Standard terms – when do they have to be reasonable?

When one business contracts with another on its standard terms, any exclusion or limitation of liability clause must be reasonable otherwise the clause will be struck down by the Unfair Contract Terms Act 1977 (“UCTA”).  This much is clear established law.  However, it is not always clear cut whether one is dealing on standard terms or not.  What if the parties start with standard terms, and then make some modifications to those?  Will these still be standard terms for the purposes of UCTA?

This is the question that the Court of Appeal was required to decide in the recent case of African Export-Import Bank and others v Shebah Exploration & Production Company Limited and others [2017].

The facts of the case were as follows.  African Export-Import Bank (“A”) formed part of a bank syndicate which loaned $150 million to Shebah Exploration Production Company (“S”). The loan agreement which detailed the terms and conditions of the loan was based on the Loan Market Association (“LMA”) model agreement (the “Loan Agreement”).

The parties’ solicitors negotiated and amended the LMA’s model terms resulting in the eventual Loan Agreement differing substantially from the LMA’s model terms.

S defaulted on its repayment obligations under the Loan Agreement, prompting A to issue proceedings to recover the amounts due. S claimed that as it had counterclaims against A, it should be able to set off those counterclaims against its repayment obligations.

The Loan Agreement expressly prohibited set off which prevented S from setting off any amounts it owed to A. S argued that the no set-off provision was an exclusion and that, as it had contracted on A’s standard terms (the LMA form), the set-off clause was subject to the test of reasonableness under UCTA, and was not reasonable.

Whether a contract is on “written standard terms” will depend on the facts of the case. In South West Water Services Ltd v International Computers Ltd [1999], the court held that if the liability clauses have not been negotiated or amended, they are more likely to be standard terms even if changes to other provisions of the contract have been made. In the more recent case of Hadley Design Associates v Westminster City Council [2003], however, the High Court held that for a contract to be on standard written terms, the terms should be adopted without any significant opportunity for negotiation or amendment.

A party seeking to rely on UCTA to challenge the reasonableness of a term of a contract must first establish that the contract was created using standard terms, and if the standard terms are industry model terms, it must also be shown that the party regularly contracts on the basis of such terms.

Court of Appeal Decision

The Court of Appeal dismissed the appeal, holding that S had failed to provide any evidence that the Loan Agreement was on A’s standard terms (i.e. that it regularly used those terms) and that in any case the lengthy negotiations and substantial amendments to the terms meant that the Loan Agreement could not be considered to be on A’s standard terms.

Paris Smith comment

Each case will turn on its own facts, but this decision highlights that a party seeking to argue that a contract was based on the other party’s written standard terms will need to prove that the other party regularly used such terms, not just on the occasion in question. Where written standard terms are negotiated and amended they are less likely to be considered standard terms and so are more likely to fall outside of the scope of UCTA.

Where you do use standard terms, you must still be aware of the need to ensure that all exclusion clauses are reasonable – otherwise they risk being struck down and no exclusion or limit will apply.