The UCTA argument—falling short of the standard

The summary judgment hearing in African Export-Import Bank v Shebah Exploration raised the interesting question of whether there are circumstances in which ‘neutral’ industry standard documents can constitute a contractual party’s standard terms of business within the meaning of section 3 of the Unfair Contract Terms Act 1977 (UCTA 1977). If so, this could have implications for the effectiveness of clauses that seek to exclude or limit liability for breach unless such clauses can be shown to satisfy the reasonableness test under UCTA 1977, s 11. The case also looks at whether a notice to accelerate a loan is valid if acceleration is expressed to be conditional on future events.

Original news

African Export-Import Bank v Shebah Exploration [2016] EWHC 311 (Comm), [2016] All ER (D) 213 (Feb)

The Commercial Court granted the claimant lenders summary judgment on their claim against the defendants for sums outstanding under a syndicated loan facility agreement, along with interest. It ruled that the defendants’ counterclaim for damages against the claimants could not provide them with an arguable defence to the claim because the ‘no set-off’ provisions of the facility agreement, under which the loan had been granted, were not subject to a test of reasonableness, under UCTA 1977, s 3, but applied with full contractual force.

The facts of the case

The three claimant lenders (the lenders) lent $150m in aggregate to the first defendant, Shebah Exploration & Production Company Limited (Shebah), a Nigerian company engaged in oil exploration and production. Shebah used the facility to discharge certain existing borrowing and for working capital purposes. The facility was guaranteed by the second defendant, Allenne Limited (Allenne), and the obligations of both Shebah and Allenne were personally guaranteed by the third defendant, Dr Orjiako.

Shebah made one repayment instalment in 2012 but failed to make any further payments so the lenders issued an application for summary judgment. The summary judgment hearing was adjourned several times to give the defendants time to refinance the debt. However, their attempts to do this were unsuccessful. The defendants contended in the present hearing that they had arguable defences to the claim and that summary judgment was therefore inappropriate.

How did the defendants use UCTA 1977 to argue that the ‘no set-off’ provisions were ineffective?

Shebah contended that it had counterclaims against the first and second claimants which should be set off against the amount claimed by the lenders. The counterclaims were based on, in relation to the first claimant, alleged breaches of its obligations as arranger and in relation to the second claimant, an alleged breach of a previous loan agreement.

As is typical in such agreements, the facility agreement and personal guarantee contained provisions expressly excluding any right of set-off by a borrower or guarantor. The defendants contended, however, that they had an arguable case that the facility agreement constituted the lenders’ written standard terms of business within the meaning of UCTA 1977, s 3. They claimed that the set-off provisions could potentially fall within UCTA 1977, s 3(2) and therefore could only be relied on by the Lenders in so far as they could show that they satisfied the requirement of reasonableness under UCTA 1977, s 11.

What was the judge’s ruling on the UCTA 1977 defence?

The question before the judge was whether the use of the Loan Market Association (LMA) standard form-based facility agreement on this transaction could fall within the expression in UCTA 1977, s 3 deals on the other’s written terms of business’. If this could be shown then issues such as whether the set-off provisions satisfied the reasonableness test would be matters for trial.

The judge quoted from and discussed previous cases where the meaning of this phrase had been debated. In summary, his finding was that there was no possibility of success at trial on this point as:

  • there was no evidence for inferring that the lenders habitually put forward the LMA standard form as a basis for their syndicated loan transactions
  • even if this could be demonstrated, there was no basis for inferring that the Lenders always refused to negotiate the terms contained in the standard form, and
  • the evidence did not demonstrate that the claimants refused to negotiate in the present case, although many of the changes proposed by the borrower’s lawyers were rejected, not all were

Could the LMA or other industry standard forms ever constitute a party’s ‘written terms of business’?

The judge provided a useful summary of what the defendants would need to demonstrate in order to succeed at trial on this issue. He concluded that:

‘the defendants would have to establish that the claimants have habitually entered into syndicated loans on the basis of the LMA form and that in all cases (including the present case) they refused to negotiate so that those terms are effectively untouched when each contract is entered.’

The judge also went on to consider whether it was conceivable that a ‘neutral’ industry model form could meet the ‘written terms of business’ test. His view was that this might be possible, provided that:

  • the relevant party could demonstrate that the other party used the industry standard form as the basis for a set of terms it treats as its own, and
  • it will not in reality countenance substantive changes

The ‘ineffective acceleration notice’ defence

The lenders issued a notice to Shebah on 16 October 2013 which they claimed constituted a valid acceleration. The defendants argued that the notice was ineffective as it was expressed to take effect at a future date.

The notice stated:

‘Notice is hereby given in terms of clause 24.17 of the Facilities Agreement that if all sums due under the Facility are not paid, and all other Events of Default not remedied by at the latest one month after the instalment due on 16 September 2013, the entire Loan, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents shall be immediately due and payable, and we shall commence legal proceedings for recovery of the Loan with no further reference to yourselves.’

What was the judge’s ruling on the ‘ineffective acceleration notice’ defence?

The judge held that the notice did not constitute a valid notice of acceleration. The facility agreement contained a typical provision allowing the facility agent to declare outstanding amounts due and payable following an event of default. This provision could not, in the judge’s view, be read so as to permit the lenders to give notice that the loans will be become due and payable at a future date of their choosing. To interpret it in such a way ‘would give rise to uncertainty and potential issue’s and would be an ‘uncommercial reading of a standard and well-understood clause’.

A valid notice of acceleration was, however, subsequently served on the borrower.

A further defence based on an assertion by the defendants that discussions at a meeting constituted a binding agreement not to commence litigation also failed. The judge therefore granted summary judgment in this case.

What are the practical implications of this case?

The question of whether a facility agreement based on an LMA standard form could fall within the remit of UCTA 1977, s 3 is an interesting one. The judge was clear that while it was conceptually possible, it was unlikely, commenting that:

‘in circumstances where commercial parties, represented by solicitors, have utilized a ‘neutral’ industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, including revising a travelling draft, it will require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties.’

Nevertheless, there may be circumstances where a lender may habitually proffer the LMA (or another industry) standard form as a non-negotiable form and lenders should be aware of the risks of doing this. It is worth noting that in his review of the relevant legal principles the judge did comment that some negotiation and amendment of standard conditions would not necessarily preclude the terms being held to be ‘effectively untouched’.

It is also worth noting the judge’s decision that a notice of acceleration which is expressed to be effective at a future date and dependent on certain conditions is not effective to accelerate a loan. Lenders should ensure that any such notice is followed up with an unconditional and immediate effective notice of acceleration once the condition has been met (eg the time limit for making payment expired).

Miranda Campbell, solicitor in the LexisPSL Banking & Finance team.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Relevant Articles
Area of Interest