02:38 PM Goh Yihan (Associate Professor, Singapore Management University)

    Is a Contractual Clause Excluding a Right of Set-Off Subject to the Requirement of Reasonableness in the Unfair Contract Terms Act?


    The Court of Appeal in Koh Lin Yee v Terrestrial Pte Ltd [2015] SGCA 6 (“Koh Lin Yee”) has decided that a contractual clause excluding a right of set-off is subject to the requirement of reasonableness in the Unfair Contract Terms Act (Cap 396, 1994 Rev Ed) (“UCTA”). In doing so, it also laid down some general guiding principles relating to the application of the UCTA, namely, when a party is considered to be dealing “as consumer” under s 12(1), when a contract contains standard terms of business under s 3(1) and the application of the requirement of reasonableness. 

    Facts and arguments

    The facts of Koh Lin Yee are not complicated. The appellants in the two appeals before the Court of Appeal were Koh Lin Yee and Allgo Marine Pte Ltd, and the respondent was Terrestrial Pte Ltd. Koh is the sole director and owner of all but one share in Allgo. On 25 May 2009, Allgo agreed to sell a flat top barge to Terrestrial for $1.2m. Although Terrestrial paid Allgo in full, Allgo failed to deliver the barge as it had itself failed to pay the barge builder an outstanding balance of $350,000. To facilitate the building of the barge, Terrestrial agreed to make two short-term loans to Allgo on 3 January 2011. Koh also agreed unconditionally to guarantee Allgo’s obligations to repay these loans. Terrestrial later agreed to make another loan to Allgo. These loans had become due and payable by certain stipulated dates, but Allgo failed to make any repayment. Terrestrial thereafter demanded repayment from both Allgo, as well as the Koh as guarantor of the loans. 

    The appellants’ defence against the respondent’s application for summary judgment in respect of the unpaid loans was that Terrestrial had failed to pay monies owed under a separate contract with Allgo for the purchase of a tug. This in turn rendered the appellants unable to repay their outstanding loans to Terrestrial. As such, the appellants argued that they were entitled to set-off the monies due under their loans to Terrestrial against the sum owed to them for the tug. The main difficulty with this argument was clause 12.2 of the earlier two loan agreements between Allgo and Terrestrial, which read as follows:

    “All payments to be made by [Allgo or Koh] under the [loan agreements] shall be made without set-off, counterclaim or condition…”

    One of the issues before the Court of Appeal was whether clause 12.2 explicitly excluded the appellants’ right to raise a set-off (legal or equitable) or counterclaim through the words “without set-off”. And if clause 12.2 did have this effect, the consequent issue was whether it is an unfair contract term within the meaning of the UCTA and therefore subject to the requirement of reasonableness prescribed by the Act. 

    Interpretation of a contractual clause excluding a right of set-off

    In respect of the interpretation of clause 12.2, the Court of Appeal held that, in accordance with the freedom of contract, parties can agree to contract out of the right of set-off. However, if they wish to do so, clear words must be used. It is thus a matter of interpretation whether the words used in the contract amount to an exclusion of the right to set-off. Applying these principles to the facts, the Court of Appeal found that the words “without set-off” excluded all forms of set-off, with no distinction between legal and equitable set-offs. As a matter of practical consideration, therefore, these words can generally be taken to include all forms of set-off.

    The application of the UCTA to contractual clause excluding a right of set-off

    This next issue required the Court of Appeal to consider ss 3 and 12 of the UCTA, which are reproduced below for easy reference:

    Liability arising in contract

    3.—(1)  This section applies as between contracting parties where one of them deals as consumer or on the other’s written standard terms of business.

    (2)  As against that party, the other cannot by reference to any contract term —

    (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

    (b) claim to be entitled —

    (i) to render a contractual performance substantially different from that which was reasonably expected of him; or

    (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

    except in so far as (in any of the cases mentioned in this subsection) the contract term satisfies the requirement of reasonableness.

    Dealing as consumer

    12.—(1)  A party to a contract “deals as consumer” in relation to another party if —

    (a) he neither makes the contract in the course of a business nor holds himself out as doing so;

    (b) the other party does make the contract in the course of a business; and

    (c) in the case of a contract governed by the law of sale of goods or hire-purchase, or by section 7, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.

    (2)  But on a sale by auction or by competitive tender the buyer is not in any circumstances to be regarded as dealing as consumer.

