Million dollar case rested on small print

A million dollar case, brought under the Sale of Goods Act, raised some interesting points to consider when drafting payment terms and ‘no set-off’ clauses.

The case of FG Wilson (Engineering) Ltd v John Holt & Company (Liverpool) Ltd arose because Holt was unable to keep to the payment terms set out in Wilson’s conditions of sale, as well as other terms allowing Holt an extended line of credit.

Among other things, Wilson had included a ‘no set-off’ clause. This barred buyers from setting off the price of Wilson’s products against any other sums due, without prior written agreement.

Wilson’s claim, worth US$12.6m, was for the price of generators and spare parts sold and delivered. Confident in the strength of their position, they applied to court for summary judgment.

Holt disputed the application, arguing that the claim could be set off against another action they had brought against Wilson for breach of an unrelated contract. They said Wilson were not protected, in this instance, by the ‘no set-off’ clause because of the retention of title (ROT) clause in their payment terms. By this, Holt meant that title to the products had not yet passed to them because they had not been paid for.

The High Court found in favour of Wilson. Despite the ROT clause, they found that title of the goods had passed to Holt because they had been sold on to Holt’s customer.

Holt had also argued that the ‘no set-off’ clause was inherently unreasonable but the court disagreed. The clause was not too narrowly drawn and was reasonable, given the length of Wilson’s credit terms, the high value of the goods supplied, their need to maintain cash flow and Holt’s poor record in terms of payments and general financial stability.

Many businesses will be facing similar situations in the present economy. A review and update of terms and conditions of sale, especially payment terms, can help avoid tangled and costly disputes like this one.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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