CL-2022-000507 - [2025] EWHC 2505 (Comm)

There have been attempts to argue that where a claimant’s claim has been caused by the “wrong” which forms the basis of the answer, the no set-off clause should not apply: e.g. where the defendant claims it was induced to enter into the contract under which the debt arose by an actionable misrepresentation. The suggestion that a widely-worded no set-off clause did not apply in similar circumstances was rejected by the Court of Appeal in Society of Lloyd’s v Leighs [1997] CLC 1398, 1408, albeit in a case which raised the complication that the party against whom the misrepresentation claim arose was suing as assignee of the debt. The Court of Appeal distinguished the case before them from cases where “breaches of warranty by the seller or provider of services reduce or extinguish the price that would otherwise be due for the goods sold or services provided” (which they referred to as “pure defence” cases), albeit stating “we consider that the words ‘or other deduction on any account whatsoever’ would probably be wide enough to encompass the reduction or extinction of the premium by way of ‘pure’ defence.” Similarly, in Skipskredittforeningen v Emperor Navigation [1997] CLC 1151, the case proceeded on the basis that a no set-off clause in a loan contract was capable of applying to a claim for damages on the basis that the defendant had been induced to enter into the contract by misrepresentation.

The issue of whether a claim to “abate” the price of goods or services by reference to defects in them is caught by a no set-off clause has been considered in a number of cases, the overall effect of which is that it is possible to exclude the operation of abatement through an appropriately worded clause, but there will be forms of clause which exclude legal and equitable set-off but not abatement. In Acsim (Southern) Ltd v Danish Contracting & Development (1990) 47 BLR 55, a construction contract provided that with certain exceptions, “no other rights whatsoever shall be implied as terms of this sub-contract relating to exceptions.” Those words were held not to “affect the right of a contractor to defend a claim … by showing that the sum claimed includes sums to which the sub-contractor is not entitled under the terms of the contract or to defend by showing that, by reason of the sub-contractor’s breaches of contract, the value of the work is less than the sum clamed under the ordinary right of defence established in Mondel v Steel” (p.70). However, the Court acknowledged that a party seeking to achieve that result “can, without difficulty, find words apt for that purpose.” The same outcome was conceded on similar wording (and with the Court’s approval) in Mellowes Archital v Bell Products (1997) 58 Con LR 22. Similarly, in NH International (Caribbean) Ltd v National Insurance Property Development Co. Ltd [2015] UKPC 37, wording regulating a contractor's entitlement “to set-off against or make any deduction from an amount certified” was held not to preclude the employer from raising an abatement argument, namely that the work for which the contractor was seeking payment was so poorly carried out that it did not justify any payment or was so defective that it was worth significantly less than the contractor was claiming, relying on Mellowes.

In Totsa Total Oil Trading SA v Bharat Petroleum [2005] EWHC 1641 (Comm), the relevant clause provided “payment shall be made without discount, deduction, withholding, set-off or counterclaim in United States Dollars … on or before the due date … against presentation to Buyer of hard copy or telex invoice together with original bills of lading or letter of indemnity …”. The buyer claimed that the quantity shipped was short. At [20]-[21], Christopher Clarke J held that while the buyer’s claims could be “put forward as counterclaims, claims to equitable set-off or claims to abate a price”, they were all caught by the provision (the judge observing that “set-off and counterclaim are dealt with expressly, and a claim by way of abatement involves claiming a deduction from the price”.) At [24], he stated:

“It seems to me that when a buyer declines to pay the full amount of the invoice upon the ground that not all of the oil that he contracted for has been shipped, what he is doing is seeking to deduct from his payment to the seller such proportion of the invoice as he declines to pay and to withhold payment of that amount. That is exactly what the buyers have undertaken not to do.”

In the case of Skipskredittforeningen v Emperor Navigation [1997] CLC 1151, a further issue arose as to whether an assumed wrongful failure to realise the value of security for a loan was caught by a no set-off clause in a loan agreement. Mance J noted that cases had treated a mortgagee’s claim for loss arising from such a failure as an “allowance” and he accepted at p.1167 that “it was arguable in law that failure to use reasonable care in realizing assets could entitle a borrower to claim a reduction in his indebtedness corresponding in amount to the amount of any loss caused by the failure.” Nonetheless, the alleged reduction was held to fall within the words “without set-off … whatsoever”.

What of circuity of action (where the defendant contends that the amount for which summary judgment is sought against it will, if recovered, constitute an amount which the defendant is immediately entitled to recover back from the claimant by reference to some separate legal entitlement, very often a claim arising out of an anterior wrong, but perhaps because of a contractual right of recovery, e.g. under an indemnity)? In Workington Harbour and Dock Board v Towerfield (Owners) [1951] AC 112, 148, Lord Normand referred at p.148 to the principle “frustra petis quod mox es restiturus” (helpfully, and necessarily in my case, translated by Geoffrey Lane LJ in Post Office v Hampshire CC [1980] QB 124, 134 as “it is no good trying to get something which immediately afterwards you are going to have to hand back”). Conceptually, this raises a similar issue to that considered in Leighs, and appropriately worded “no set-off clauses” have been held to apply to circuity arguments. In Petroplus Marketing AG v Shell Trading International Ltd [2009] EWHC 1024 (Comm), payment was to be rendered “in full without deduction, offset or counterclaim”. This was held to be sufficient to preclude an argument that the price should be reduced to the extent that it arose from the seller’s assumed wrongful late shipment (the price being tied to the bill of lading debt).

