African Export-Import Bank and others v Shebah Exploration & Production and others  EWHC 311 (Comm), 19 January 2016 (Bailii)
The High Court in this case had to consider whether the use of a Loan Market Association (LMA) standard-form based facility agreement was entered into on the Claimants’ “written standard terms of business” and engaged section 3 of the Unfair Contract Terms Act 1977 (UCTA), thus potentially subjecting an exclusion clause in the agreement prohibiting a ‘right to set-off’ to the reasonableness test in section 11 of UCTA.
‘WRITTEN TERMS OF BUSINESS’ AND APPLICABILITY OF S3, UCTA
If a party deals on its “written standard terms of business”, any term limiting or excluding its liability for breach of contract or claiming to render no contractual performance or alternatively performance substantially different from that which was reasonably expected of him must pass a test of reasonableness in order to be valid.
The difficulty in establishing whether such standard terms have been used is that the expression “deals on the other’s written terms of business” is neither defined nor explained in UCTA. The development of this expression through case law must therefore be relied upon.
The claimant lenders, African Export-Import Bank, Diamond Bank Plc and Skye Bank Plc (the “Claimants”) brought a claim for the sums due under a facility agreement against the defendants, being the borrower Shebah Exploration, its guarantor Allenne and the personal guarantor of both Shebah Exploration and Allenne.
The facility agreement was initially based on the LMA standard form and then negotiated by solicitors acting on behalf of the Claimants and the Defendants, after which the agreement was finalised and executed by the parties.
The defendants, after having made one repayment instalment, then failed to pay any further repayments and the Claimants subsequently accelerated repayment of the entire debt in accordance with the facility agreement.
The Defendants, contending that they had counterclaims against the Claimants, sought to set off the alleged counterclaims against the sums due under the facility, notwithstanding that the facility agreement contained an express provision excluding the right to set-off.
The lenders then sought summary judgment for the amount of debt outstanding and subsequently, in their defence, the Defendants alleged that they had entered into the facility agreement on the Claimants’ written terms of business, section 3 of UCTA therefore applied and subsequently the exclusion of the right to set-off could only be relied upon by the Lenders in so far as they could demonstrate that the requirement of reasonableness under section 11 of UCTA was satisfied.
To determine whether the facility agreement was based on “the other’s written standard terms of business” in accordance with section 3 of UCTA, Justice Philipps considered and referred to two cases where the meaning of this expression had been discussed.
The first case was Hadley Design Associates v City of Westminister  EWHC 1717 (TCC) HHJ, in which Judge Seymour QC commented that for a contract to fall under section 3 of UCTA, it should be “intended to be adopted or imposed without consideration or negotiation specific to the individual case”.
The second case was Yuanda (UK) Co Lt v WW Gear Construction Ltd  Bus LR 360 in which Edwards-Stuart J agreed with Judge Seymour QC’s reasoning above and stated that “the conditions have to be standard in that they are terms which the company in question uses for all, or nearly all, of its contracts of a particular type without alteration…”.
It was recognised, however, that negotiation of such standard terms and the inclusion of slight amendments does not necessarily preclude the terms remaining standard and effectively untouched.
Having regard to the above case law, Justice Philipps held that there was no basis for inferring that the Claimants habitually put forward the LMA standard form as a basis for their syndicated loan transactions. This was based on express evidence produced by the Claimants that their syndicated lending is negotiated and agreed on a transaction by transaction basis.
Justice Philipps further stated that there was no basis for inferring that the Claimants always refused to negotiate the terms of the standard LMA. Similarly, the evidence did not suggest that the Claimants refused in this instance to negotiate the facility agreement as it was clear that additional terms, such as a material adverse effect clause, had been negotiated and added to the standard LMA form.
As a result, Justice Philipps held that the Defendants had no realistic prospect of establishing at trail that the facility agreement was entered into on the Claimants’ written standard terms of business. Consequently, the no set-off exclusion was not subject to the reasonableness test but applied with full contractual force.
Summary judgement was therefore granted in favour of the Claimants against all three Defendants for the principal amount outstanding under the facility, the management fees and interest calculated on the basis that the loan was accelerated on 2 October 2014.
This case will be of particular interest to entities which use industry standard terms in their business as it provides clear guidance on the threshold that will need to be met in order for a commercial contract to be entered into on a party’s “written standard terms of business” and for section 3 of UCTA to apply.
Furthermore, it acts as a warning sign for parties who habitually put forward an industry standard form as non-negotiable to consider the wider implications that this may have on the effectiveness of any limitations of liability or exclusion clauses included in the agreement.