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

A contract is made on a party’s written standard terms of business for the purposes of section 3 of the Unfair Contract Terms Act 1977 only where that party habitually uses the terms and the transaction is made on them. Use of an industry model form is insufficient without evidence that the party adopted it as its own standard form.

Negotiation does not automatically prevent section 3 from applying. Substantial variations are, however, strong evidence that the resulting contract was not made on standard terms. The party invoking section 3 bears the burden of producing evidence capable of showing that the statutory condition is met; a bare assertion does not require its counterparty to disclose other contracts.

Three banks advanced US$150 million under a syndicated pre-export finance facility. The borrower defaulted, and the lenders sought summary judgment against the borrower and its guarantors. The finance documents excluded set-off and counterclaim.

The defendants alleged counterclaims of approximately US$1 billion. They argued that the exclusion of set-off was subject to the reasonableness requirement in section 3 of the Unfair Contract Terms Act 1977 because the facility was made on the lenders’ written standard terms of business. The agreement had been based on a Loan Market Association model but had undergone detailed negotiation.

Phillips J granted summary judgment in [2016] EWHC 311 (Comm). A further issue was whether proceedings breached an alleged oral agreement to refrain from litigation while refinancing negotiations with another bank continued.

1. The appeal was dismissed. The defendants had no realistic prospect of establishing that the facility was made on the lenders’ written standard terms of business. Nor was it arguable that commencement of the proceedings breached a binding oral agreement.

2. Section 3 of the Unfair Contract Terms Act 1977 applies only if the party invoking it proves that the relevant term is written, is a term of business, forms part of the other party’s standard terms of business, and the transaction was made on those terms. Terms are the other party’s standard terms only where that party habitually uses them. Occasional use of a model form does not suffice. The party must have adopted the form as its own standard terms.

3. Negotiation does not invariably take a transaction outside section 3. It is relevant, however, whether the supposed standard terms underwent more than insubstantial variation. Substantial variations make it unlikely that the statutory burden can be discharged. Negotiations need not concern the exclusion provision itself.

4. The facility had been based on an industry model intended as a starting point for negotiation. There was no evidence that any claimant habitually adopted that form. The defendants had proposed extensive amendments and secured changes of substance. The resulting terms could not be described as effectively untouched.

5. A party resisting summary judgment on the basis that an agreement was made on standard business terms must produce some evidence making that contention arguable. A bare assertion does not require the other party to disclose its previous transactions. The defendants produced no such evidence, while the lenders’ solicitor gave straightforward evidence that the documentation was negotiated transaction by transaction.

6. The court left open whether an agreement based on a Loan Market Association form could never constitute standard terms. A lender which habitually used a particular form and refused substantive amendment might fall within section 3.

7. The refinancing discussions were subject to contract. Each participant remained free to withdraw, and there was no evidence that the proposed refinancing terms had been accepted. The lenders were therefore entitled to withdraw from negotiations and commence proceedings.

1. Court of Appeal (Civil Division): The appeal in [2017] EWCA Civ 845 was dismissed. The summary judgment order was upheld.
2. High Court, Commercial Court: Phillips J granted the lenders summary judgment in [2016] EWHC 311 (Comm), holding that the defendants had no realistic prospect of proving that the facility was made on the lenders’ written standard terms or that litigation breached an oral agreement.