B e f o r e :
THE MASTER OF THE ROLLS (Lord Donaldson)
LORD JUSTICE BALCOMBE
LORD JUSTICE STUART-SMITH
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Between:
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STEWART GILL LIMITED
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Appellants
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v.
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HORATIO MYER & CO. LTD
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Respondents
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(Transcript of The Association of Official Shorthandwriters Limited, Room 392, Royal Courts of Justice, and 2 New Square, Lincoln's Inn, London WC2A 3RU.)
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MR. DAVID JOSEPH (instructed by Messrs. Palmer Cowen) appeared for the Appellants (Plaintiffs).
MR. MICHAEL YELTON (instructed by Messrs. Copleys, St. Ives, Huntingdon) appeared for the Respondents (Defendants).
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HTML VERSION OF JUDGMENT
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THE MASTER OF THE ROLLS: This appeal raises a not uninteresting point under the Unfair Contract Terms Act 1977. It arises on an appeal against a decision of His Honour Judge Loyd Q.C., sitting in the Official Referee's court, giving the defendants unconditional leave to defend.
In or about October 1988 the defendants, who are manufacturers of beds, entered into a contract with the plaintiffs for the delivery, installation and testing of a twintrack Power and Free Overhead Conveyor system at a price of £266,400 plus V.A.T. There was also provision for additional work and special equipment to be the subject of extra charges.
The terms of payment were 15 per cent with the order, 75 per cent by progress payments during the work, 5 per cent on completion of installation and 5 per cent 30 days following completion. All these stages have been reached and I understand the plaintiffs' claim to be for the 10 per cent of the price due on completion or 30 days thereafter. The defence to the claim is based upon alleged breaches of the contract by the plaintiffs giving rise to cross-claims which overtop and pro tanto can be set off against the amount claimed. The plaintiffs, whilst denying the defendants' cross-claims, accept that, but for a special term of the contract, on these facts the defendants would be entitled to unconditional leave to defend. That term, which is one of the plaintiffs' General Conditions of Sale to which the contract was admittedly subject, is in the following terms:-
"12.4 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."
The defendants accept that if this clause can survive the impact of the 1977 Act, the plaintiffs are entitled to summary judgment, although this would leave it open to the defendants to pursue their claims as a counterclaim and would also, incidentally, leave it open to the court in giving judgment for the plaintiffs additionally in an appropriate case to stay execution upon that judgment or to do so conditionally upon the money being brought into court.
The defendants relied upon sections 3, 7 and 13 of the Act.
Judge Loyd held that neither sections 3 nor 7 were applicable, but that section 13 applied and in consequence the clause could only be relied upon if it was reasonable. His conclusion on that issue was expressed in the following terms:-
"I am afraid that I cannot conclude that the material before me in relation to reasonableness is in any way complete. It would be quite wrong on the state of the evidence to say that I am satisfied that the test of reasonableness has been met enabling me to say that clause 12.4 should remain in force.
With some reluctance I have to decline the Plaintiffs' application and give unconditional leave to the Defendants to defend. Defendants' costs in any event."
With all respect to the judge, I think that he overlooked the fact that such a clause, if it is to be effective at all, can only take effect either upon an application for summary judgment under Order 14 or on the subsequent hearing of a preliminary point as to its reasonableness. To give unconditional leave to defend without ordering the hearing of a preliminary point is in effect to render the clause nugatory, since by the end of a final hearing it would not matter whether there was a set-off or separate judgments on claim and counterclaim. He should therefore have reached a decision on its reasonableness in the light of such evidence as he had.
The 1977 Act approaches contracts governed by the law of sale of goods or hire-purchase in some respects differently from other contracts - see for example section 7. Accordingly it needs to be said, and this was not in controversy, that this contract was not governed by the law of sale of goods or hire-purchase, but by the Supply of Goods and Services Act 1982.
Section 3 of the Act applies where, as here, one party to a contract deals with the other on that other's written standard terms of business. However, it is limited to terms excluding or restricting liability or entitling the party concerned to render no contractual performance or a performance which is substantially different from that which was reasonably expected of him. Clause 12.4 is not such a clause, but the section is relevant to a consideration of section 13, although it is not there referred to in express terms.
