Why vague set-off defences do not survive summary decree

Ahsan Mustafa explores the role of summary decree in a recent commercial recovery action.

A motion for summary decree came before the sheriff in a commercial action for payment. The pursuer was a long-established supplier of building materials trading on a credit basis. The defender was a limited company operating in the construction and accommodation sector.

The sum sued for arose from a defined supply period under an agreed trade credit facility. Twenty-seven invoices were founded upon, supported by statements of account, copy invoices and proof of delivery documentation. Receipt of the goods and the accuracy of the invoices were not denied on record.

The defender resisted decree by advancing a defence founded on compensation, more commonly described as equitable set-off, while also disputing the applicability of the written credit agreement and suggesting that trading instead took place on an informal or verbal basis.

The sheriff granted summary decree with expenses.

Procedural posture

The pursuer sought summary decree on the basis that the sum sued for was tacitly admitted, the invoices and delivery of goods were not genuinely disputed, no plea in law supported set-off, no counterclaim was pled and the defence had no real prospect of success.

The defender maintained that disputed issues of fact required proof before answer and that the procedural history of the litigation was irrelevant to the court’s assessment.

Set-off, compensation and the existence of a liquid obligation

The defender’s reliance on compensation engaged settled principles of Scots law. Compensation, now commonly described as equitable set-off, has its statutory roots in the Compensation Act 1592. As a matter of doctrine, it presupposes the existence of a liquid and enforceable obligation. A party cannot contend that a debt is extinguished by compensation without, at the same time, accepting that the debt exists.

That position is reflected in McBryde, The Law of Contract in Scotland (3rd edition, paras 25-54), where it is made clear that set-off is not a free-standing defence but a juridical mechanism which must be properly constituted and pled. In particular, it requires a relevant plea in law and a properly articulated basis, whether contractual or otherwise.

In the present case, no counterclaim was advanced and no contractual entitlement to set-off was averred. In those circumstances, the invocation of compensation proceeded on the assumption that the principal sum was due and resting, but without the legal structure required to extinguish it. The court was therefore entitled to proceed on the basis that liability for the invoiced sums was not genuinely in dispute.

Alleged verbal agreements and the requirement for specification

The defender sought to avoid the written credit agreement by asserting that trading occurred under informal verbal (parol) arrangements. That position was unsupported by averments on record.

Where a party seeks to displace an averred contractual framework by asserting alternative informal contracts, Scots law requires those alleged contracts to be pled with clarity and precision. This includes averments as to the parties, the timing of formation, the terms relied upon and the basis upon which payment obligations arise.

That requirement was articulated in a recent unreported case, where the sheriff observed that a party who denies the existence or applicability of a written contract must set out the alternative contractual structure upon which it relies. Absent such averments, fair notice is not given and the court is left without any intelligible basis upon which a proof could be conducted.

In the present case, the defender did not aver when any verbal agreement was concluded, with whom it was made, whether there was a single overarching agreement or multiple discrete agreements, what terms governed price and payment, or how any such arrangement differed from the written credit facility. The assertion of verbal trading was therefore legally insufficient.

Interdependency and the limits of set-off

Even if multiple informal contracts were assumed to exist, the authorities do not support the use of set-off in the absence of contractual interdependency.

In Glen Clyde Whisky Ltd v Campbell Meyer & Co Ltd 2016 SCLR 341, the Court of Session held that distinct contracts, even where similar in nature and concluded between the same parties, remain independent unless performance of each is conditional upon the successful completion of the others. Similarity of subject matter or trading relationship is insufficient to establish interdependency.

No such interdependency was averred in this case. On the defender’s own position, each order or project stood alone. That was inconsistent with any attempt to aggregate alleged cross-claims by way of compensation so as to extinguish a liquid debt arising from a defined supply period.

Procedural history and assessment of the defence

The defender submitted that the procedural history was irrelevant. The court did not accept that proposition.

While parties cannot rely upon superseded averments, the procedural history may inform the court’s assessment of whether a defence is substantive or whether further procedure is likely to assist in resolving the dispute. In Canmore Housing Estate v Scott 2003 SLT (Sh Ct) 68, the sheriff recognised that a pattern of unsupported denial may properly be characterised as a delaying tactic.

In the present case, the defender’s position evolved as the litigation progressed, including the abandonment of earlier challenges once documentary material was produced. That history was relevant to the court’s assessment of whether the defence, as pled at the date of the motion, had any real prospect of success.

Summary decree, evidence and disputed facts

The existence of disputed facts does not, of itself, preclude summary decree. In Delta Sales & Marketing Ltd v Nugent 1991 SCLR 461, the court confirmed that, in determining a motion for summary decree, it may have regard to matters of evidence, such as affidavits, and is not constrained in the same way as at a debate on relevancy.

In Maclay Murray & Spens LLP v Orr [2014] CSIH 107, the Inner House emphasised that summary decree is available where the material before the court directly and compellingly contradicts the defender’s assertions of fact, and where the defence has no real prospect of success.

Here, the pursuer produced contemporaneous correspondence and solicitor file notes, with privilege waived for that purpose, which supported the pursuer’s narrative and addressed the defender’s position. The defender did not produce material capable of establishing a competing contractual or legal framework.

This was not a case of the type discussed in Arthur J Gallagher Insurance Brokers Limited (Formerly Giles Insurance Brokers Limited) and Arthur J Gallagher Services (UK) Limited v Graham Hudson and George Stubbs Insurance Services Limited [2017] SC BAN 2, 2017 WL 00369023, where the court refused summary decree because the moving party had failed to point to specific deficiencies or to place extraneous material before the court. In the present action, the pursuer did precisely that.

Further procedure and procedural economy

The pursuer’s position on further procedure went to the root of the defender’s pleadings. In Cyma Petroleum (UK) Ltd v Total Logistics Concepts Ltd 2004 SLT (Sh Ct) 112, the sheriff observed that where a party can “deal a knockout blow” to the pleadings at debate, or substantially reduce the scope of proof with a consequent saving of time and expense, the court should do so.

The court also noted that a diet of debate is appropriate only where it would lead to decree or substantially limit proof, a question of law rather than discretion, as recognised in Hugh Gracey v John D Sykes 1994 SCLR, applying OCR 9.12(3)(c).

In the present case, the sheriff was satisfied that even a proof before answer would not advance matters in any material way.

Outcome

The sheriff was satisfied that the invoices and delivery of goods were effectively admitted, the reliance on set-off was incompetent in the absence of proper pleading, the alleged verbal agreements were wholly unspecified and no contractual or legal basis had been articulated which could extinguish the debt.

Summary decree was granted for the full sum sued for, together with expenses.

Conclusion

The case illustrates the continuing importance of pleading discipline in commercial recovery actions. Where a defender seeks to resist payment of a liquid debt, concepts such as compensation or informal agreement must be supported by a coherent contractual and legal framework.

Summary decree remains an essential procedural mechanism where liability is effectively admitted, defences lack specification and further procedure would not assist the court in resolving the dispute proportionately.

Written by Ahsan Mustafa, Senior Associate, Aberdein Considine LLP; accredited by the Law Society of Scotland as a specialist in debt and asset recovery.