Repair Costs Derived From Breach of These Obligations

Many commercial agreements contain express provisions forremedies. For example, in a contract for the sale of goods, thebuyer may be entitled to require the seller to make good orreplace defective items. There may be a presumption (which may beexpressed in the contract) that all the terms which are to governtheir contractual relationship have been included by the partiesin express written form in the contract itself. In doing so theyintended to displace any rights and remedies provided by law(such as the buyer's right to terminate the contract forfundamental breach) which are not specified in the contract.

The purpose of a cumulative remedies clause is to ensure thatthe parties' rights specifically provided for in the agreementare in addition to their rights provided by the general law(see inset box "Cumulative remedies clause"). Anyparticular remedy that a party envisages it may need should bespecifically preserved in the contract.

Damages

Unlike the equitable remedies of specific performance andinjunction (see "Specific performance" and "Injunctions"below) damages for loss in a breach of contract claim areavailable as of right.

An innocent party may claim damages from the party in breachin respect of all breaches of contract. The damages may benominal or substantial. Nominal damages are awarded where theinnocent party has suffered no loss as a result of the other'sbreach and substantial damages are awarded as monetarycompensation for loss suffered as a result of the other party'sbreach.

For an innocent party to obtain substantial damages he mustshow that he has suffered loss as a result of the breach(remoteness) and the amount of his loss (measure). It is up tothe party in breach to argue that the innocent party has failedto mitigate his loss.

Remoteness of loss

The innocent party may only recover damages for loss sufferedas a result of the breach provided it is not too remote. The aimof damages is to put him in the position he would have been hadthe contract been properly performed.

The principles of remoteness are given in Hadley vBaxendale ([1854] 9 Exch. 341) and provide that thefollowing losses are recoverable:

All loss which flows naturally from the breach.
All loss which was in the contemplation of the parties at thetime the contract was made as a probable results of thebreach.

If the loss does not fall within the above categories, then itwill be too remote and will not be recoverable.

The rule in Hadley v Baxendale has been interpretedto mean that only loss which is within the reasonablecontemplation of the parties may be recovered (The Heron II[1969] 1 AC 350).

(Note that when dealing with specific types of contract theremay be legislation that covers remedies under that particulartype of contract. For example, in a sale of goods contract, aparty may be able to recover special damages (for example, fromunusual loss arising from special circumstances known thecontract breaker (section 54, Sale of Goods Act 1979)(SGA).)

Measure of damages

This is the method for calculating the damages to which theinnocent party is entitled. It covers loss of bargain orexpectation loss. The usual aim of the court is to put theinnocent party in the position he would have been in had thecontract been properly performed (Robinson v Harman [1848] 18LJ Ex 202). The two usual methods of assessing this aredifference in value or cost of cure. The court will generally usethe more appropriate.

Sometimes reliance loss may be sought where loss ofexpectation is difficult to prove. The aim of reliance loss is toput the innocent party into the position he would have been inhad the contract never been made, that is, an indemnity for hisout of pocket expenses incurred in reliance on the contract(Anglia TV v Reed [1972] 1 QB 60).

There are many other types of loss that have been claimed byinnocent parties. Damages for disappointment or mental distressare not generally awarded (Addis v Gramophone Co. Ltd [1909]AC 488) unless the contract is, for example, a holidaycontract (Jarvis v Swans Tours Ltd [1973] 1 QB 233).

Mitigation

An innocent party cannot recover for loss that he could haveavoided by taking reasonable steps. This is sometimes expressedas the duty to mitigate. This does not apply to actions for theprice of goods delivered. Such an action is an action for anagreed sum and not an action for damages.

Although there is no duty to mitigate before actual breachoccurs the innocent party should not aggravate his loss. It isfor the defendant to prove that the plaintiff has failed tomitigate his loss (Pilkington v Wood [1953] Ch 770).

Advance payments

If a party in breach has made advanced payments under thecontract his ability to recover that money depends upon whetherthat payment constitutes a deposit (that is, a guarantee by himof due performance) or merely a payment of the whole or part ofthe price in advance.