Section 7 applies where, as here, the contract transfers the ownership of goods otherwise than under a contract for the sale or hire-purchase of goods. Unlike section 3 it is referred to in section 13 but, like section 3, it is concerned with exclusion or restriction of liability.
This leaves section 13 which is in the following terms:-
"Varieties of exemption clause
(1) To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents -
(a) making the liability or its enforcement subject to restrictive or onerous conditions;
(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;
(c) excluding or restricting rules of evidence or procedure;
and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.
(2) But an agreement in writing to submit present or future differences to arbitration is not to be treated under this Part of this Act as excluding or restricting any liability."
It is a trite fact (as contrasted with being trite law) that there are more ways than one of killing a cat. Section 13 addresses this problem. On behalf of the plaintiffs it was submitted that it only did so to the extent of rendering ineffective any unreasonable term which by, for example, introducing restrictive or onerous conditions, indirectly achieved the exclusion or restriction of liability which, if achieved directly, would fall within the scope of other sections. The plaintiffs rightly say that clause 12.4 does not have this effect. On behalf of the defendants it was submitted that it had a wider scope.
The answer is, of course, to be found in the wording of the section, but it does not exactly leap out of the print and hit one between the eyes. Analysing the section and disregarding words which are irrelevant, it seems to deal with the matter as follows:-
"To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents - ".
This seems to me to do no more than give expression to the "cat" approach. Both sections 3 and 7 would render ineffective any clause in the plaintiffs' written standard terms of business which excluded or restricted liability in respects which are here material and section 13 extends this in some way. In order to find out in what way, one must read on:-
"It also prevents -
(a) making the liability or its enforcement subject to restrictive or onerous conditions;
(b) excluding or restricting any right or remedy in respect of the liability ...;
(c) excluding or restricting rules of ... procedure".
Now clause 12.4 can perhaps be said to make the enforcement of the plaintiffs' liability subject to a condition that the defendants shall not have sought to set off their own claims against their liability to pay the price and this might well be said to be onerous. However, I do not think it necessary to pursue this, because it is quite clear that clause 12.4 excludes the defendants' "right" to set off its claims against the plaintiffs' claim for the price and further excludes the remedy which they would otherwise have of being able to enforce their claims against the plaintiffs by means of a set-off (see paragraph (b)). It also excludes or restricts the procedural rules as to set off (see paragraph (c)). Thus far, therefore, the defendants can bring themselves within the section.
We then get to the words "and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty." Although I find this obscure, I do not think that these words restrict the ambit of the preceding words. I think that they constitute an extension and that what is intended to be covered is an exclusion or restriction of liability not by contract but by reference to notices or terms of business which are not incorporated in a contract. If this is correct, it is irrelevant to the present case.
On this construction of section 13 the defendants succeed because, whatever the reasonableness of a clause which excludes or restricts a right of set-off, nothing could prima facie be more unreasonable than that the defendants should not be entitled to withhold payment to the plaintiffs of any amount due to the plaintiffs under the contract by reason of a "credit" owing by the plaintiffs to the defendants and, a fortiori, a "payment" made by the defendants to the plaintiffs. In this context "payment" must I think mean overpayment under another contract and credit mean "credit note" or admitted liability again under another contract, because otherwise it would be doubtful whether it could be said by the plaintiffs that any amount was due to them under the contract. Mr. D. P. Joseph appearing for the plaintiffs did not seriously gainsay this, but he submitted that as the defendants were not seeking to rely upon a payment or credit, this part of the clause could be ignored. In support of my view that clause 12.4 as a whole completely fails the test of reasonableness, I gratefully adopt the additional considerations based upon its concluding words and Schedule 2 of the Act discussed in the judgment of Stuart-Smith L.J. which I have read in draft.
Whether or not it is possible to sever parts of the clause depends upon section 11(1) which is in these terms:-
"The 'reasonableness' test
(1) 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."
In the face of this wording it seems to me to be impossible to contend that we should look only at the part of the clause which is relied upon. The issue is whether "the term [the whole term and nothing but the term] shall have been a fair and reasonable one to be included". This has to be determined as at the time when the contract is made and without regard to what particular use one party may subsequently wish to make of it. I would unhesitatingly answer this in the negative and accordingly would dismiss the appeal.
