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Minimum Quantity Clauses & VAT

In a recent summary hearing (E-NIK Ltd v Department for Communities and Local Government) the High Court has highlighted the dangers of setting minimum quantities of product which a buyer must pay for.

This case revolved around a consultancy contract which the High Court found set a minimum requirement of 500 hours per annum to be supplied to the Buyer who had an option to request further hours if necessary. When the Buyer failed to use at least 500 hours the Supplier sued.

An initial argument examined by the judge, Mr Justice Burton, was whether the Supplier was suing for an outstanding debt or for breach of contract. If the claim was for a debt then the value of the claim would be for the remainder of the 500 hours unused and unpaid for by the defendants, which would be an easily calculable fixed amount. If the claim was for damages for breach of contract, because the Defendant failed to use at least 500 hours, then the Claimant would have to demonstrate loss in order to receive damages.

The claim was determined to be for an outstanding debt rather than for damages. As a result the judge relied on his previous decision in another case (M&J Polymers) to find that the minimum requirement clause could be a penalty and therefore void if it fails certain tests.

Mr Justice Burton went on to explain that in order not to be seen as a penalty a minimum requirements clause should:

• Be negotiated freely between the parties
• Not amount to oppression of one party by the other
• Be for a primary purpose other than deterring a breach of contract
• Legitimately relate to the needs of the Supplier

In this case the Supplier maintained enough workers throughout the contract to meet the 500 hours requirement had the Buyer requested that amount. The Buyer and Supplier negotiated the 500 hour requirement and the bargaining power of the parties was equal and so the Supplier could not oppress the Buyer. The purpose of the clause was to ensure that the Supplier met the perceived needs of the Buyer by guaranteeing a fixed number of hour’s availability. The minimum quantity clause was therefore not a penalty and was upheld.

This case demonstrates the need to take care with minimum quantity clauses. Instances where the minimum quantity will be void as a penalty should be rare; however, it is important that, especially where standard terms are used, and minimum quantity requirements can be commercially justified by the Supplier. These justifications should ideally be recorded and periodically reviewed to ensure they remain relevant. Arbitrary minimums should be avoided to ensure that clauses, if challenged, are given full effect.

Another important reminder which came from this case was in relation to VAT. In the contract the Supplier had failed to specify whether VAT was inclusive or exclusive of the hourly rate. The judge held that as a result the price was inclusive of VAT.

This should again remind suppliers to clearly outline their pricing structures and explicitly state whether prices are inclusive or exclusive of VAT, as where the agreement is silent, normal rules will apply and the price will be deemed to be inclusive of VAT.

E-NIK Ltd v Department for Communities and Local Government [2012] EWCH 3027
M&J Polymers Ltd v Imerys Minerals Ltd [2008] EWCH 344

Written by Solicitor, Vaughan Jones.

About the author

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Vaughan Jones

Vaughan Jones is Partnership Chair and a specialist in Corporate Law.

Published: Friday 3rd May 2013
Categorised: Corporate Law

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