If it is a deposit (this depends on the intentions of theparties) the general rule is that it cannot be recovered and itwill be set off against any damages awarded to the innocentparty. Care should always be taken with deposits so that they donot amount to penalties (see "Penalty clauses"below). However it may be possible to recover a deposit ifthe party has a lien over it (for example, Chattey andAnother v Farndale Holding Inc., The Times, 17th October,1996).

If the advance payment is not a deposit, the party in breachmay recover it, subject to any claim for damages by the innocentparty in respect of the breach.

An innocent party may only recover an advance payment if therehas been a total failure of consideration. This is aquasi-contractual remedy. If there is only a partial failure ofconsideration, this remedy is not available (Rowland v Divall[1923] 2 KB 500).

Penalty clauses and liquidated damages

It is common for the parties to expressly state in thecontract that if the contract is breached, a specified sum willbe payable or that goods will be forfeited. Clauses coveringthese areas are known as liquidated or agreed damages clauses.They frequently appear in commercial contracts, whetherindividually negotiated or on a party's standard business termsand, most commonly, in relation to late rather than defectiveperformance, particularly in the fields of construction andengineering and supply or sale of goods. Occasionally, theyappear in lease agreements imposed by a key or anchor tenant who,for example, needs to be trading from the demised premises by acertain deadline. Such clauses do not usually appear in contractsof employment.

The purposes of such clauses are to make recovery of damageseasier, avoiding the problems of proving actual loss; to avoidarguments as to the remoteness of certain types of consequentialor indirect losses; and to assure the other party of theirintention to be bound by the contract.

The normal rules applicable to the determination of whether aclause operates as liquidated damages or a penalty applyirrespective of the type of contract in question. A distinctionmust be drawn between clauses which purport to impose a penaltyon the defaulting party and clauses which levy liquidated damagesfrom that party. Penalty clauses are generally not enforceable,whereas liquidated damages clauses are.

Penalty or liquidated damages?

For a liquidated damages clause to be valid the specified summust be a genuine pre-estimate of the anticipated loss which theclaimant would be likely to suffer in the event of a breach ofthe obligation in question. If the loss is difficult to quantifya "best guess" procedure should be operated, keeping a record ofthe calculations underlying any elements of the determinedfigure. Provided the selected figure is not vastly in excess ofthe greatest loss which could be suffered, the clause is likelyto be enforceable. The essence of a penalty is that the moneyspecified is in terrorem of the defaulting party, inother words, it is intended to apply undue force to the otherparty to perform his side of the contract.

The use of the words "penalty" or "liquidated damages" are notconclusive. It is necessary to examine whether the amountspecified is in fact a penalty or liquidated damages. It is forthe party in breach to show that the sum is a penalty(Robophone Facilities Ltd v Blank [1966] 3 All ER128).

The leading case of Dunlop Pneumatic Tyresestablishes the tests to distinguish penalties from liquidateddamages:

A clause will be construed as a penalty clause if the sumspecified is "extravagant and unconscionable" in comparison withthe greatest loss that could possibly have been proved as aresult of the breach.
It is likely to be a penalty if the breach of contractconsists of not paying a sum of money and the sum stipulated asdamages is greater than the sum which ought to have beenpaid.
There is a presumption that if the same sum is stated toapply to different types of breach of contract, some of which areserious and others not, it is likely to be a penalty clause.
It is not a bar to the operation of a liquidated damagesclause that a precise pre-estimation is impossible.

(Dunlop Pneumatic Tyre Co Limited v New Garage & MotorCo Limited [1915] A.C 79)

There is no public policy issue in relation to the upper limitof damages to which parties can contract to be liable. The UnfairContract Terms Act 1977 will in certain circumstances impose atest of reasonableness in relation to exclusion clauses (whichpurport to limit or exclude liability) but this is unlikely toapply to a genuine liquidated damages clause. If the clausespecifies a sum which is more than a genuine pre-estimate (andtherefore a penalty) the clause will be unenforceable. The courtswill not benefit the party claiming damages by imposing a lowersubstitute figure.