LORD JUSTICE BALCOMBE: I have had the advantage of reading in draft the judgments of Lord Donaldson of Lymington M.R. and Stuart-Smith L.J. I agree with them, and for the reasons which they give, that this appeal should be dismissed.
LORD JUSTICE STUART-SMITH: Section 3 of the Unfair Contract Terms Act 1977 provides:
"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term -
(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach;
except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."
Section 13(1), so far as it is relevant, provides:
"To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents -
(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy ..."
Two questions therefore arise in this appeal:
(1) Is clause 12.4 of the plaintiffs' standard conditions of contract caught by section 13(1)(b) of the Act?
(2) If so, have the plaintiffs satisfied the requirement of reasonableness?
The use of the word "also" in the introductory words shows that the section is intended to extend the scope of section 3 of the Act. Applying the words of section 13(1)(b) to the clause in question, the liability referred to is that of the plaintiffs, the alleged contract breaker, and the right or remedy is that of the defendant. In my judgment, but for the provisions of clause 12.4, the defendants would have a right to set off the claim for damages in respect of the plaintiffs' liability for breach of contract against the claim for the price. This is a right given by the law in the form of an equitable set-off. Does clause 12.4 exclude or restrict that right? In my judgment plainly it does, since it prevents the defendants from relying on the right of set-off.
The burden of satisfying the court that the term is reasonable rests on the plaintiffs in this case. What is it that they have to show is reasonable? Is it clause 12.4 as a whole or is it only that part of it which the plaintiffs need to rely upon in this case to defeat the defendants' set-off, namely "The consumer shall not be entitled to withhold any amount due to the company under the contract by reason of having ... set off counterclaim allegation of incorrect or defective goods ..."
If it is the former, then in my judgment the clause is plainly unreasonable. There can be no possible justification for preventing a payment or credit to be set off against the price claimed, and the width of the concluding words "or for any other reason whatsoever which the customer may allege excuses him from performing his obligation" is unlimited, and would extend for example to a defence based on fraud.
In my judgment it is the term as a whole that has to be reasonable and not merely some part of it. Throughout the Act the expression used is "by reference to any contract term.", "the contract term satisfies the requirement of reasonableness." (see sections 3 and 7). And in section 11 the reasonableness test is laid down as "in relation to a contract term, the requirement for reasonableness 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." Although the question of reasonableness is primarily one for the court when the contract term is challenged, it seems to me that the parties must also be in a position to judge this at the time the contract is made. If this is so, I find it difficult to see how such an appreciation can be made if the customer has to guess whether some, and if so which, part of the term will alone be relied upon.
Section 11(2) of the Act requires the court which is determining the question of reasonableness for the purpose of sections 6 and 7 to have regard in particular to the matters specified in Schedule 2. Although Schedule 2 does not apply in the present case, the considerations there set out are usually regarded as being of general application to the question of reasonableness. Two paragraphs of these guidelines would in my judgment be unworkable unless the whole term is being considered.
Paragraph (b) provides:
"whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term; ..."
If there was an inducement, it would I think be quite impossible in most cases to say that it related only to the words which the party seeking to establish reasonableness relies upon as opposed to those he wishes to delete. It is equally unreal to suppose that the customer could divine which part the vendor will ultimately seek to rely upon so as to decide whether other persons are willing to contract without the term. Paragraph (c) provides:
"whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);…"
In my judgment the customer would be most unlikely ever to know the extent of the term if the vendor is entitled, when it is questioned as to reasonableness, to rely on only part of it.
These examples in my judgment support the construction of the word term as being the whole term or clause as drafted, and not merely that part of it which may eventually be taken to be relevant to the case in point.
Nor does it appear to me to be consistent with the policy and purpose of the Act to permit a contract or to impose a contractual term, which taken as a whole is completely unreasonable to put a blue pencil through the most offensive parts and say that what is left is reasonable and sufficient to exclude or restrict his liability in a manner relied upon.
In these circumstances it is unnecessary to decide whether on the material before the court the plaintiff had discharged the burden of showing that the particular part of clause 12.4 relied upon by them was reasonable.
I would dismiss the appeal.
Order: Appeal dismissed with costs; leave to appeal to the House of Lords refused.
