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Court Ponders Effect of ‘No Set-Off’ Clause

In an important ruling which defines the interplay between ‘no set-off’ and retention of title clauses in commercial contracts, the Court of Appeal has upheld a company’s challenge to an order requiring it to pay $12 million to a supplier of generator equipment.

The supplier had sued the company in respect of unpaid invoices for equipment with which the latter had been provided with a view to onward sale in Nigeria. The company counter-sued for more than $53 million, claiming that the supplier had breached an exclusive distributorship agreement by supplying equipment to others in the Nigerian market.

In entering summary judgment for the supplier, the High Court found that a no set-off clause within the contract created an immediate obligation on the company to pay for the goods, regardless of the validity or otherwise of its counter-claim. Whilst failing to unseat the High Court’s decision in respect of the ambit and interpretation of the no set-off clause, the company’s appeal was nevertheless allowed by a majority.

The contract was also subject to a retention of title clause whereby the supplier had retained ownership of the equipment until such time as the company paid in full for the same. On that basis, the Court found that the company, whilst retaining the right to sell the equipment on, had never acquired title to it.

In those circumstances, the supplier’s claim could not be viewed as an ‘action for the price of the goods’ within the meaning of Section 49 of the Sale of Goods Act 1979. Having never owned the equipment itself, the company had held it as the supplier’s fiduciary agent. Although the company was obliged to account to the supplier for the agreed price on achieving a re-sale of the goods, the no set-off clause had no application to what was an agency relationship.