To claim on a genuine liquidated damages clause, the claimantmerely has to show breach of contract, whether or not there hasbeen any actual loss and regardless of the extent of anyloss.

It is not entirely clear whether a liquidated damages clauseis intended to be a mutually binding limitation on the amount ofdamages payable. It is likely that it is intended to be mutuallybinding in the field of building and engineering contracts. ACourt of Appeal case held that where "£nil" was inserted asthe amount of liquidated damages, then general damages for breachof contract were not recoverable in the alternative (Temloc vErrill Properties, 1987 39 BLR.30). A contract can, however,expressly provide for the party seeking to impose the clause tohave a choice whether to operate it or not. Certain charterpartycases suggest that the claimant may have a choice either to sueunder the liquidated damages clause or to ignore it and claimgeneral damages without limitation although these cases areprobably limited to that area of law.

If, however, the clause is invalidated because it is a penaltyclause or due to acts of the claimant (such as requiring theother party to perform additional work without a contractualmechanism to grant that party further time to perform thecontract) or breach of contract by the claimant, then the limitspecified in the unworkable clause will operate as a limitationon the amount of damages which can be claimed (although in thecase of a penalty the limit is unlikely to be reached because byits nature, it will be higher than the loss could ever be).

As regards enforcement, many contracts will specify that thedamages can be deducted from subsequent sums due. This isparticularly the case for building contracts where interimpayments to the contractor are usual. Many contracts will alsoprovide for the claimant to be able to recover liquidated damagesas if they were a debt due by the other party. If possible, whendrafting a penalty clause, you should try to ensure that you candeduct or recover damages in these ways as they are a moreeffective way of ensuring that you will be able to recover themoney due.

Otherwise the usual rules of enforcement would apply and aclaim form would be issued in the normal manner (without, ofcourse, having to prove actual loss).

Note that it will be a defence to a claim for liquidateddamages that the claimant has prevented the other party fromcompleting his obligations either by the claimant's own breach ofcontract or by other acts of prevention in circumstances wherethere is no provision in the contract to make an allowance orgive a time extension to the party from whom damages are claimedfor these circumstances.

It is important to observe all relevant proceduralrequirements in the contract such as notice periods andprovisions requiring the liquidated damages to be assessed anddeducted within certain time periods, otherwise the defendantwill not be required to pay the damages.

Specific performance

This is an equitable remedy granted at the court'sdiscretion.

Specific performance is a decree by the court to compel aparty to perform his contractual obligations. It is usually onlyordered where damages are not an adequate remedy (for examplewhere the subject matter of the contract is unique for example,Chinese vases in Falcke v Gray ([1859] 4 Drew651) but not if a replacement of the subject matter could beobtained even after a long delay (Societe des IndustriesMetallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyds Rep465).

It is a general rule that specific performance will not beordered if the contract requires performance or constantsupervision over a period of time and the obligations in thecontract are not clearly defined. For example, specificperformance of a covenant to keep a shop open during normalbusiness hours was refused by the House of Lords in Co-opInsurance v Argyll Stores ([1997] 3 All ER 297) onthe grounds that enforcement of a covenant to carry on a businesswould require constant supervision of the courts with the courtresorting to criminal punishment for contempt of court if theorder was not complied with. However, a recent case has reversedthis rule in relation to a tenant's repair covenants (RainbowEstates Limited v Tokenhold Limited and another [1998] NewProperty Cases 33). The judge in this case concluded thatthe old law of refusing specific performance if it would involveconstant supervision was no longer good or (at least) that therewere exceptions. It may be that only in the most exceptionalcircumstances (such as in this case) specific performance will beavailable to the landlords; however the arguments advancedindicate that it should be available in other situations.Specific performance was ordered requiring tenants to spend£300,000 on repairs to the flats. Factors militating infavour of this remedy were that the landlord had no right ofentry to repair in default of the tenant; that the lease had noforfeiture clause and that the building was listed so that repairas distinct from redevelopment was the most appropriateoutcome.

