UCTA and use of industry standard model form facility agreement
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In the context of a syndicated facility agreement based on a Loan Market Association standard form, the Court of Appeal confirmed the extent to which negotiation and amendment of a party’s “written standard terms of business” will preclude application of the reasonableness requirement, under the Unfair Contract Terms Act 1977 (UCTA), to clauses limiting or excluding liability: African Export-Import Bank & ors v Shebah Exploration & Production Co Ltd & ors  EWCA Civ 845.
Negotiation on the basis of a Loan Market Association standard form
An international syndicate of banks sued a Nigerian oil company borrower for repayment under a syndicated facility agreement. The loan agreement was based on a London Market Association (LMA) standard form syndicated facility agreement, which had been used as the template for the final contract negotiated between the parties.
The borrower wanted to set off certain amounts by way of counterclaim. The facility agreement and guarantee expressly excluded set-off. The borrower claimed that it was arguable (this being a summary judgment application) that the term excluding the right of set-off would be subject to requirements of reasonableness under s3 UCTA.
Section 3 UCTA
Section 3 UCTA provides that where a contracting party “deals… on the other’s written standard terms of business”, the requirement of reasonableness will apply to provisions by which the other party: (a) excludes or restricts its liability in respect of the breach of contract; or (b) claims to be entitled: (i) to render a contractual performance substantially different from that which was reasonably expected of it; or (ii) in respect of the whole or any part of its contractual obligation, to render no performance at all.
Amendment of standard terms – are they still “standard”?
A party who wants to rely on s3 has to show that there are written terms of business which are standard for the other party, and on which the parties have dealt in the transaction in dispute. There has been some debate on the extent to which negotiation and amendment of a party’s written standard terms of business means that the parties are no longer dealing on the written standard terms of business. The Court of Appeal in St Albans City Council v IFC Ltd  4 All ER 481 CA has previously stated that some negotiation and amendment of a party’s written standard terms of business would not take the terms outside s3 provided that the process leaves the terms “effectively untouched”.
Test – are the standard terms “effectively untouched”?
At first instance, the court stated that it was possible for a party to adopt a third party’s written terms (such as the LMA standard terms), as its own. However, citing St Albans City Council v IFC, the court held that s3 would apply only if negotiation and amendment of the draft contract had left the terms “effectively untouched”. For s3 to apply in this case, it would need to be arguable that: (a) the LMA form or a tailored version was ‘habitually profered’ by the lenders; that (b) the lenders always refused to negotiate the terms it contained; and that (c) the lenders either refused to negotiate the terms in this case or the draft put forward by the lenders had remained “effectively untouched” following negotiation.
The court found that the borrower did not have a realistic prospect of showing that the parties were dealing on the lenders’ written standard terms. Although the lenders had rejected most of the changes proposed by the borrower, the court referred to three substantive changes proposed that were accepted by the lenders.
Use of industry model forms
The court added that, in circumstances where commercial parties, represented by solicitors, had utilised a “neutral” industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, including revising a travelling draft, it would require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties.
Court of Appeal – same result, plus further guidance
The Court of Appeal upheld the decision at first instance, and applied the “effectively untouched” test to reach the same result. The Court of Appeal also stated that if there had been “substantial” variations to the terms which might otherwise have been habitually used by one party, then the other party was unlikely to be able to show that the contract had been made “on the other’s written standard terms of business” under s3. There was no need for the variations to relate to the term being challenged. The Court of Appeal agreed with the first instance decision that three amendments “of some considerable substance” showed that there was a “substantial negotiation” and therefore demonstrated that the terms ultimately agreed were not standard business terms.
Like the court at first instance, the Court of Appeal left open the possibility that an LMA form contract could in theory fall within the scope of s3. 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.
The Court of Appeal also commented on the threshold of proof at the summary judgment stage, emphasising that a party who wished to contend that it was arguable that a deal was on standard business terms must produce some evidence that it was likely to have been so done. In a summary judgment application such as this, the burden of proof was on the borrower to show how the lender went about its business. The Court of Appeal considered that this would not be difficult for the borrower, since the borrower could make anonymised requests about prospective terms of business or might well have knowledge of how particular lenders go about their business.
Given the potentially far-reaching consequences of applying a requirement of reasonableness to provisions of contracts agreed between commercial counterparties, any clarification on the application of s3 UCTA will be of significant practical interest. In particular, the limited application of s3 UCTA is demonstrated by the facts of this case in which only three substantial changes were made to the draft during negotiations, being sufficient to take the contract out of scope.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Amy Edwards at firstname.lastname@example.org.
This case was also covered on Compact Contract, a blog where experts from Allen & Overy analyse the latest contract law themes and developments, and what they mean for your business.