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Watch out – ROT and No Set-off clauses can backfire

If you supply wine on credit it is essential to have “Retention of Title” and “No Set-off” clauses in your supply contracts.  In a recent Court of Appeal case*, however, a supplier who had both clauses – and therefore probably considered itself well-protected – found that the interaction of the clauses had unfortunate consequences.

The Caterpillar case

The issue, commercially, was whether a supplier (S) was entitled to immediate judgment on its claim for over US $12m, the price of goods supplied to its distributor (D), or had to wait until trial of D’s counterclaim for breach of the distribution agreement, which was for over US $53m.  It would obviously make a huge difference to the dynamics of the situation, and to each side’s tactics, if D could be forced to stump up the $12m immediately.

The CA ruled in favour of D.  The contract contained a valid “No Set-off clause”.  The way it was worded meant it prevented any set-off against a claim for the price of goods supplied.  But there was also an ROT clause, and the way that was worded meant that S was not legally entitled to claim the price.  Since all the goods in question had been re-sold by D, quite lawfully, the ROT clause wording meant that S could only claim the proceeds of sale.  That was not what S had claimed, so it could not have judgment.  The whole case would have to go to trial.

Moral

As the CA observed, ROT clauses can have disadvantages as well as benefits. And a “No Set-off” clause can be too narrowly worded.

Suppliers do need to have both types of clause in their contracts – they really can provide essential protections – but the clauses (a) have to be worded correctly, and (b) have to work together correctly.  In this case, the idea was right, but the drafting was wrong.  It’s as risky to have badly worded clauses as it is not to have them at all.

See also:

FAQs – Why is an ROT clause essential?
FAQs – Why is a No Set-off clause essential?

*Caterpillar v John Holt and Co (CA October 2013).  The CA gave permission to appeal to the UK Supreme Court, but the case may not make it that far.