Is it worth negotiating? Clarification of “written standard terms of business” under UCTA section 3

In African Export-Import Bank v Shebah Exploration & Production Company, the Court of Appeal confirmed the test for when negotiation and amendment of “written standard terms of business” will preclude application of the reasonableness requirement in section 3 of the Unfair Contract Terms Act 1977 (UCTA).

Section 3 of UCTA subjects certain exclusion clauses to the requirement of reasonableness where one contracting party “deals … on the other’s written standard terms of business”. There has been some debate as to the extent to which negotiations over the terms of a contract would take it out of the scope of this section.

Here, a syndicate of banks entered into a facility agreement with a Nigerian oil company. The parties based their negotiations on a form of syndicated facility agreement recommended by the Loan Market Association.

Amongst its defences to a claim for summary judgment for sums owed under the facility agreement, the borrower sought to set off certain amounts by way of counterclaim. The facility agreement and associated guarantee contained an express term excluding the right of set-off, but the borrower alleged that it was arguable that this term would be subject to requirements of reasonableness under UCTA.

The judge at first instance considered previous case law and stated that section 3 would apply only if negotiation and amendment of the draft contract had left the terms “effectively untouched”. Here, substantive aspects had been changed and section 3 did not apply.

The Court of Appeal upheld the decision at first instance. It approved the previous caselaw and applied the “effectively untouched” test. It added that if there have been substantial (i.e. more than insubstantial) variations to the terms which may otherwise have been habitually used by one party, then the other party is unlikely to be able to show that the contract had been made “on the other’s written standard terms of business” for the purposes of UCTA, section 3. However, if a lender habitually used a particular LMA form and refused to countenance any amendment, it would be difficult to say that the deal was not done on that lender’s standard business terms.

There was also interesting comment on the threshold of proof at the summary judgment stage.