John Dee Group Ltd & Anor v WMH (21) Ltd

Where a contract creates separate charges payable at different times, advance payments cannot be appropriated against other charges or an overall balance unless the contract provides for it. An anti-set-off term may require each charge to be paid in full without deduction, both during the contract and after termination.

In a debenture context, the term can protect the debenture-holder where the counterparty’s cross-claim has effectively passed into different beneficial ownership. A credit note acknowledging a debt does not, without more, vary or waive the term or create a right of set-off. The court noted that statutory insolvency set-off would operate differently in a liquidation.

John Dee Group Ltd and John Dee Transport Ltd supplied transport services to WMH (21) Ltd, formerly Magnet Ltd, under a contract containing separate standing, running and additional charges and an anti-set-off clause. After a debenture was enforced and receivers appointed, the supplier sued for unpaid charges.

Neuberger J held that Magnet could neither deduct advance standing-charge payments of about £879,905 nor set off a £204,224 credit note against the sums claimed. The appeal concerned whether the prepayments reduced the contractual amounts payable, whether the anti-set-off clause ceased to operate after termination or could not bind the debenture-holder, and whether the credit note varied or waived that clause.

The Court of Appeal dismissed the appeal with costs. Morritt LJ gave the judgment, with Thorpe LJ and Kennedy LJ agreeing. Leave to appeal was refused.

1. Prepayments. The contract created separate standing, running and additional charges, each payable at a different time. It contained no mechanism for appropriating advance standing-charge payments to running charges, additional charges or an overall balance. The amounts payable under clause 5.1.2 were therefore the separate charges computed under the contract, without deduction by reference to the prepayments. The interest provision in clause 5.1.1.5 confirmed that the charges were treated separately.
2. Anti-set-off clause. Clause 5.1.2 prevented both deduction and set-off. Its application was not confined to the period during which the contract was being performed. The words referring to any occasion, together with clause 5.2’s recognition that sums could remain payable after termination, meant that the clause also applied when the contract ended.
3. Debenture context. The clause was particularly important because the debenture-holder had the benefit of the charged book debts, while the counterparty’s cross-claim could not be paid from assets which had been charged. The court referred to Rother Iron Works v Canterbury Precision Engineering [1974] QB 1. It contrasted this situation with liquidation, where Rule 4.90 of the Insolvency Rules would override the clause and require set-off, as illustrated by Stein v Blake [1996] 1 AC 243.
4. Execution practice. The court observed, obiter, that the usual practice of allowing execution only for the balance of cross-claims might not apply where beneficial ownership of the claims was in different hands because of an assignment and contractual set-off was excluded. The point was not pursued because it did not arise on the appeal. The court referred to Stumore v Campbell [1892] 1 QB 314 and Coca Cola Financial v Finsat [1998] QB 43.
5. Credit note. The credit note was an admission that a debt was owing. It did not state that the amount could be set off and did not refer to clause 5.1.2. In the circumstances, it was neither an agreement varying the contract under clause 10.2 nor a waiver of the anti-set-off provision. The judge was correct on both issues.

1. Court of Appeal (Civil Division): The appeal from Neuberger J’s order was dismissed with costs. Leave to appeal was refused. [1998] EWCA Civ 1182.
2. High Court: On 5 December 1996, Neuberger J held that Magnet was not entitled to deduct the prepayments or set off the credit note against the sums claimed.