Specific performance is often ordered in relation to buildingcontracts because the contract deals with results rather than thecarrying on of an activity over a period of time and it usuallydefines the work to be completed with certainty (Jeune vQueens Cross Properties Ltd [1973] 3 All ER 97).

Specific performance is not available for contracts requiringpersonal services such as employment contracts because such anorder would restrict an individual's freedom (Chappell vTimes Newspapers Ltd [1975] 1 WLR 482).

The court has broad discretion to award specific performanceand in exercising this discretion it takes into account factorssuch as:

Delay in asking for the order (Lazard Brothers & CoLtd v Fairfield Properties co (Mayfair) Ltd [1977] 121 SJ793).
Whether the person seeking performance is prepared to performhis side of the contract (Chappell v Times Newspapers Ltd[1975] 1 WLR 482).
Whether the person against whom the order is sought wouldsuffer hardship in performing (Patel v Ali [1984] 1 All ER978).
The difference between the benefit the order would give toone party and the cost of performance to the other (Tito vWaddell (No 2) [1977] Ch 106).
Whether any third party rights would be affected.
Whether the contract lacks adequate consideration (the rule"equity will not assist a volunteer" applies so that specificperformance will not be ordered if the contract is for nominalconsideration even if it is under seal (Jeffrys v Jeffrys[1841] 1 Cr & Ph 138)).

Injunction

Like specific performance, an injunction is an equitableremedy and therefore only granted at the discretion of the court.It is awarded in circumstances where damages would not be anadequate remedy to compensate the claimant because the claimantneeds to restrain the defendant from starting or continuing abreach of a negative contractual undertaking (prohibitoryinjunction) or needs to compel performance of a positivecontractual obligation (mandatory injunction).

In exercising its discretion the court will consider the samefactors as above for specific performance and will use thebalance of convenience test (weighing the benefit to the injuredparty and the detriment to the other party). An injunction willnot be granted if its effect would be to compel a party to dosomething which he could not have been ordered to do by a decreeof specific performance (Lumley v Wagner [1852] 1 DM & G604).

In urgent cases a plaintiff may be able to obtain an interiminjunction to restrain an act. Special types of injunction may begranted to preserve property and assets pending trial (Marevainjunctions and Anton Piller orders).

Quasi contract: other remedies

Quasi-contract creates obligations at common law, distinctfrom obligations under a contract. It is an area of law in itsown right.

Quasi-contractual remedies are sometimes available either asan alternative to a remedy for breach of contract or where thereis no remedy for breach of contract. For example, a claim forquantum meruit (a reasonable remuneration for work done of goodssupplied under a contract which is later discovered to bevoid).

Limitation of actions

An innocent party will lose his right to bring a claim forbreach of contract if he delays for a certain length of time.

The Limitation Act 1980 provides statutory limitation periods.Theses do not apply to equitable remedies, however, in practice,equity usually applies the statutory rules.

The Limitation Act 1980 distinguishes between simple contractsand deeds. It provides the following limitation periods:

For simple contracts, six years from when the cause of actionaccrued.
For deeds, twelve years from when the cause of actionaccrued.

If there has been fraud or mistake, the limitation period doesnot begin to run until the innocent party has discovered this orshould have discovered this. There is a three year time limit inrespect of damages for personal injuries arising from breach ofcontract.

In acquisition agreements (which may be deeds) the seller maywant a shorter limitation period (commonly six years from thedate of the contract) This shorter period relates to the InlandRevenue's time limit for making tax assessments. Alternatively,the seller may want an even shorter period in relation to non-taxmatters (perhaps to link in with the audit of the targetcompany).

Self-help remedies

Rather than bringing an action for breach of contract, partiescan make use on some self-help remedies such as retention oftitle clauses, enforcement of security, withholding payments andset off and rights against the goods themselves.

Retention of title

A seller can avoid the problems of having to sue a buyer inevent of the buyer's default under the agreement by inserting aretention of title clause into the contract.

