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Law Report: Cancelling direct debit was like dishonouring cheque

Esso Petroleum Co Ltd v Milton; Court of Appeal (Lord Justice Simon Brown, Lord Justice Thorpe, Sir John Balcombe) 5 February 1997

A payment by direct debit, like a payment by cheque, was to be treated as equivalent to cash, in that no defence of set-off should be available to a person sued for breach of a contract under which such payments were to be made for goods already supplied.

The Court of Appeal (Lord Justice Simon Brown dissenting on the above point) allowed an appeal by the plaintiff, Esso Petroleum Co Ltd, against the decision of Judge Anthony Thompson QC, sitting as a deputy High Court judge in Exeter on 21 June 1996, who dismissed Esso's application for summary judgment against the defendant, Howard James Milton, for pounds 167,885.81

The defendant was the licensee of two of Esso's service stations, which he occupied and managed under successive three-year agreements. It was a condition of these agreements that he bought all his fuel from Esso and that he paid for it by direct debit.

The price at which he sold the fuel was fixed by Esso. In 1996 Esso began its "price watch" initiative to help it compete with supermarket chains who had begun to sell cut-price petrol. Esso lowered its prices and increased the rents charged to its licensees. The defendant complained that he could not continue profitably to run his service stations. He took the view that the business relationship between them was over.

Between 1 and 9 April 1996 Esso made 12 fuel deliveries to the two service stations. On 9 April the defendant cancelled the direct debit instruction by which such deliveries were paid for. Esso gave the defendant notices purportedly terminating his licence agreements and sued him for the outstanding payments for fuel already delivered.

Esso's application for summary judgment was refused, however, and the defendant was granted unconditional leave to defend. He admitted Esso's claim but counterclaimed for damages for repudiatory breach of contract, which damages he sought to set off in extinction of Esso's claim.

Esso argued that no such right of equitable set-off was available. Under the direct debit scheme the debtor should be subject to the same restrictive rules, as to the stay of judgments and the scope of defences, which applied with regard to dishonoured cheques. Reliance was placed on Nova (Jersey) Knit Ltd v Kammgarn Spinneri GmbH [1977] 1 WLR 713 in which the House of Lords refused to allow a plaintiff's action upon a dishonoured bill of exchange to be stayed pending the resolution of the defedant's counterclaim for unliquidated damages: see per Lord Wilberforce at p 721.

The defendant's case was that a distinction should be made between the debtor's mandate and the creditor's request for payment under the direct debit system: the mandate did not constitute a cheque; and the request, far from being a signed instrument equivalent to cash provided by the debtor, was drawn rather by the creditor. What the defendant had done was to dishonour a promise, not a cheque.

Mark Hapgood QC (Irwin Mitchell, Sheffield) for Esso; Michael Soole (Anstey Sargent & Probert, Exeter) for the defendant.

Lord Justice Thorpe accepted Esso's argument on the direct debit issue. Whilst conscious of the difficulties and dangers involved in such an extension, his Lordship believed it was consistent with the principle stated by Lord Wilberforce in 1977. Where goods were effectively sold for cash, the seller should have the security that cash brought when for mutual convenience the parties had adopted the banking mechanisms in general usage for the transfer of cash from one account to another.

Twenty years ago that was still by cheque. Theoretically the tanker driver could demand a signed cheque on arrival for an amount to be written in when ascertained by completion of the fuel delivery. But Esso's daily petrol sales varied between pounds 9m and pounds 20m and the modern mechanism for handling what were effectively cash sales on that scale was the direct debit system.

It seemed a natural evolution, rather than an extension, of the Nova Knit principle to hold that the seller of goods for cash transferred by the direct debit mechanism should be in no worse a position that if he had accepted a cheque on delivery.

In this case justice was not required to safeguard the defendant's cash flow pending trial of his claim against Esso.