Under section 3 of the Unfair Contract Terms Act 1977 ("UCTA"), where one party deals on the other's written standard terms of business, that other party can only exclude or restrict its liability insofar as is reasonable within the meaning of UCTA. But when will a party be deemed to have dealt "on the other's written standard terms of business"? That was one of the questions for the Court of Appeal in African Export-Import Bank and Others v Shebah Exploration & Production Co Ltd and Others  EWCA Civ 845.
The appellants (the "Borrowers") were involved in oil exploration and production in Africa. They entered into a finance facility agreement with the respondents (the "Lenders") initially for US$100 million and later restated for $150 million (the "Facility Agreement"). The Lenders advanced the agreed sums, and the Borrowers subsequently defaulted on substantially all of their capital repayment obligations. The Lenders accelerated the Borrowers' entire debt under the Facility Agreement such that all outstanding amounts became immediately due and repayable. The Lenders commenced proceedings to recover the outstanding sums, and applied for summary judgment on the claim.
The Borrowers contended that summary judgment should not be given as they had an arguable case that:
- they had counterclaims against the Lenders which they could set off against and thus discharge the outstanding sums; and
- although the Facility Agreement contained a clause which purported to exclude any such right of set-off, this clause was part of the Lenders' "standard written terms of business"; was thus subject to s.3 of UCTA; and was valid only if it satisfied the requirement of reasonableness as defined in section 11 of UCTA.
High Court Decision
In the High Court, Phillips J found that the Facility Agreement was based on a form recommended by the Loan Market Association ("LMA"). The judge noted that the LMA form was intended as a starting point for negotiation, balancing the interests of borrowers and lenders, and the LMA's own user guide said it was impossible to use the form without amendments and additions. The judge found there was no evidence that the Lenders habitually used the LMA form or indeed any other standard written terms for syndicated lending, and in any event the final Facility Agreement was the product of substantive negotiation between the Lenders and Borrowers and their respective solicitors.
Accordingly, the judge found there was no merit in the Borrowers' arguments and granted summary judgment on the Lenders' claim. The Borrowers appealed.
Court of Appeal
The Court of Appeal found that there was no controversy that the "no set off" clause was "written" or that it was a "term of business" for the purposes of UCTA. The key questions for the court were therefore:
- Whether the term in question was part of the Lenders' standard written terms of business; and
- If so, had the Borrowers in fact been dealing on those standard written terms of business, or had they negotiated something different.
Was the term part of the Lenders' standard terms?
In order for the term to be considered part of a party's standard written terms of business, it has to be shown that the other party habitually uses those terms of business. It is not enough that it sometimes does and sometimes does not. Reviewing the limited previous case law on the point, the Court found that to be considered standard terms, the terms in question "should be intended to be adopted more or less automatically in all transactions of a particular type without any significant opportunity for negotiation".
It is perfectly possible in theory for terms prepared by a third party (e.g. a trade association) to form a party's written standard terms, provided they are used habitually in this way. Longmore LJ quoted with approval from British Fermentation Products Ltd v Compare Reavell Ltd  EWHC Technology 227:
"It must be shown that either by practice or by express statement a contracting party has adopted a model form as his standard terms of business. For example, an architect might say, "My standard terms of business are on the terms of the RIBA Form of Engagement".
While therefore, in theory, the LMA form could form a party's standard terms, the court agreed with the trial judge that there was no evidence that in fact the Lenders used the LMA form habitually.
Were the parties in fact dealing on the Borrowers' standard terms?
The second question of principle that arose was whether UCTA applies in cases where there has been negotiation between the parties such that some, but not all, of a party's standard terms are applicable. Previous cases had opined that it was not necessary for the standard terms to be used absolutely without alteration, but that s.3 of UCTA would still apply where a party's standard terms were left "effectively untouched" or had been used "without material variation".
In this case, the court found that there had been detailed negotiations which made it impossible to say that either the LMA form or the final Facility Agreement constituted the Lenders' standard terms - the Borrowers' proposed many substantial amendments to the documents, many of which were accepted by the Lenders.
The court dismissed the Borrowers' appeal and upheld the summary judgment in favour of the Lenders.
The Borrowers in this case accepted that a right of set-off could in theory be excluded as a matter of contract law; they simply contended that in the circumstances the "no set-off" clause had to satisfy the reasonableness requirement under UCTA. Both at trial and on appeal however, the argument held little sway with the court.
The court accepted the Lenders' evidence that, in the context of a syndicated lending, where there were many possible permutations of lenders, it was unlikely that the lenders involved would have common standard written terms, and so the documents would be negotiated on a case by case basis, as was the case here. The court found it was difficult to see that the Borrowers could have believed they were dealing on the Lenders' standard terms when they were dealing with three parties in a syndicated loan agreement, one of whom was Egyptian and two of whom were Nigerian. They were also critical of the Borrowers seeking to avoid their liability by raising a speculative argument without actual evidence that the documents constituted the Lenders' standard terms.
Although it was not ultimately necessary to decide the appeal, the court noted obiter that the LMA form of agreement could in theory constitute a lender's standard terms, but only if that lender habitually used the form and refused to countenance any amendment to it, which was not the case here.
Finally, the court rejected the Borrowers' submission that negotiation only had the effect of taking terms outside of UCTA if the negotiation was over the exclusion clause in question. Although UCTA reasonableness test bites on exclusions or restrictions on liability, substantial negotiation of any clause is likely to mean that the parties are not dealing on standard terms such that UCTA won't apply.
Those drafting contracts may welcome the courts not taking an expansive view of what a standard term is. However this is not an opportunity to introduce unreasonable exclusion clauses in contracts - there will always be a risk that a court might conclude for a particular contract that it is on standard terms. Therefore those drafting contracts are wise to factor in the risk of an UCTA argument.
Points to remember
- Exclusions or restrictions in standard terms are enforceable only if they are reasonable;
- Standard terms are those which are habitually used by a party with minimal alteration;
- Terms may still be deemed to be standard (and thus subject to UCTA reasonableness) if there is some negotiation over them, provided that it is not substantial;
- It does not matter which clauses are negotiated - if there is substantial negotiation on any clause (not just exclusions or restrictions on liability) then the parties may no longer be dealing on standard terms and UCTA may not apply;
- A party cannot escape the effect of a clause simply by speculatively claiming it is the other's standard term of business and thus vulnerable to challenge under UCTA - it must provide some evidence that it is a standard term.
- Those drafting contracts should not see this as an opportunity to introduce unreasonable exclusion clauses in contracts.