A retention of title clause (sometimes referred to as a Romalpa clause, after the first leading case on the subject,Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976]1 WLR 676) aims to give the supplier of goods priority oversecured and unsecured creditors of the buyer if the buyer failsto pay for the goods because it is insolvent, or for some otherreason which may be specified in the clause.

In a basic retention of title clause the supplier reservesownership of the goods supplied to the buyer until the buyer haspaid for those particular goods. When drafting, it is importantto ensure that legal and beneficial title are retained: thereservation of equitable or beneficial title alone will not do(Re Bond Worth [1979] 3 AER 919). The clause should besupplemented by standard clauses containing:

A right for the supplier to enter the buyer's premises inorder to repossess the goods (so that the supplier will notcommit a trespass when doing so).
An obligation on the part of the buyer to store thesupplier's goods separately from goods belonging to thirdparties, to mark them as the supplier's property and to allow thesupplier access to the buyer's premises to verify that this hasbeen done. This will enable the supplier to identify its owngoods if a repossession of the goods becomes necessary.
A list of insolvency related events which will trigger thesupplier's right to demand payment for the goods (if not alreadydue) and to repossess them.

In addition, although not a standard clause, if the goodssupplied might be attached to the buyer's premises (for example,in the case of heavy plant or machinery), it is worth including aprovision prohibiting the buyer from annexing them to suchpremises without the supplier's consent. If goods do becomeannexed to the buyer's premises, the consent of the owner ofthose premises will be necessary if the supplier is to beentitled to repossess them in the event of non-payment by thebuyer.

This basic clause is often backed up by certain other standardclauses such as clauses for all monies, proceeds of sale andmixed goods:

All monies clause

In this of clause, the supplier reserves ownership of thegoods supplied until the buyer has paid not only for thoseparticular goods, but also for any other goods supplied by thesupplier to the buyer, and has repaid all other moneys owed tothe supplier, regardless of how such indebtedness arose.

A limitation upon the practical effectiveness of this clauseis that the supplier retains title to goods only until thosespecific goods have been paid for. The buyer will thereforeobtain title to those goods upon paying for them even if othergoods received from the supplier have not been paid for. Theeffect of the all monies clause is that all of the goodssupplied, whether paid for or not, belong to the supplier untilthe buyer has settled all invoices. In practice, the clausetherefore avoids the need to relate specific goods at the buyer'swarehouse with specific unpaid invoices.

It has been suggested that an all monies clause creates acharge by the buyer in favour of the supplier, which would bevoid against a liquidator or administrator and any creditor ofthe buyer unless registered at Companies House in accordance withthe Companies Act 1985. The House of Lords, on appeal from aScottish decision, has held that such a clause does not create acharge, but the decision, while of strong persuasive authority,is not binding on the English courts (Armour v ThyssenEdelstahlwerke AG, PLC, 1990, I(5),51 ).

It is therefore advisable to incorporate the all monies clausein a separate sub-clause from the basic retention of titleclauses so that it could be severed from them if it were everheld invalid by a court for lack of registration as a charge.Although possible in theory, the registration by a supplier ofall its sales contracts at Companies House in case they containretention of title clauses which create charges is, for a numberof practical reasons, unlikely to be a realistic option.

Proceeds of sale clause

This is where the goods supplied are to be sold on by thebuyer and the supplier seeks rights in the proceeds of sale inorder to satisfy the purchase price of the goods.

A clause giving the supplier rights over the sale proceeds ofgoods resold by the buyer was held to be valid in the Romalpa case, on the basis that there was, on the factsbefore the court, a fiduciary relationship between the buyer andthe supplier, and the buyer as a fiduciary was under a duty toaccount for the sale proceeds to the supplier as beneficiary.Since the Romalpa decision, the courts havedistinguished the facts of the cases before them from the factsin the Romalpa case, and have in a series of cases heldthat clauses of this kind create a charge by the buyer in favourof the supplier which will be void if not registered at CompaniesHouse.

