Esso Petroleum Co Ltd v Milton

Equitable set-off requires a close connection between the claim and counterclaim, and a relationship making it manifestly unjust to enforce one without regard to the other. A claim for future losses from an alleged repudiatory breach was insufficiently connected with the price of particular fuel deliveries, especially where the fuel was rapidly converted into cash.

The appeal was therefore allowed. A majority also held that direct-debit payment for goods or services already received will generally preclude set-off, although Lord Justice Simon Brown rejected that wider analogy. The contractual exclusion clause was ineffective because its breadth was unreasonable under the Unfair Contract Terms Act 1977.

Esso appealed from an order of Judge Anthony Thompson QC, sitting in the Queen’s Bench Division at Exeter, which dismissed its application for summary judgment and granted the respondent unconditional leave to defend.

Esso claimed £167,885.81 for fuel deliveries made to two service stations. The debt was admitted, but the respondent counterclaimed damages for alleged repudiatory breach and sought to set them off against the debt. The appeal concerned the arguability of that counterclaim, the effect of cancelling a direct-debit mandate, the connection required for equitable set-off, and the effect of a contractual exclusion clause.

Disposition and procedure. The appeal was allowed with costs, and leave to appeal was refused. On an Order 14 appeal, where determinative legal issues required no further evidence, the court had to reach clear and final conclusions rather than grant unconditional leave to defend. Lord Justice Simon Brown adopted the approach in Stewart Gill Limited v Horatio Myer & Co Ltd [1992] QB 600; Sir John Balcombe expressly agreed.

1. Counterclaim. Lord Justice Simon Brown and Sir John Balcombe held that the counterclaim was properly arguable for summary-judgment purposes, despite serious difficulties concerning liability, acceptance of repudiatory breach and damages. Lord Justice Thorpe regarded the alleged acceptance and the pleaded quantum as lacking realistic arguability, but that view did not determine the common basis of the decision.
2. Equitable set-off. Applying Hanak v Green [1958] 2 QB 9 and Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] AC 927, the court required both a close connection with the same transaction and such a relationship between the claims that it would be manifestly unjust to enforce the debt without considering the counterclaim.
3. Application. The individual fuel deliveries were not closely connected with a claim for speculative future losses arising from an alleged breach of the overall trading relationship. A common agreement and trading relationship were insufficient. The deliveries had been made before any loss was suffered, and the fuel was readily converted into cash. It was therefore unjust to withhold payment pending trial. All three judges agreed on this ground.
4. Direct debit. Lord Justices Thorpe and Balcombe accepted the fundamental principle in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei G.M.B.H. [1977] 1 WLR 713: direct-debit payment for goods or services received should generally place the seller in no worse position than payment by cheque. Lord Justice Simon Brown rejected that general extension, although he agreed with the result on insufficient connection.
5. Exclusion clause. The majority also held that clause 34 of schedule 7 could not be relied upon. Lord Justice Simon Brown considered it insufficiently clear and, in any event, unreasonably wide. Sir John Balcombe considered it clear but likewise held it unreasonably wide by reference to Stewart Gill. The clause therefore fell foul of the Unfair Contract Terms Act 1977.

1. Court of Appeal (Civil Division): Allowed Esso’s appeal with costs and refused leave to appeal.
2. Queen’s Bench Division: Judge Anthony Thompson QC dismissed Esso’s application for summary judgment and granted the respondent unconditional leave to defend.