Two cases dealing with an argument which might be regarded as a sub-set of the circuity doctrine – the so-called “prevention principle” – reached different conclusions on the application of the “no set-off” clauses in issue to the argument that the defendant’s liability had arisen because the claimant’s breach of a co-operation agreement had prevented the defendant from performing. In Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2018] EWHC 2977 (Comm), clause 6.4 of a contract for the supply of steel provided that “no default by the Buyer of its obligations under this Agreement …. or any other action or inaction by the Buyer, any Alternative Buyer or a third person shall suspend, terminate or otherwise extinguish the Seller's payment obligation.” Teare J held that this clause, which he described as “rather wider in effect than simple no set-off clauses” ([18]) precluded reliance on a defence based on the prevention principle ([19]-[20]).

In TMF Trustee Limited v Fire Navigation Ince [2019] EWHC 2918 (Comm), a clause requiring payment “without any form of set-off, cross-claim or condition” was held to be insufficient to exclude a defence based on the prevention principle, Phillips J stating at [41] that the effect of the no set-off clause was “that the Borrowers cannot resist liability for amounts due by reason of any alleged set-off or cross-claim, but that does not in any way stop the Borrowers from arguing that the amounts claimed are not due in the first place”. At [42], he held that the authorities establish “that the prevention principle ‘excuses’ a breach where performance was prevented by the other party's breach, giving rise to a defence to liability for the breach itself, not merely defence by way of a set-off.” However, I do not understand the case to hold that an appropriately worded no set-off clause could not apply to a defence based on the prevention principle, and I am satisfied that it could.

I remain of the view I expressed in Delivery Hero v Mastercard [2023] EWHC 1827 (Comm), [22]-[23], in reliance on Fibrosa Spolka Akcyna v Fairbairn Lawson Come Barbour Limited [1943] AC 32, 55, that the principle summarised in Chitty and Treitel is best explained by reference to the defence of circuity of action. I note that the deputy judge analysed the principle in these terms in Ministry of Sound (Ireland) Limited v World Online Limited [2003] EWHC 2178 (Ch), [63] as did a different deputy judge in Lomax Leisure Limited v Miller [2007] EWHC 2508, [54]. The latter’s statement that “a liability to honour the cheques never properly arose” is readily understood as meaning never arose in a way which meant that the claim could not be resisted on the circuity basis.

On the basis of the authorities and as a matter of principle, I am satisfied that circuity defences can be made the subject of no set-off clauses when these are appropriately worded. Clause 8.9.1 is a widely worded clause, providing for payment “without any set-off or counterclaim whatsoever and free and clear of all deductions or withholdings whatsoever ….”

The passage relied upon in Hyundai is at 1136, where Viscount Dilhorne states:

“I conclude that save in the case of sales of land and goods and where there has been a total failure of consideration, it was the law prior to the decision in Lep Air Services Ltd. v. Rolloswin Investments Ltd [1973] A.C. 331 that cancellation or rescission of a contract in consequence of repudiation did not affect accrued rights to the payment of instalments of the contract price unless the contract provided that it was to do so.”

That passage is concerned with the (different) question of whether a right to payment which has accrued prior to termination of a contract can be affected by termination, the answer being that it can when the termination has the result that there is a total failure of consideration but not otherwise. It does not follow, however, that the “effect” in question is that no debt ever accrued, as opposing to a defence coming into existence, still less that it is not possible through an appropriately worded no set-off clause to require that defence to be pursued by independent action.

I do not believe Mirimskaya v Evans [2007] EWHC 2073 (TCC), assists. The case involved judgment following a trial, and the principle applied was that in Hyundai, namely “after a repudiation, unpaid instalments which were due prior to the repudiation remain payable by the party repudiating unless there has been a total failure of consideration in respect of those instalments.” At [63], the deputy judge explained the reason why total failure of consideration is language redolent of the circuity analysis, rather than a Pure No Debt analysis:

“The result in law is that, although DZL might technically be entitled to payment of those paid instalments, the Claimant would have a clear restitutionary right to recover them immediately due to a total failure of consideration. In these circumstances the law does not require the instalments to be paid and then recovered.”

There is an obviously closer connection between the basis of the claim and the basis of the answer than found in many other “circuity” contexts.

In this case, the total failure argument is one assumed to be available when the MR first became due (contrast a case in which it might arise after the debt became due, e.g. because goods under a contract of sale were subsequently rejected, and property revested in the buyer).

Virgin is able to plead and prove what it needs to plead and prove for the purposes of establishing its debt claim absent any response, and there is no arguable basis for denying those elements. While that is not sufficient to prevent the answer from being a Pure No Debt argument, it is necessary.

It is not alleged that there has been any change in the status of the debt through a subsequent agreement between the parties, or that it has been satisfied in a manner which, if it had occurred, would constitute an undisputed means of discharging the payment.

Alaska’s answer is one which is capable of being asserted and given effective relief by way of independent action (which is one of the basic premises of a no set-off clause, often reflected in their characterisation as “pay now, sue later” clauses).

Entering judgment for the debt does not create a cause of action estoppel which precludes later reliance on the answer (such that it can be said that the answer must either be taken into account when judgment is sought for the debt, or not at all).

From a commercial perspective, the issue raised (whether there has been a breach of a contractual obligation on disputed facts) is the type of dispute which a no set-off clause is ordinarily intended to prevent being set up as an answer to a payment obligation arising as one of the primary obligations under a contract (see by analogy Popplewell J in FG Wilson at [88]-[89]).