Stewart Gill Ltd v Horatio Myer & Co Ltd

Under the Unfair Contract Terms Act 1977, a term preventing a customer from withholding payment or relying on equitable set-off may restrict a right or remedy within section 13, even if it does not directly exclude liability. Reasonableness must be assessed by considering the contractual term as a whole, at the time of contracting and in light of the circumstances then known or contemplated. A clause that is plainly unreasonable overall cannot be saved by severing its more objectionable wording.

Stewart Gill contracted to deliver and install an overhead conveyor system for Horatio Myer. Stewart Gill claimed the final 10 per cent of the contract price. Horatio Myer alleged breaches giving rise to cross-claims which could be set off against the price, but Stewart Gill relied on clause 12.4 of its standard conditions, which purported to prevent withholding payment, set-off and counterclaim.

The High Court judge held that sections 3 and 7 of the Unfair Contract Terms Act 1977 did not apply, but that section 13 did, and gave unconditional leave to defend because the evidence on reasonableness was incomplete. Stewart Gill appealed. The issues were whether clause 12.4 was caught by section 13 and whether its reasonableness could be assessed by considering only the part relied upon.

The appeal was dismissed with costs. Leave to appeal to the House of Lords was refused.

1. Lord Donaldson MR held that clause 12.4 excluded or restricted the defendants’ right to set off claims for breach against the price, together with the related remedy and procedural rules. Section 13 of the Unfair Contract Terms Act 1977 therefore applied, although sections 3 and 7 did not directly catch the clause.

2. The reasonableness inquiry concerned the whole contractual term. Under section 11(1), the question was whether the term as drafted was fair and reasonable for inclusion, having regard to circumstances known or contemplated when the contract was made. The court was not confined to the wording relied upon in the particular dispute.

3. The clause was plainly unreasonable as a whole. It purported to prevent withholding payment for credits or payments owed by the supplier and contained unlimited concluding words capable of extending to matters such as fraud. Lord Justice Stuart-Smith additionally relied on the considerations in Schedule 2, although it did not directly apply, and held that severing the most objectionable wording would be inconsistent with the Act’s policy and purpose.

4. Lord Justice Balcombe agreed with both judgments. The judge below should have determined reasonableness on the available evidence, either on the summary judgment application or as a preliminary issue, rather than granting unconditional leave to defend in a way which rendered the clause nugatory.

• Court of Appeal (Civil Division): [1992] EWCA Civ 6. Appeal dismissed with costs; leave to appeal to the House of Lords refused.
• High Court of Justice, Queen’s Bench Division: His Honour Judge Loyd QC gave the defendants unconditional leave to defend.