The Court of Appeal has recently held that parties, which negotiated a loan agreement based on a model form, were not dealing on written standard terms of business for the purposes of the Unfair Contract Terms Act 1977 (UCTA).
This meant that the no-set off clause included in the loan agreement was not subject to the reasonableness requirement enshrined in UCTA.
The case of African Export-Import Bank and others v Shebah Exploration & Production Company Limited and others  EWCA Civ 845 concerned a loan agreement entered into by a syndicate of banks (consisting of an Egyptian financial institution and two Nigerian banks) and Shebah (an African oil and gas company).
The loan agreement was based on the Loan Market Association (LMA) model terms which were negotiated by the parties and substantial amends were agreed. Shebah fell behind with repayments under the agreement and the banks issued proceedings to recover the outstanding sums.
One of the counterclaims before the High Court was that Shebah should be entitled to set off a claim it had against the banks’ claim. In particular, Shebah asserted that the banks owed USD 1 billion for an alleged breach of an oral agreement not to accelerate the debts before a certain time. To counter this, the banks sought to rely on a no-set off clause included in the loan agreement which prevented Shebah from setting off any claims it had against the banks.
Shebah contended that it had contracted on the banks’ written standard terms and as such, the set off clause was subject to the reasonableness test (which requires an inquiry into how reasonable a term is) included in section 3 of UCTA. The High Court granted summary judgment on the basis that Shebah did not have a realistic prospect of establishing that they were dealing on the banks’ written standard terms and Shebah appealed.
The Court of Appeal dismissed the appeal and held that in order for section 3 of UCTA to apply, the party relying on UCTA (in this case Shebah) must prove the existence of certain elements including the following:
The court considered that to amount to written standard terms of business, those terms should be used on a habitual basis. It was not enough to show that those terms of business were sometimes used, nor was it enough to show that those terms were part of a model form. On the facts, the court held that Shebah failed to produce any evidence to show that the LMA model form (on which the loan agreement was based) was used habitually by the banks.
In any event, due to the detailed negotiations and substantial amendments prior to the conclusion of the loan agreement, the court would be unlikely to conclude that the deal was carried out on the banks' written standard terms of business.
In determining whether the parties were dealing on the banks’ written standard terms of business, the Court of Appeal referred to (among other judgments) the case of St Albans City and District Council v International Computers Ltd. In that case, the court found that it was not necessary for the standard terms to be used absolutely without alteration, but that section 3 of UCTA would still apply where a party's standard terms remained "effectively untouched". In the present case, the Court of Appeal noted that “it is relevant to inquire whether there have been more than insubstantial variations to the terms which may otherwise have been habitually used by the other party to the transaction”. It concluded that variations in this case were more than insubstantial.
The Court of Appeal therefore found it impossible to conclude that the parties were dealing on written standard terms of business for the purposes of UCTA and the clause prohibiting set off stood (as it was not subject to the reasonableness test). The upshot was that the order for summary judgement for sums due under the loan agreement was upheld.
The judgment provides useful guidance on the approach courts may take when called to consider the issue of whether a deal has been done on written standard terms of business. This approach highlights that where model terms have been negotiated and amended by both parties courts are less likely to determine that the contract in question was based on written standard terms of business.
The decision also underlines the need for the parties to provide compelling evidence in order to prove that a contract was made on the written standard terms of one of those parties within the meaning of section 3 of UCTA. To that end, the party intending to rely on UCTA, would be required to prove that those terms were regularly used by the other party.
Contributor: Rolla Rostam
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.