In the recent case of Readie Construction Ltd v Geo Quarries Ltd [2021], the High Court agreed with the County Court’s finding that despite a product being defective, the buyer had to “pay now, argue later”.
Readie Construction Ltd (Readie) entered into arrangements for the purchase of aggregate from Geo Quarries Ltd (Geo), and the case hinged on a clause stating that payment was to be made in full without any deductions by the end of the month following the month of invoice, and the argument that the right to payment at this time was the ‘quid pro quo’ for extending credit to Readie rather than actual delivery of the contract goods.
Background
In 2018, Readie, a construction company, entered into an agreement with Geo, a supplier of building materials, to purchase aggregate. At the same time, Readie signed an application for credit with Geo, which incorporated the latter’s standard terms and contained two key clauses:
- Every contract for the sale of goods shall be deemed to be concluded only when the Goods had been delivered (clause 2.2); and
- The Customer shall make payment in full without any deduction or withholding whatsoever on any account by the end of the calendar month following the month in which the relevant invoice is dated (clause 4.1).
Readie placed a bulk order for aggregate worth over £600,000, which was to be delivered in batches. Before paying the final invoice of around £225,000, Readie discovered that the aggregate was defective and had turned to slurry during heavy rainfall. Readie withheld the final payment.
County Court – summary judgment
The County Court granted a summary judgment in Geo’s favour. Geo claimed that despite the aggregate being of a different type than was ordered, it was still entitled to claim for the full price under section 49(2) of the Sale of Goods Act 1979 (SGA) which states that:
“Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such a price, the seller may maintain an action for the price, although the property in the Goods has not passed and the Goods have not appropriated to the contracts”.
Readie argued that because Geo did not deliver the Goods ordered, payment never became due. Alternatively, Readie argued that notwithstanding clause 4.1 of the standard terms, it was entitled to rely on abatement (a common law remedy allowing a party to reduce the payment owed for goods or services to reflect the extent of a defect) and further that the contract did not come under the true construction of s.49(2) SGA.
The County Court held that that clause 4.1 of Geo’s standard terms was not contrary to the Unfair Contract Terms Act 1977 and as such was capable of excluding a defence in abatement. The County Court did not agree with Readie and granted summary judgment, agreeing with Geo that the application of s.49(2) SGA meant that payment was to be made regardless of the fact that a defective product had been delivered. The County Court agreed with Geo in respect of its interpretation of section 49(2) SGA and granted summary judgment.
Readie appealed to the High Court.
Appeal – High Court
The High Court dismissed Readie’s appeal against summary judgment.
Readie’s argument
Readie argued that on its true construction, clause 4.1 is concerned with how payment is made, not what has to be paid, and as such clause 4.1 does not identify the obligation of what has to be paid, which is dealt with elsewhere in the standard terms. In Readie’s opinion, the judge had failed to consider the question: against what is the deduction under clause 4.1 not permitted?
Geo had previously argued that by virtue of clause 4.1, Readie would have to pay for the goods in full even if the goods Geo delivered were defective or were different in substance to those ordered. Readie argued that if Geo’s interpretation was correct, it would follow that Readie would be obliged to make payment in full even if Geo had not delivered any goods at all, or if Geo had delivered a completely different product, for example “teddy bears” instead of aggregate. Readie stated that such interpretation could not be correct.
Readie also argued that clause 2.2 of the standard terms meant that there could be no invoice without delivery and the price was therefore not payable “irrespective of delivery” for the purposes of s.49(2) SGA. Therefore, this did not give rise to a claim in debt and Geo was left with a claim in damages only, which would not entitle it to summary judgment.
Finally, Readie stated that there were three cumulative components of s.49(2) SGA which had to be met:
- Payment had to be required on a “day certain” – Readie agreed that this condition was met.
- Payment must become due “irrespective of delivery” – Readie argued that this condition was not met because payment and delivery were interdependent and in fact, the contract did not come into being until the goods were delivered. As such, it could not be true that payment became due irrespective of delivery.
- Buyer must have “wrongfully” neglected to pay – Readie argued that this condition was not met as it had grounds for not paying.
Geo’s argument
Geo argued that the essence of the commercial deal was that it granted Readie credit of up to two months, and the "quid pro quo" for extending such credit was that Geo be protected as if Readie had paid for the goods in advance or on delivery. As such, Geo was entitled to be paid in full notwithstanding the fact that the goods delivered were defective. Further, as a matter of language, clause 4.1 excluded abatement.
In addition, Geo highlighted that there were other provisions under the standard terms which dealt with the goods not meeting the specification, and that Readie should have relied on those provisions to deal with a potential breach.
Geo also rejected Readie’s interpretation of s.49(2) SGA, arguing that:
- The condition that payment must become due “irrespective of delivery” was met, and the obligation to make payment was specifically linked to invoicing rather than delivery and
- Readie had misinterpreted the meaning of “wrongfully” neglecting to pay, which refers to the particular contractual terms.
Judgment
The judge considered whether Readie was entitled to withhold payment on the basis that the goods delivered were defective, or whether the contractual terms meant that Readie was obliged to pay irrespective of quality.
The judge found that, on the basis of clause 2.2, delivery of goods was a condition precedent to payment, and if Geo had delivered a different type of goods, such as sand rather than aggregate, the obligation to pay would not have arisen because the goods supplied would not be in accordance with the conditions of the contract. However, it does not follow that the buyer is entitled withhold payment if it considered that the goods did not meet the agreed specification and were non-compliant.
The judge considered that it was necessary to construe the contract as whole and endeavour to reach a construction which gave meaning and effect to all the clauses. As stated by Geo, other clauses of the contract covered a situation where the delivered goods failed to comply with specifications in some material respect. These clauses would be redundant if the buyer could pre-empt matters by refusing payment because of perceived non-delivery or defective delivery.
As Geo had delivered the goods, which accounted for bona fide purported delivery, there had been delivery for the purpose of the contract and Readie could not withhold payment on the basis that the goods did not conform with the contractual specification.
Summary
This interesting case may come as a surprise to customers assuming that they would be within their rights to withhold payment for delivery of defective goods. Customers should take note that section 49(2) SGA imposes an absolute obligation to pay where it applies, and appears to be wide in scope. Where a supplier’s standard terms entitle it to payment in full without deduction on a “day certain” and where delivery of conforming goods is not obviously a precondition of payment, the customer is likely to have to pay the supplier in full for defective goods whilst it seeks compensation separately.
It is worth noting however, that emphasis was placed on the fact that the seller had extended credit to the buyer, and that the buyer had express remedies for defective goods and had these not been the case, the court’s ruling may have been different.
Beverley Flynn