UCTA and standard terms of business – case law update

UCTA

Under the Unfair Contract Terms Act 1977 (“UCTA”), when a party to a business to business (“B2B”) contract deals on its“written standard terms of business”, any term which seeks to limit or exclude that party’s liability for breach of contract, non-performance or performance substantially different from that reasonably expected, must pass the test of reasonableness in order to be enforceable.

There is no statutory definition of“written standard terms of business”, but the recent Court of Appeal decision in African Export-Import Bank v Shebah Exploration & Production[1] has further developed the meaning of what “written standard terms of business” are, particularly in the context of model form agreements.

The Court of Appeal held that in determining whether parties are contracting on standard terms of business it must be shown that:

  • the other party habitually uses those terms of business. This means that occasional use will not be enough; and
  • some negotiations and amendments are permitted provided there have not been “more than insubstantial variations to the terms”.

CASE SUMMARY

The claimants were an Egyptian bank and two Nigerian banks (the “Banks”) whom entered into a facility agreement for US$150 million (the “Facility Agreement”) with the first defendant, a Nigerian company engaged in oil exploration and production (guaranteed by the second and third defendant) (the “Borrower”). The monies were to be used for refinancing and to fund oil exploration. The Facility Agreement was based on the Loan Market Association (“LMA”) template. The borrower defaulted on its obligations under the Facility Agreement and the claimants accelerated the debt.

The terms of the Facility Agreement were subsequently negotiated and amended. The defendants argued that, because they were dealing on the claimants’ written standard terms of business, pursuant to section 3 of UCTA, the set-off clause could be relied upon only insofar as it satisfied the requirement of reasonableness.

On the facts, the court found that the parties were not dealing on the claimant’s standard terms. While the parties had used the claimant’s model form as a starting point, the subsequent detailed negotiations and substantial amendments made to finalise the form, made it difficult to conclude that the agreement or its terms constituted the claimants’ original model form agreement any more.

The decision suggests that, where a party uses a standard form document but its terms are then negotiated, it is unlikely to be seen as contracting on standard terms for the purpose of UCTA. This decision conflicts with the judgement on Commercial Management (Investments) Ltd v Mitchell Design and Construct[2] which suggested that parties could be contracting on standard terms even if the standard terms formed a small part of the contract.

NEXT STEPS

For more information, and any guidance or advice on UCTA or your terms of business Cleveland & Co external in-house counsel, your specialist outsourced legal team, are here to help.

[1] African Export-Import Bank v Shebah Exploration & Production co Ltd [2016] EWHC 311 (Comm)

[2] Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd [2016] EWHC 76 (TCC)

 

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