UCTA, exclusion clauses and standard terms

27th July 2017

In another recent case concerning the enforceability of exclusion clauses and UCTA, the Court of Appeal has clarified what is required where a party seeks to avoid liability, having contracted on the other’s standard terms. Commercial Dispute Resolution Partner Nick Lees explains.

We have already seen that contractual exclusions can be controversial and that the law in this area is often complex.  Commercial contracting parties are therefore likely to welcome the clarity that has recently been provided by the Court of Appeal in the case of African Export-Import Bank v Shebah Exploration [1] – at least in relation to those claims where a party specifically seeks to avoid liability by virtue of section 3 of the Unfair Contract Terms Act 1977 (UCTA).

UCTA and standard terms

Section 3 UCTA provides that where a party deals on another party’s written standard terms of business, any attempt by the former to exclude or restrict liability for breach of contract, or to allege that their contractual performance is either rendered substantially different to that which was expected or not required at all, will be subject to the reasonableness test [2].

In African Export-Import Bank v Shebah Exploration the borrower defaulted on a $150m loan agreement which had been entered into with three banks on terms based on the Loan Market Association model form facility agreement.  When the claimant banks sued the borrower for the full amount owing as a result of its breach of contract, the borrower made counter-claims and argued that it should be entitled to set off the counterclaims against its liability.  The borrower contended that a clause within the contract which excluded any right of set off was an exclusion clause, to which section 3 UCTA applied and was subject to the reasonableness test.

The Court of Appeal rejected the borrower’s arguments and the following key points arise:

• The onus of establishing that section 3 UCTA applies is on the person seeking to rely on it.
• It should not be difficult to adduce evidence of a party’s written standard terms, since anonymised requests for standard terms of business can be made.
• However, even if it can be shown that the terms in question are habitually, invariably or at least usually used, a party seeking to rely on section 3 UCTA must also be able to demonstrate that the standard form was intended to be adopted more or less automatically in transactions of the relevant type without any significant opportunity for negotiation.
• In this case, the borrower had not adduced any evidence of what the banks’ standard written terms of business actually were; the contract in question was a syndicated facility involving multiple lenders; and travelling draft documentation between the parties showed that substantial negotiations upon the contractual documentation had taken place overall, even if not in relation to the particular clause in question. The borrower’s attempt to rely on section 3 of UCTA to render the set-off exclusion unenforceable (and, in turn, to avoid its liability for defaulting on its loan repayments) was unsuccessful.

WM Comment

This case does not make new law, but it is a good illustration of the operation of section 3 UCTA and it has afforded the Court of Appeal the opportunity to clarify what will be required if and when a party seeks to rely on section 3 in practice.

Furthermore, because this case draws attention to the additional potential for parties getting around exclusion/limitation clauses where they contract on another’s standard terms, it also highlights how important it is for businesses who regularly contract on their own T&Cs to make sure that those terms are reasonable under UCTA, and therefore enforceable.

If you would like any advice or assistance in relation to your standard terms of business or any other exclusion or limitation provisions within your contractual arrangements, please do not hesitate to contact Nick Lees or any other member of the team.

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[1] African Export-Import Bank & Ors v Shebah Exploration and Production Co. Ltd & Ors [2017] EWCA Civ 845
[2] See section 11 (1) and Schedule 2, UCTA