Exclusion of the Right of Set-Off In Commercial Cases
What is Set-Off in Commercial Disputes?
Set-off can be a powerful tool in commercial disputes. It allows one party to withhold or reduce payment by reference to a cross-claim against the other. For obvious cash-flow reasons, many commercial contracts now seek to exclude that right.
Freedom of Contract and Excluding Set-Off
As a matter of principle, there is nothing contrary to public policy in commercial parties agreeing that sums due under a contract must be paid in full without set-off, counterclaim, deduction or withholding. The courts will generally uphold such clauses, provided the wording is clear. That is the key point from the authorities. In Coca-Cola Financial Corpn v Finsat International Ltd [1998] QB 43 the Court of Appeal recognised that parties are free to agree that payment obligations are to operate without reference to cross-claims. The issue is therefore not whether set-off can be excluded, but whether the contract clearly does so.
The Importance of Clear Contractual Wording
Clarity is critical. The court will construe the clause in the usual way, looking at the wording used and the contract as a whole. A clause which expressly provides that sums must be paid “in full without set-off, counterclaim, deduction or withholding” is far more likely to be effective than vague or indirect wording. The same general approach appears in In the matter of Kaupthing Singer and Friedlander Ltd [2009] EWHC 740 (Ch), where the court emphasised that the question is whether the language used clearly shows that payment is to be made without reference to the claim otherwise said to be available by way of set-off.
Case Law Guidance on No Set-Off Clauses
A short illustration is FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC 2477 (Comm). In that case Popplewell J considered a clause stating that the buyer was not to apply any set-off to the price without the seller’s prior written agreement. The decision is a useful reminder that the court will examine the wording closely and treat payment machinery as a serious contractual allocation of risk in a commercial contract.
Limitations and Exceptions to Excluding Set-Off
That said, not every no set-off clause will succeed. Much will depend on the precise wording and the nature of the defence being raised. The court may also distinguish between a true set-off argument and a contention that no debt ever became properly due in the first place.
Statutory Considerations: Unfair Contract Terms Act 1977
There is also a statutory note of caution. In some cases, particularly where standard terms are involved, a no set-off clause may be subject to scrutiny under the Unfair Contract Terms Act 1977. In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600 the Court of Appeal held that such a clause was subject to the requirement of reasonableness.
Northern Ireland Perspective and Practical Drafting Points
From a Northern Ireland perspective, the same approach applies. The question will usually be whether the clause clearly excludes set-off and, if relevant, whether it survives any challenge under the 1977 Act. The practical lesson is simple. If a party wants to exclude set-off, it should say so expressly and in terms that attach directly to the payment obligation. Clear drafting will usually be upheld. Unclear drafting invites dispute. The Unfair Contract Terms Act 1977 extends to Northern Ireland, so the same statutory caution remains relevant here.
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