| Date | 18 October 2000 |
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| Judgment | BOC Group Plc & Centeon LLC CA 29 April 1999 |
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| The Issue | Consideration of set-off and whether the right to set-off can be excluded under a contract by express words. |
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| Implication |
It is possible to exclude the right of a paying party to apply a set-off or deduction to payments otherwise due, providing clear express language is adopted. |
printThe construction industry places great importance upon the operation of set-off in administering payments. Indeed it is more common for interim payments to be made where a set-off or deduction has first been applied than for interim payments to be made free of any deduction. The primary reason for this state of affairs is the common practice for main contractors to establish contra charge accounts with each of their sub-contractors whereby the sub-contractors will be charged for a proportion of common site services such as scaffolding, protection, power, cleaning and site offices. In addition to these "standing" charges a set-off may be made in respect of damages incurred by a main contractor as a consequence of a breach by the sub-contractor concerned. Typically this might include delay by the sub-contractor or damage to adjacent works. Main contractors in the past have often been quite cavalier in the manner in which they administer such deductions, confusing true set-off items (sums to be paid by the sub-contractor) with adjustments made to the value of the works carried out by the sub-contractor as set out in the sub-contractor's application for payment. The Construction Act has brought greater clarity to this process, it being necessary now to separately identify the value of the work done, as distinct from the amount of any set-off or deduction, through the separate statutory requirements for notices. A right to set-off or to make any deduction whatsoever from an account may be excluded by the express words of the contract. In April last year the Court of Appeal examined the circumstances in which such an exclusion might be made in the case of BOC Group Plc -v- Centeon LLC. BOC had sold the entire share capital in one of its subsidiaries, Delta Biotechnology, to Centeon. The contract for sale contemplated a minimum price of $45 million as initial consideration plus further consideration which was expressed as a percentage of the annual sales of Delta products. The first instalments of the initial consideration were paid, but Centeon refused to pay a third instalment in the amount of $15 million. It was argued by them that there had been non-disclosures and misrepresentations which gave them a right to an indemnity from BOC in a sum substantially in excess of $15 million. BOC strenuously denied any suggestions of misrepresentation, and in any event argued that the instalment of $15 million should be payable to them without any right of set-off, relying on a clause of the sale agreement which stated: "the purchaser's obligations to make payments of the deferred instalments shall be absolute and unconditional and shall not be affected by transfer of any of the equity interest in Delta, the transfer of any or all of Delta's assets or business, the dissolution of Delta, the termination of the business of Delta, the success or failure of any research projects undertaken by Delta, the future commercialisation or otherwise of any products, Delta's future business or technological or technical successes, or by any other matter whatsoever". BOC argued that the language in this clause to the effect that the purchaser's obligation to make payment of the initial consideration shall be "absolute and conditional" and "shall not be affected by any other matter whatsoever" amounted to a clear and express exclusion of the right of set-off. It was recognised that the words "set-off" were not actually used in the clause but it was argued that the words were sufficiently clear and that the phrase "or any other matter whatsoever" cast the net sufficiently wide. BOC drew attention to the court that "no set-off" clauses merely affected cash-flow and did not exclude liability. Such clauses should thus not be regarded with any particular suspicion. There was no good reason to treat such clauses in the same way as exclusion clauses, the latter purporting to excluding liability altogether. A "no set-off" clause simply does not touch liability. The contractor can still prosecute its claims to judgment. There was common ground between the parties that appropriate language could exclude set-off. The relevant general principles were to be found in the case of Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd where Lord Diplock had said: "but in construing such a contract one starts with presumption that neither party intends to abandon any remedies for its breach arising by operation of law and clear express words must be used in order to rebut this presumption". In Cosworth Engineering v Team Lotus Ltd an exclusion of set-off rights was achieved by the following clause: "waives all and any future claims and rights of set-off against any payments due hereunder and agrees to pay all sums due hereunder regardless of any set-off or cross claim" Similarly in Coca-Cola v Finsat International the language "free and clear of any right of set-off or counter-claim or any withholding or deduction whatsoever" was effective in excluding rights of set-off. In Mottram Consultants -v- Bernard Sunley the contract provided for payment in accordance with an architect's interim certificate less only (i).retention money, and (ii) any sum previously paid. A third exception (iii) in the standard form of contract had been deleted. That exception had expressly permitted a deduction by way of set-off. The House of Lords concluded that the rights of deduction had been deliberately limited and that all other rights of set-off had been excluded. In the present case however it was held that the clause was not sufficiently particular to exclude an arguable set-off and BOC could not demand payment in full of the outstanding instalment pending resolution of the claims against it.
CJ-0041
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