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31 July 2017

Are you dealing on standard terms?

African Export-Import Bank v Shebah Exploration & Production Company Ltd [2017] EWCA Civ 845

Section 3 of the Unfair Contract Terms Act 1977 applies ‘between contracting parties where one of them deals as a consumer or on the other’s written standard terms of business’ and provides that a party contracting on its own standard terms cannot exclude or restrict his liability for breach of contract, except in so far as the limitation/exclusion clause satisfies the requirement of reasonableness. But what happens where the contract contains some, but not all, of a party’s written standard terms of business?

In this appeal, which was heard on 28 June 2017, the Court of Appeal considered the application of UCTA to a loan facility agreement and provided guidance on the approach to adopt where a party’s standard terms have been amended. It was held that the correct question to ask is whether there has been ‘more than insubstantial variations’ to the standard terms. If there has been substantial variation, it is unlikely that the party relying on UCTA will have discharged his burden of showing that the contract has been made on the other’s written standard terms of business.

Background

  • A borrower, Shebah Exploration & Production Company Ltd (a company incorporated in Nigeria) and two guarantors, Allenne Ltd (a BVI company and affiliate of Shebah) and Dr Orjiako (the President of Shebah) appealed against the entry of summary judgment in favour of three lenders, African Export-Import Bank (an Egyptian bank) and Diamond Plc and Skye Plc (both Nigerian banks), on their claim for sums due under a syndicated loan facility agreement;
  • Each lender had advanced $50 million to the borrower under the loan agreement, which was an adapted and amended version of the form recommended by the Loan Market Association (LMA) following negotiation between the parties;
  • The borrower defaulted and the lenders accelerated the debt and made demands on the guarantors. As no payment was made, the lenders commenced proceedings in the Commercial Court in 2014 to recover the sums due under the facility agreement;
  • The borrower and guarantors (the borrowers) asserted that they were entitled to set off a counterclaim worth $1 billion against their liabilities under the facility agreement and guarantee so as to discharge those liabilities. The lenders sought to rely on a clause in the facility agreement which provided for all payments to be made without set-off or counterclaim. The borrower argued that clause was caught by section 3 of UCTA because the parties had been contracting on the lenders’ standard terms; and
  • In giving summary judgment, Phillips J found for the lenders on the basis that the borrowers had no realistic prospect of establishing that the parties had contracted on the lenders’ standard terms of business.

Decision

Lord Justice Longmore and Lord Justice Henderson dismissed the appeal, having agreed with Phillips J that section 3 of UCTA did not apply because the parties had not contracted on the lenders’ standard terms of business. The following observations were made:

  • For section 3 to apply the party seeking to rely on it must prove that:
    • The term is written;
    • The term is a term of business;
    • The term is part of the other party’s standard terms of business; and
    • The other party is dealing on those written standard terms of business.
  • The first two are unlikely to be controversial. To prove that the exclusion clause was part of the lenders’ written standard terms of business, the borrowers would have to establish that the lenders habitually used those terms. It was not enough simply to show that a model form of contract had been used; the borrowers would have to show that the lenders habitually used that model form;
  • A party who wishes to argue that a deal is on standard business terms must produce some evidence to support that; in this case, the borrowers had produced no such evidence. The fact that the borrowers had contracted with three different lenders, one being Egyptian and the others Nigerian, in a syndicated loan agreement reduced the likelihood that the contract had been on standard terms;
  • The borrowers also had to establish that the lenders had been dealing on their written standard terms. In a case where the negotiations had resulted in some, but not all, of one party’s standard terms applying, the correct approach was to inquire whether there had been more than insubstantial variations to the standard terms which might otherwise have been habitually used by that party;
    In this case, the parties had engaged in detailed negotiations, which had resulted in substantive amendments to the LMA model form, such that it was impossible to say that the terms agreed were standard business terms. There is no requirement that the negotiations had to relate to the exclusion clause for section 3 of UCTA not to apply; and
  • It was unnecessary to consider the lenders’ submission that a contract based on an LMA form could never be made on standard business terms because of the adaption and amendments which would always be required. However, LJ Longmore expressed the view that if a lender habitually used a particular LMA form and refused to countenance any amendment, it would be difficult to argue that the deal was not done on that lender’s standard business terms.

Commentary

The case provides useful guidance on how the courts should approach limitation/exclusion clauses in circumstances where the contract consists of an amended version of one party’s standard terms of business. Borrowers should bear in mind that where the terms of a loan facility agreement have been substantially amended from a lender’s standard terms, section 3 of UCTA is very unlikely to subject any limitation/exclusion clause to the test of reasonableness (which in turn makes it more likely that the clause will be relied upon by the lender).

If you would like further information please contact Sinead Lester.

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