    (3)  Subject to this, it is for those claiming that a party does not deal as consumer to show that he does not.

    As can be seen, in order for s 3 to apply, it has first to be shown either that one of the contracting parties “deals as consumer” or that one of the contracting parties deals “on the other’s written standard terms of business”. And if, either one (or both) of the two threshold requirements is satisfied, it has, in order to bring the exception clause within the scope of s 3, to be proved that the clause concerned falls within at least one of the categories set out in ss 3(2)(a), 3(2)(b)(i), and 3(2)(b)(ii), respectively; and such clause would be inoperative only if it did not satisfy the “requirement of reasonableness”.

    The appellants argued that s 3 applied to clause 12.2 and that clause 12.2 was unreasonable and thereby inoperative. In order to do so, the appellants first had to show that either of the threshold requirements in order to invoke s 3 was met. 

    Dealing “as consumer”

    First, the appellants submitted that they were dealing “as consumer” as they were not represented at the time the loan agreements were signed and Terrestrial was engaged in financing or lending money to them. In dealing with this argument, the Court of Appeal first pointed out that the requirements in ss 12(1)(a) and (b) are cumulative. The starting point is the English Court of Appeal decision of R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321, in which Dillon LJ read the phrase “in the course of business” under ss 12(1)(a) and (b) to mean that the transaction in question was a “clearly integral” part of the company’s business, as opposed to being merely incidental to such business. In addition, a “degree of regularity” is needed before a particular transaction, could be considered a “clearly integral” part of the business.

    Applying this definition to the facts, the Court of Appeal found that Allgo’s obtaining of a loan was merely incidental to its carrying out of its business. Although Terrestrial adduced evidence that Allgo had intended to obtain financing from banks, there was no evidence pointing to the regularity required to constitute a course of business. Hence, Allgo was not contracting in the course of business and fulfilled the requirement under s 12(1)(a). 

    This was not the end of the matter. Section 12(1)(b) further requires the other contracting party, Terrestrial in this case, to have contracted in the course of a business. This the Court of Appeal did not find satisfied as Terrestrial could not be said to have made the loans in the course of a business; in other words, the loans were not integral to Terrestrial’s business, which was certainly not to make loans. 

    Because the requirements under ss 12(1)(a) and (b) are cumulative, and s 12(1)(b) was not satisfied, Allgo failed to prove that it had dealt “as consumer” under the UCTA. The result is that s 3 could not be invoked. This part of the Court of Appeal’s judgment is thus noteworthy for its clear guidance on to the application of ss 12(1)(a) and (b) under Singapore law.

    Standard terms of business

    Alternatively, the Court of Appeal also considered that the loan agreements did not contain any standard terms of business within the meaning of s 3(1). The locus classicus is the English High Court decision of Hadley Design Associates v Westminster [2003] EWHC 1617 (TCC). In that case, Judge Richard Seymour QC considered that the phrase “standard terms of business” means a set of terms in the written form existing prior to the making of the agreement which was intended to be adopted more or less automatically in respect of transactions of a particular type without any significant opportunity for negotiations. This was not the case on the facts since the loan agreements were drawn up specifically to deal with certain circumstances that had arisen, that is, Allgo could not pay for the construction of the barge. 

    Again, because the alternative threshold requirement under s 3 was not satisfied, s 3 could not be invoked. Nonetheless, for completeness, the Court of Appeal went on to consider, on assumption that either (or both) threshold requirements was satisfied, whether s 3 could apply to clause 12.2, being a contractual clause excluding a right of set-off. Again, as a practical matter, this now provides very clear guidance in the context of Singapore law as to the application of the “standard terms of business” threshold requirement of s 3.

    Application of s 3 of the UCTA to clause excluding right of set-off

    As already indicated at the start of this entry, the Court of Appeal held that s 3 of the UCTA could apply to a contractual clause excluding the right of set-off which, in this case, was clause 12.2. 

    There are two opposing views on this issue. On the one hand, it has been considered that clauses such as clause 12.2 merely define the contractual obligation between the parties and therefore fell outside the ambit of the UCTA. On the other hand, as accepted by the Court of Appeal, such clauses restricts the rights and remedies of the party who would otherwise have been entitled to rely on the set-off and therefore fell within the ambit of the UCTA. In preferring the second view, the Court of Appeal accepted the reasoning of the English Court of Appeal in Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600 (“Stewart Gill”), which dealt with the following clause:

    “The customer shall not be entitled to withhold payment of any amount due to the company under the contract by reason of any payment credit set off counterclaim allegation of incorrect or defective goods or for any other reason whatsoever which the customer may allege excuses him from performing his obligations hereunder.” 

