It was considered in the recent Court of Appeal case, African Export-Import Bank v Shebah Exploration and Production Co Ltd, how section 3 Unfair Contract Terms Act 1977 (UCTA) may apply in relation to dealing on ‘standard terms of business’.
What is UCTA and section 3?
UCTA was introduced to provide protection to consumers from unfair contract terms and limiting liability. Although many provisions of UCTA have now been merged into the Consumer Rights Act 2015 in relation to Business to Consumer contracts, the act remains prevalent in Business to Business contracts.
Section 3 of the act applies where one party deals on the others ‘written standard terms of business’. If any of these terms purports to limit or exclude liability, the it is subject to the ‘reasonableness test’.
What is ‘reasonable’?
In order to pass the reasonableness test, a term must be one which is fair and reasonable to include having regard for the circumstances which are known or ought to be in the contemplation of the parties at the time of the contract being made in accordance with section 11 of UCTA. To assist with assessing if a term is ‘reasonable’, schedule 2 of UCTA provides factors that may be considered. These include:
- The bargaining positions of the parties;
- Whether the customer received any inducement to agree to certain terms;
- Whether the customer knew about the existence or the extent of a term;
- Whether liability can be excluded in relation to a condition not being complied with, whether it was reasonable at the time of the contract being made to expect compliance with that condition; and
- Whether the goods were a ‘special order’.
What happened in the case?
Three banks (the Banks) entered into a facility agreement with a Borrower [and its guarantors] under which each bank loaned $50 million to the Borrower. The facility agreement was based on an agreement recommended by the Loan Market Association (LMA). The Borrower fell behind with repayments, and so the Banks accelerated the debt. The Borrower sought set-off against the amount due to the Banks.
The Banks relied on a term of the facility agreement which excluded the right to set- off. However, the Borrower argued that the Banks could not rely upon the clause as it was unfair in accordance with UCTA.
At first instance, the Commercial Court found in favour of the Banks in that the Borrower could not rely upon the right to set-off as it has been expressly excluded from the facility agreement. The Borrower appealed against the decision.
How will this affect you? – Dealing on ‘Standard Terms’
Although the Banks won the appeal, queries were raised as to when parties could be deemed as dealing on standard terms of business as required by section 3 of UCTA. The Banks attempted to argue that as the contract was based on one recommended by the LMA and always required amending, it could never be made on ‘standard business terms’.
This view was refused by the Court. Although a business may use a standard form, it is rare for them to be ‘untouched’ as they usually form the basis of negotiation between the parties.
As UCTA was introduced to protect contracting parties from limiting their liability [through means of exclusion clauses], it seems unreasonable that a contract would fall outside of its scope merely because that contract had been amended from a standard form. The court did consider whether insubstantial amendments were relevant in relation to terms which are habitually used by a party and it was found that where terms had been substantially varied, they could not be said to be dealing on standard terms.
What does this mean?
- Consumers – it is common to contract with a party under what you believe to be their ‘standard terms’. For this to be case, you would need to consider the extent of any amendments that may have been made to suit your unique position. If it is found to be dealing on standard terms of business, you may have the ability to question the fairness of any terms which aim to exclude or limit liability of the other party.
- Businesses – UCTA was created to protect consumers, therefore businesses need to ensure that any terms which limit or exclude liability are considered reasonable.
The content of this blog does not constitute legal advice and should not be considered to be the same. EHL Commercial LLP can assist you in ensuring your contracts are drafted correctly to leave little room for dispute. Should you wish to speak to one of our advisors, please call on 0330 024 9643.