Remember the Unfair Contract Terms Act When Using Precedents
The recent 2017 case of African Export-Import Bank v Shebah Exploration & Production Company Ltd (Afreximbank v Shebah) before the Court of Appeal might raise some alarm bells over the risks of insisting on LMA terms or any other standardised precedent with minimal negotiation.
The Loan Market Association’s model forms are popular precedents for lenders to enter into syndicated facilities agreements and adapted forms of LMA terms are increasingly being used for bilateral facilities. These model forms will almost invariably be the subject of negotiation and amendment between the borrower and the lender and the LMA’s User Guide stipulates that this should be the case when contracting on its model forms.
The borrower in the case of Afreximbank v Shebah attempted to challenge the bespoke facility agreement with its banks on the basis that the agreement was a standard form agreement by reason of use of an LMA precedent. In particular, Shebah attempted to avoid an exclusion clause on the grounds that the facility agreement, based on an LMA model form, should be classed as standard terms of business and consequently the agreement should be subject to the Unfair Contractual Terms Act 1977 (UCTA).
The specific agreement in Afreximbank v Shebah was the subject of various modifications and amendments. Among other matters, the syndicate of banks accepted varying the material adverse change clause, changing monthly certificates of oil reserves to annual certificates and adding a section on project accounts.
The lenders applied for summary judgement for sums outstanding under the loans. The borrower sought to set off various sums and alleged that the facility agreement was under the banks’ written standard terms of business meaning that the “no set-off” clause was subject to the reasonableness test in UCTA.
The Provisions of UCTA (1977)
The effect of a lender dealing on its “written standard terms of business” is that any exclusion clause in favour of the drafting party must satisfy the reasonableness test. Failure to satisfy this test would mean that the lender would be unable to rely on the exclusion clause. The provisions of UCTA are silent when it comes to defining the meaning of “deals on the other’s written standard terms of business” and this is something that the courts have sought to interpret.
The issue of consistency has been of paramount importance when deciding whether written terms can constitute a party’s standard terms. HHJ Seymour in Hadley Design Associates v City of Westminster (2003) stated that the terms must be “drawn from as a matter of routine” and “without negotiation”. This approach was followed in the case of Yuanda (UK) v WW Gear Construction (2010) where Edwards-Stuart J suggested that the terms should be used by a company for all or nearly all its contracts and without alteration.
The use of third party model forms has been considered in the case of British Fermentation Products v Compare Reavall (1999). HHJ Bowsher QC commented that proof would be needed that the third party model forms were usually used by the party in question.
The Court of Appeal dismissed the appeal. It held that the borrower had failed to produce evidence that the deal was on standard terms by the borrower. Crucially, there had been detailed negotiations between the parties which made it impossible to say that the LMA model form was the bank’s standard terms of business.
Lenders should be wary about insisting that LMA terms or potentially any standardised precedent in regular use are accepted with minimal negotiation as its standard approach to doing business. The risk is that UCTA may apply with undesirable consequences that exclusions or limitations of liability of lenders may be compromised by borrowers making challenges under UCTA.