Unfair Contract Terms Act

African Export-Import Bank v Shebah Exploration & Production Company Ltd

The question

What does “deals on the other's written terms of business” in section 3 of the Unfair Contract Terms Act 1977 really mean?  Put another way, when are standard terms subject to the UCTA reasonableness test?

The facts

The claimants were the lenders under a loan agreement for $150m.  The defendants defaulted (save for one $6m repayment) but contended they were entitled to set off their counterclaims against their accepted liabilities to the claimants under the facility agreement.  The claimants argued that the defendants had no right of set-off as the facility agreement contained provisions expressly excluding any right of set-off.  The defendants argued that they were dealing on the claimants' “written standard terms of business” within section 3 UCTA, such that the claimants could not rely on the set-off provisions except in so far as that provision satisfied the requirement of reasonableness.

The decision

The Court of Appeal summarised the relevant law around reliance on section 3 UCTA.  The party relying on a term must establish that: (i) the term is written; (ii) the term is a term of the business; (iii) the term is part of the other party's standard terms of business; and (iv) the other is dealing on those written terms of business.  To do this, the party must show that the other party “habitually” uses those terms of business.  Longmore J also held that: “it is relevant to inquire whether there have been more than insubstantial variations to the terms which may otherwise have been habitually used by the other party to the transaction.  If there have been substantial variations, it is unlikely to be the case that the party relying on the Act will have discharged the burden on him to show that the contract has been made 'on the other's written standard terms of business'“. There was: “no requirement that negotiations must relate to the exclusion terms of the contract, if the Act is not to apply”.

Why is this important?

Knowing when UCTA is, or is not, likely to apply can be critical, especially here where $144m (the remaining loan) is at stake. The case shows that strong evidence is needed to show that a complex agreement like a loan facility (even if based on an industry template) is made on a party's standard written terms.

Any practical tips?

Model form contracts and standard written terms are a common feature of the legal landscape.  Be aware when such agreements are likely to be subject to UCTA and its reasonableness tests, and how far negotiations (whether or not relating to exclusion clauses) may start moving the UCTA dial.