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LMA model form facility agreements - standard terms of business?

A recent case has considered whether, in the context of the Unfair Contract Terms Act 1977, facility agreements based on LMA model forms can be classed as written standard terms of business.

For lenders that regularly enter into facility agreements based on LMA model forms, it may be a surprising notion that someone could suggest that the agreements could be classed as standard terms of business such that the provisions of the Unfair Contract Terms Act 1977 (UCTA) applied.

But that is exactly what the defendants argued, when trying to avoid an exclusion clause, before the Court of Appeal earlier this year in the case of African Export-Import Bank v Shebah Exploration & Production Company Ltd [2017] EWCA Civ 845.

Unfair Contract Terms Act 1977

Section 3 of UCTA provides that, where one of the contracting parties deals on the other's written standard terms of business, any exclusion clause in favour of the drafting party they must satisfy the test of reasonableness. If the test is not met, the party cannot rely on that exclusion clause.

Background facts

The claimant lenders were an Egyptian financial institution and two Nigerian banks (the Lenders). The Lenders entered into a facility agreement with the first defendant, Shebah, pursuant to which they agreed to lend US$150 million to refinance existing debt and to provide working capital for an oil production facility in Nigeria. The loan was subject to a corporate guarantee by the second defendant (an entity related to Shebah) and a personal guarantee from the third defendant (who was the main principal behind Shebah). The facility agreement was based on the LMA model form for syndicated facilities.

Shebah defaulted and the Lenders commenced proceedings against all three defendants for the sums outstanding. Amongst the grounds of defence, the defendants asserted counterclaims totaling US$1 billion, which they argued should be set off against the sum claimed by the Lenders. The Lenders' response was that the terms of the facility agreement prevented any set off being applied. The defendants argued that section 3 of UCTA applied because the contract was based on the Lenders' written standard terms of business, such that the Lenders could only rely on the set off clause to the extent that it met the reasonableness test.

At first instance, the Lenders were granted summary judgment.

Court of Appeal's decision

The Court of Appeal held that, for UCTA to apply, the defendants had to satisfy two limbs, namely (a) whether the Lenders habitually used those terms and (b) whether there have been more than insubstantial variations to the terms.

In relation to the first limb, the Court of Appeal held that it was not enough to show that the terms were sometimes used and sometimes not, nor that the terms comprised part of a model form of contract. If it was a model form, then that model had to be used habitually. The defendants did not satisfy this limb because they had failed to adduce any evidence that they either believed they were contracting on standard terms or that the Lenders habitually contracted on such terms. In this regard, the defendants had sought to argue that the issue was not suitable for summary judgment until the Lenders had disclosed evidence of similar contracts in the past. Lord Justice Longmore, given the main Judgment, dismissed that argument saying that it could not be right that a defaulting borrower could simply assert that the agreement was on standard terms to defeat any summary judgment until such time as the lender had provided disclosure.

When considering the second limb, the Court of Appeal recognised that it was common place that standard terms or model forms would be subject to minor amendments (price, time for performance etc) which would not change the fact that they were standard terms. The more amendments there were and the more substantial in nature, however, the less likely it was that the party relying on UCTA could discharge their burden of proof that they remained standard terms of business.

In this case, when entering into the facility agreement both the Lenders and the defendants engaged lawyers who had negotiated amendments to the LMA model form over a three month period. It was quite clear from the drafts that the amendments were substantial and the fact that the amendments did not touch on the set off clause in question had no bearing on the matter.

Conclusion

The Court of Appeal's decision is not surprising on the facts of the case.

Large loan facilities based on LMA model forms are almost always subject to negotiation between the parties. As a result, it is highly unlikely that the resulting agreement would ever be considered as standard terms of business within the definition of UCTA.

The cautionary note is that the Court of Appeal refused to rule that an agreement based on a LMA model form could never be considered standard business terms. It recognised that it would be arguable that a lender habitually using the same agreement based on a LMA model form that refused to agree to any non-substantial amendments was contracting on standard terms of business. 

 This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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