As a result, it is now extremely difficult, if not impossible,to draft a proceeds of sale clause without its being construed asa charge over the goods which will, therefore, be unenforceableunless registered as such. One of the main difficulties inpractice is that, in order to rely on the equitable remedy oftracing, the supplier must create a fiduciary relationship withthe buyer and, in order to achieve that, the buyer must resellthe goods as the supplier's agent. This would mean the buyer'scustomers holding the supplier directly liable for any defects inthe goods, which is unlikely to be desirable from the supplier'spoint of view. If, on the other hand, the authority of the buyeras agent is cut down, so that it cannot create privity ofcontract between the supplier and the buyer's customers, theresult is that there is unlikely to be a true agency.

The inclusion of a proceeds of sale clause in standard termsis inadvisable without specialist advice or a thorough review ofthe latest relevant case law. It has been argued that if a courtwere to hold that the proceeds of sale clause created a chargewhich was invalid for non-registration, it might also decide thatthe invalidity of the proceeds of sale clause extended to thebasic retention of title and all monies provisions, with theresult that they too would be rendered invalid fornon-registration. It is considered more likely that, if theproceeds of sale clause is contained in a separate clause orsub-clause and the standard terms contain a severance provision,the court will sever the proceeds of sale clause leaving theremaining provisions unaffected, but the need for caution in thisarea is clear.

Mixed goods clause

This is useful where the goods supplied have been mixed orcombined in a manufacturing process with other goods owned by thebuyer or third parties. In this clause the supplier seeks rightsof ownership in any new product resulting from the manufacturingprocess.

The supplier may be selling goods for use in a manufacturingprocess, rather than for resale in their original condition (if,for example, it is a supplier of components rather than finishedproducts). The case law distinguishes between:

Goods which maintain their identity (and which, if attachedto other goods, can be separated without causing damage). Suchgoods will continue to belong to the supplier where there is abasic form of retention of title clause as described above, so noadditional provisions are necessary.
Goods which lose their identity in the manufacturing process;for example, the sale of resin which is used in the manufactureof chipboard. The resulting new product (the chipboard) willbelong to the buyer and the courts have held that if a retentionof title clause purports to reserve rights in the new goods tothe supplier, the clause will create a charge which will beineffective if not registered (Borden (UK) Limited v ScottishTimber Products [1979] 3 AER 961).

It is clear from the case law, therefore, that the use of amixed goods clause will achieve nothing for the supplier; on thecontrary, it may do harm if (following the same argument asdescribed above in the case of a proceeds of sale clause), itsinvalidity also rendered the basic and all monies clauses invalidfor non-registration as charges. Suppliers of products which arequickly consumed within a manufacturing process should thereforeconsider alternative means of securing their purchase price, suchas credit insurance.

Limitations on effectiveness

The following actual or potential limitations upon theeffectiveness of retention of title clauses should be borne inmind:

If the buyer is a company against which an application for anadministration order has been made, no steps may be taken withoutthe consent of the court (which in practice is unlikely to beforthcoming) to repossess goods supplied pursuant to a retentionof title clause until the hearing of the application and, if anadministration order is made, while the order remains in force(section 11, Insolvency Act 1986).
The retention of title clause must be properly incorporatedin the contract between the supplier and the buyer in order to beenforceable as a contract term. A retention of title clause isnot, however, so unusual that special notice needs to be given ofit (John Snow & Company Limited v DBG Woodcroft &Company Limited [1985] BCLC 54).
Retention of title will be of little or no practical benefitwhere the goods supplied are perishable or have a low scrapvalue.
Retention of title is an area which generates a rapidlychanging body of case law. Particular clauses are liable to berendered ineffective by a court decision at any time, so a reviewof retention of title clauses is a particularly important aspectof the overall review of standard terms which suppliers should becarrying out on a regular basis.

Decisions of the courts have severely restricted theeffectiveness of complex mixed goods and proceeds of saleclauses. The most that a well drafted retention of title clauseis likely to achieve for a supplier is:

The right to enter the buyer's premises withouttrespassing.
The ability to recover goods stored at the buyer's premiseswhich can be identified as the supplier's, possibly to the extentof all sums owed by the buyer to the supplier.
A possible action for damages for conversion against areceiver or liquidator personally who sells goods which wereidentifiably the supplier's.

