Can You Refuse Payment for Defective Goods? Guideline Contract Ruling

If goods you have received do not come up to specification, are you within your rights to refuse to pay for them? The High Court addressed that critically important question in a case concerning the supply of building aggregate that was alleged to have turned into slurry when the heavens opened.

A construction company refused to pay £224,091 in respect of the aggregate on the basis that it had dissolved amidst heavy rain. It asserted that the goods were not of the type promised by the supplier and that it was thus under no obligation to pay for them. After the supplier launched proceedings, however, a judge found that it was entitled to receive payment of the agreed price in full.

Ruling on the company's challenge to that outcome, the Court noted that it signed up to a credit agreement whereby it submitted to the supplier's standard terms and conditions of sale. Amongst those was a requirement to pay for goods in full, without any deduction or withholding whatsoever.

The Court noted that the payment in full clause could be seen as a quid pro quo for the supplier extending credit to the company. Rather than being required to pay for the goods immediately on delivery, the company was afforded two months' grace. The purpose of the clause was the legitimate and important one of protecting the supplier's cashflow, the lifeblood of any business.

The clause was fair and reasonable and made good sense in terms of business efficacy. It did not prevent cross-claims in the event that goods delivered turned out to be defective. It created a 'pay now, argue later' regime that deferred argument about such cross-claims until after the price for the goods had been paid.

The Court acknowledged that, had the supplier delivered sand, or for that matter teddy bears, instead of aggregate, the company would not have been required to pay. That was because the goods delivered would not have been in accordance with the contract. The supplier had, however, made a bona fide purported delivery of the goods ordered and the company was not entitled to withhold payment on the basis that they did not come up to specification. Further arguments put forward by the company were also rejected and its appeal was dismissed.