number of competing suppliers to choose from. If a company is in this position, the directors should bargain hard during negotiations - it’s unlikely that UCTA will be able to dig them out of a hole.