A retention of title clause should be regarded as an adjunctto a proper credit control system, not as a substitute for it.Where the supplier has doubts as to the financial standing of thebuyer, the supplier should consider:

Reducing the period of credit allowed to the buyer, or theamount of credit, or both.
Taking alternative forms of security, such as a bankguarantee or letter of credit.
Obtaining credit insurance. This has become more readilyavailable in recent years, with a greater choice of tailor-madeproducts on offer. The existence of a satisfactory set ofstandard terms of business is likely to be a precondition toobtaining such insurance.

Risk and insurance

The risk in the goods will pass at the same time as title tothem passes unless otherwise agreed (section 20, SGA).In standard terms of sale risk is usually stated to pass at thetime of delivery of the goods. This is on the basis that thesupplier will not wish to remain responsible for loss or damageto the goods up to the time when title passes, given that theeffect of the basic retention of title clause is that title doesnot pass until the buyer has paid for the goods. The result isthat if the goods are destroyed after delivery the buyer willremain liable for the price.

To guard against the risk of the buyer being unable to pay,the supplier should include a provision requiring the buyer upondelivery to insure the goods with a reputable insurance company(the supplier may reserve a right of pre-approval) and to ensurethat the supplier's interest in the goods is noted on thepolicy.

Taking security

If a lender has loaned money to a person and taken security tosupport the loan, this enables the lender to appoint a receiverto enforce his security if the person defaults on the loan.Security can take the form of a fixed charge over specific assetsor a floating charge over the whole of part of anundertaking.

Withholding payment and set-off

Where a debtor has a cross-claim against a creditor, a rightof set-off enables him to reduce or extinguish the creditor'sclaim by the amount of his cross-claim. There are four types ofset-off (the first three of which may be extended bycontract):

Legal set-off. Legal set-off is a proceduralremedy which evolved from the Statutes of set-off and a number of18th and 19th century cases (see also Bennett v White [1910]2QB 643 CA). It can only be resorted to as a defence to acourt action and, unlike other types of set-off, is not availableas a "self-help" remedy. Legal set-off is also only availablewhere the two claims are liquidated or ascertainable withcertainty and are both due and payable at the commencement of theaction. However, unlike equitable set-off, the two claims do nothave to arise from the same transaction or closely connectedtransactions.
Equitable set-off. This is available to adebtor outside the context of litigation where his cross-claimarises from the same transaction (or a closely relatedtransaction) as the debt owed. Either and probably both of theclaims may be for an unliquidated sum, such as a claim fordamages (Hanak v Green [1958] 2 All ER 141 CA and McCreagh vJudd [1923] WN 174 DC). As it is a self-help remedy, adebtor can, without formality, simply deduct the amount of hismutual cross-claim from the debt he owes and tender the balanceof the debt (if any) to the creditor. However, as with legalset-off, the sums in question must be due and payable or, in thecase of unliquidated damages must be a reasonable assessment ofthe loss made in good faith (The Nanfri [1978] Lloyd's Rep132 CA).
Banker's set-off. Banker's set-off arises ina situation where a customer has more than one account with hisbank, at least one of which is in debit and one of which is incredit. It is also known as the right to combine accounts.Banker's set-off is arguably of wider commercial application andcould be available in any situation where one party has two ormore accounts with another, for example between principals andtheir agents or between a supplier and his customer, but theposition has not been explicitly judicially determined. A debtorcan only invoke banker's set-off if the two accounts are currentor running accounts, that is, where the balance on the account,whether it be positive or negative, is payable on demand or onreasonably short notice (Re Willis, Percival & Co exparte Morier [1879] 12 ChD 491 CA). As with equitableset-off, the remedy is one of self-help and can be automaticallyexercised without formality.
Insolvency set-off. While each of the abovecategories of set-off may be varied by contract, either byextending or restricting a party's rights under the general law,the rules of insolvency set-off are mandatory and may not bevaried by contract (Halesown Presswork and Assemblies Ltd vWestminster Bank [1972] AC 785). Contractual rights ofset-off do not survive the liquidation or bankruptcy of eitherthe creditor or the debtor.

