Unfair contract terms – or not

Jan 2018

Unfair contract terms – or not

Rating system:
Reading time (1-10 minutes): 1
Sophistication level (1 (idiot) – 10 (expert)): 4
Entertainment value (1 (turgid) – 10 (side-splitting)): 5

A syndicate of lenders used an industry standard facility agreement provided by the Loan Market Association (‘LMA’) with a borrower (a Nigerian oil explorer and producer). Some of the terms were changed by negotiation. One that wasn’t was a clause saying that the borrower had no right of set off against amounts claimed by the lenders. Things went wrong and the borrower wanted to set off claims it had against the lenders against the monies the lenders wanted to recover. The borrower argued that the facility agreement was based on the lenders’ ‘written standard terms of business’, which would mean the ‘no set-off’ clause must pass a reasonableness test. This is because the Unfair Contract Terms Act 1977 (‘UCTA’) says that where a party ‘deals on its written standard terms of business’, any term limiting or excluding a party’s liability for breach of contract or claiming to render no contractual performance or one differing substantially from that reasonably expected must pass the reasonableness test in order to be valid. The lender syndicate argued that the facility agreement wasn’t their written standard terms of business.

What did the court say?

The court (of course, you would think) agreed with the lenders. And the Court of Appeal agreed. To deal on standard terms of business means that the terms in question must be used for pretty much all relevant contracts and signed off with no or hardly any changes. In this case, none of the lenders in the syndicate habitually used the LMA precedents. They tended to use whatever precedents were used by whichever lawyers they instructed. And also, in this case the syndicate had agreed changes to at least three significant other clauses.

Comment:

No comment really. It seems pretty obvious. Don’t know why I reported it really. But then again, the borrower thought it was worth appealing this case all the way to the Court of Appeal. When the outstanding loan is $100 million or so and the purported counterclaim you want to set off is $1 billion or so (however spurious) you might decide it’s worth a punt.

Case: African Export-Import Bank and others v Shebah Exploration & Production Company Ltd (2017)