Loan facility agreements: when does one party deal on the other's written standard terms of business?

Loan facility agreements: when does one party deal on the others written standard terms of business?

In a recent case, African Export-Import Bank and Others v Shebah Exploration & Productions Co Ltd & Others [2017] EWCA Civ 845, the Court of Appeal provided some clarity on when negotiation and amendment of “written standard terms of business” will preclude the application of the reasonableness requirement as laid out in section 3 of the Unfair Contract Terms Act (UCTA). Where one party deals on the other’s written standard terms of business, UCTA says that the other party can only exclude or restrict its liability to the extent that it is “reasonable” within the meaning of UCTA.

Background

A syndicate of banks entered into a facility agreement with a Nigerian oil company which used a Loan Market Association (LMA) recommended form as the starting point for negotiation. The lenders advanced the agreed sums, but the borrowers subsequently defaulted on substantially all of their capital repayment obligations. The lenders started proceedings to recover the outstanding sums and applied for summary judgment. The borrowers argued that they had counterclaims against the lenders which they could set off against any outstanding sums. The lenders pointed to the “no set-off by the borrowers” clause in the facility agreement and sought summary judgment to recover the relevant sums. The borrowers then argued that this clause was part of the lenders’ standard written terms of business, and was only valid if it satisfied the section 11 UCTA reasonableness test.

The borrowers lost in the High Court. The judge held that there was no evidence that the lenders customarily used the LMA form or any other “standard” form. The facility agreement did not constitute “standard written terms of business”. It was noted that the LMA document was to provide a starting point for negotiation and, in this case, the facility agreement was negotiated and amended significantly, thereby taking it outside the scope of section 3 of UCTA.

Decision

On appeal, the Court considered whether:

  1. the “no set-off” clause was part of the lenders’ standard written terms of business; and
  2. whether the borrowers had been dealing on those standard terms.

Re 1., for a term to be considered part of a party’s standard written terms of business it has to be shown that the other party habitually uses that term; only using it sometimes is not sufficient. That said, the court held that it is possible for terms prepared by a third party (e.g. the LMA) to form written standard terms.  But in this particular case the LMA form was not used habitually by the lenders so the terms were not standard.  Accordingly, and re 2., this meant that the borrowers and the lenders had not dealt on standard terms.

In any event, the Court of Appeal judges also concluded that because in this case the LMA form was negotiated and amended by the parties the terms could not be considered “standard”.  UCTA did not apply. The Court rejected the argument that negotiation only had the effect of taking terms outside of the scope of UCTA if the negotiation was over the exclusion clause in question. But, interestingly, the court did note that in some cases negotiation and amendment of a contractual clause may mean that the clause in question could still be classed as a “standard term.” This will very much depend on the facts.

Comment

Jonathan Porteous, head of Stevens & Bolton’s banking and finance practice, comments:

This case provides some comfort for lenders using LMA documents, especially where the parties are sophisticated and legally advised, and where the template recommended forms are heavily negotiated. In this situation, it is highly unlikely that lenders will fall foul of UCTA “reasonableness” arguments made by borrowers seeking to avoid their financial obligations. However, for lenders operating on standard terms, a note of caution: where a borrower has little or no ability to negotiate or amend your loan facility documentation, the UCTA reasonableness provisions may apply to any clauses excluding or limiting your liability in those finance documents.

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