    Lord Donaldson MR held that this clause came within s 3 of the UK UCTA because it came within the varieties of exemption clauses set out in s 13 covered by s 3. Section 13 of the UK UCTA, which is in pari material with the UCTA, reads as follows:

    Varieties of exemption clause

    13.—(1)  To the extent that this Part prevents the exclusion or restriction of any liability it also prevents —

    (a) making the liability or its enforcement subject to restrictive or onerous conditions;

    (b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;

    (c) excluding or restricting rules of evidence or procedure,

    and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.

    Thus, according to Lord Donaldson MR, and pursuant to the terms of s 13(1)(b), the clause in Stewart Gill excluded the defendants’ “right” to set off their claims against the plaintiffs’ claim and further excluded the “remedy” which they otherwise would have been able to bring by means of a set-off. Furthermore, this clause also excluded or restricted the procedural rules as to set-off pursuant to the terms of s 13(1)(c). Thus, on either account, the clause, or indeed, any clause excluding the right of set-off, would come within s 3 of the UCTA, being a variety of exemption clause caught by the statutory regime. The Court of Appeal in Koh Lin Yee accepted, and rightly so, this reasoning as correct.  Indeed, on a plain reading of the section, it is clear that clauses that exclude the right of set-off would come within its ambit. To construe it otherwise would be to ignore the clear meaning and (more importantly) the purpose of the section.

    The Court of Appeal also accepted that the reasoning in Stewart Gill did not affect the rights of parties to agree to include no set-off clauses in the contract that cover specific circumstances. Whether the drafting has such an effect and whether the particular clause attracts the application of the UCTA are separate questions. 

    The application of the requirement of reasonableness to clauses that exclude right of set-off

    As to the relevant factors to determining the reasonableness of clauses that exclude the right of set-off, the Court of Appeal considered that such clauses have a clear rationale, namely, that it may be important for cash flow reasons that a party should receive payment in full under a contract so that the counterparty should be required to seek its right of a set-off in separate proceedings. From this starting point, the relevant factors are those enunciated in Schedule 2 of the UCTA, even though the Act provides that they only apply to ss 6 and 7 of the Act.

    In relation to the relative bargaining strength of the parties, whether or not the party impugning the exception clause concerned is experienced is a significant factor that the courts will take into account. The guiding principle seems to be that an experienced commercial party would not be taken into advantage of and hence any exception clause entered into by it is likely to be reasonable. Other important factors include whether the clause concerned is well known or accepted in commercial circles, as well as the availability of legal advice would be important.

    On the assumption that s 3 covered clause 12.2 in the present case, the Court of Appeal considered that it was reasonable since the parties were of relatively equal bargaining positions, and since it was a common provision in the context of a loan facility. 

    Unresolved issue

    The Court of Appeal expressly left unresolved the issue of whether a clause excluding the right of set-off would be considered in full or in part when subjected to the requirement of reasonableness. In other words, would the part of the clause excluding the right of set-off be severed and assessed separately, or would the entire clause be assessed altogether? The answer to this question had practical consequences in Stewart Gill. In deciding to subject the whole of the affected clause to the requirement of reasonableness, the English Court of Appeal made it much harder for the clause to be found reasonable. This was because the rest of the clause was couched very extensively, regardless of whether the exclusion of the right of set-off itself was phrased as extensively. It is conceivable that had the exclusion of the right of set-off be severed and assessed separately, it might have been found to be reasonable. 

    It is perhaps understandable why the Court of Appeal elected to leave this issue open since the parties did not argue it. Preliminarily, it might be thought that the rationale behind the doctrine of severance might apply to govern this issue, that is, if severance does not alter the meaning of the clause, then there is no reason why the exception clause cannot be assessed only on its exclusion or restriction part. 

    * This blog entry may be cited as Goh Yihan, "Is a Contractual Clause Excluding a Right of Set-Off Subject to the Requirement of Reasonableness in the Unfair Contract Terms Act?", Singapore Law Blog (12 February 2015) (

    ** A PDF version of this entry may be downloaded here

Comment Section