Any creditor proving in a liquidation or bankruptcy mustdeduct from his claim the amount of any liabilities incurred:

Prior to the company or individual going into liquidation orbankruptcy.
At any time when the creditor had notice of either aresolution or a petition to wind up the company or bankrupt theindividual.

All liabilities, including future, contingent and unliquidatedsums must be brought into account (Rule 4.90, InsolvencyRules 1986 for company liquidations; section 323, Insolvency Act1986 for bankruptcies).

Since any attempt to vary these rules by contract will bevoid, parties would need to use indirect means to avoid theirapplication. They could, for example, enter into an agreementwhich provides that one or both of them should not prove in anyliquidation or bankruptcy of the other or that any such claimswill be subordinated to those of other creditors.

Rights of set-off are frequently varied by the terms of acontract. For example, in a commercial contract, a buyer may wantthe ability to set-off claims for debts or claims under othercontracts against payments that he owes for goods or servicesunder that contract.

Purpose of exclusion of set-off clause

Commercial agreements frequently restrict rights of set-off.For example, a seller may wish to ensure that a buyer isprevented from setting off amounts owed to it or claims regardingalleged defects in the seller's performance against the sums dueto be paid by it to the seller under the agreement. An exclusionof set-off rights is particularly common in an agreement whichprovides for payments over a period of time. A borrowers' rightof set-off will invariably be excluded in loan and securitydocumentation.

While such a clause does not survive the insolvency of eitherparty, the Court of Appeal has confirmed that such a clause isenforceable and not contrary to public policy (Coca-ColaFinancial Corporation v Finsat International, The Times, 1st May,1996). However, as against a party contracting on itsstandard terms or with a consumer, the clause constitutes alimitation of liability which will be subject to thereasonableness test set out in the Unfair Contract Terms Act 1977(Stewart Gill v Horatio Myer Co [1992] 2 All ER257).

SGA and rights against goods

The SGA provides for the consequences of disputes arising incontracts for the sale of goods. For example, if a sellerdelivers a quantity of goods less than he contracted to sell, thebuyer can either:

Reject the goods and sue for any loss occasioned by thebreach, and if the price had been paid, recover the price;or
Retain the goods, pay for them at the contract rate, recoversuch part of the price for the undelivered quantity and claimdamages for the breach.

There are restrictions on the buyer's right to reject thegoods. First, at common law, if the shortfall is deminimis, he will not be allowed to reject the goods. Second,section 30(2A) provides that a buyer who does not deal as aconsumer may not reject the goods if the shortfall is so slightthat it would be unreasonable for him to do so.

If a the buyer is in breach of a term of a sale of goodscontract, for example in relation to the payment terms, theunpaid seller has rights against the goods themselves in additionto rights against the buyer. These rights may prove useful on thebuyer's insolvency. If some or all of the price of the goods isoutstanding the seller will be an unpaid seller (section38(1), SGA). This gives the seller the right to:

Retain the goods. This can be done if the seller is still inpossession of the goods and the buyer has not been given a periodof credit, or the credit period has expired or the buyer isinsolvent. The seller can retain the goods until the buyer paysfor them (the seller's lien). The seller loses his lien when thegoods are delivered to an independent carrier or the buyerlawfully takes possession of them.
Stop the goods in transit. If the buyer is insolvent theunpaid seller may stop the goods in transit and retain them untilthe buyer pays for them (section 44). Sections 45 and 46provide rules as the duration of transit and how to effectstoppage.
Resell the goods. Section 48(3) allows the seller to resellthe perishable goods if he notifies the buyer of his intention tosell and the buyer does not pay within a reasonable time. Theseller may claim damages from the buyer for loss on the resale(section 48(3)).

Samantha Cotton is a PLC trainer.

Repair Costs Derived From Breach of These Obligations

Source: https://uk.practicallaw.thomsonreuters.com/7-101-0603?transitionType=Default&contextData=(sc.Default)