August 10th, 2017 by Jessica Cousin
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Introduction

The recent Court of Appeal case of African Export-Import Bank & Ors v Shebah Exploration & Production Company Ltd & Ors [2017][1] dealt with a Rumsfeldian “known unknown” – the question of whether dealing on negotiated industry standard terms could be said to be dealing on “written standard terms” for the purposes of the Unfair Contact Terms Act 1997 (“UCTA”).

Section 3 of UCTA applies where a contracting party (“A”) has dealt on the written standard terms of business of the other party (“B”). In these circumstances, B can only limit or exclude its liability for breach of contract to the extent reasonable.  However, the phrase “written standard terms” has no definition.  Moreover, where standard terms have been negotiated, it remained uncertain as to whether these could continue to be regarded as the “written standard terms” of the contracting party which first proffered them.

The Case

A Facility Agreement (the “Agreement”) was entered into between African Export-Import Bank (“AEIB”) and Shebah Exploration & Production Company Limited (“Shebah”) for the purposes of enabling Shebah to refinance some of its pre-existing debt and to provide working capital.  The Agreement was based on the form of facility agreement recommended by the Loan Market Association (“LMA”). Unfortunately, Shebah defaulted on its capital repayment obligations.  Following a failed attempt to settle the matter, AEIB accelerated the facility.

Shebah counterclaimed against AEIB on the basis that it was entitled to set off the alleged counterclaims against sums that it owed AEIB.  The Agreement contained a “no set-off” clause which, Shebah argued, failed the reasonableness requirements of UCTA.

A party wishing to take advantage of the protection offered by section 3 of UCTA must establish that the:

  1. term is written;
  2. term is a “term of business”;
  3. term is part of the other party’s standard terms of business; and
  4. other is dealing on those written standard terms of business.

The last two requirements were of particular relevance in the instant case.  In relation to point 3 above, the court held that a party seeking to claim that it had dealt on the standard terms of business of its counterparty must show that its counterparty “habitually” used the document claimed to be its “standard terms of business”.  It would be insufficient to show that a model form had, on occasion, been used.

If point 3 above is satisfied, the party seeking to claim that it had dealt on the standard terms of business of its counterparty must also prove that it was actually dealing on those standard terms of business.  In practice, this raises the question of whether written standard terms that have been negotiated can still be regarded as “standard written terms”.  On this topic, Longmore LJ stated that “it is relevant to inquire whether there have been more than insubstantial variations to the terms”.  If so, it is unlikely that a party seeking to claim that it had dealt on the standard terms of business of its counterparty would be able to discharge the burden of proof placed upon it.  In addition, he made clear that there is no requirement that negotiations themselves must relate to the exclusive terms of the contract.

On the facts, the court held that there was “no basis for inferring that…[AIEB]…habitually put forward the LMA form as a basis for their syndicated loan transactions”.  In reality, Shebah filed no evidence to rebut this finding.  In addition, the final form of the Agreement between AIEB and Shebah was the result of negotiations between the parties, sufficient to make it impossible to say either that (i) the LMA model, or (ii) the actual terms of the Agreement, represented AIEB’s “standard terms of business”.

Application to other Master Agreements?

The standard form of the ISDA Master Agreement does not contain a traditional “limitation of liability” clause.  However, Section 6(e)(iv) of the 1992 ISDA Master Agreement and Section 6(e)(v) of the 2002 ISDA Master Agreement (“Pre-Estimate”) can be regarded as a form of “limitation of liability” clause.  Both state that (a) the amounts recoverable under Section 6(e) are a reasonable pre-estimate of loss, and (b) neither party will be entitled to recover any additional damages as a consequence of such loss.  In addition, more traditional forms of “limitation of liability” clause are sometimes to be found within schedules to ISDA Master Agreements.  Beyond this, both the GMRA 2000 and the GMRA 2011 contain more traditional “limitation of liability” clauses.  Both state[2] that “…neither party may claim any sum by way of consequential loss or damage in the event of a failure by the other party to perform any of its obligations under this Agreement…”  As such, it is worth considering what lessons, if any, can be learned from the AIEB case and applied more generally.

Both the ISDA Master Agreement and the GMRA are the pre-eminent master agreement used to document transactions in their respective markets.  Applying the four requirements detailed above to their terms – both are in writing (point 1) and clearly represent “terms of business” for parties entering into “over-the-counter” derivatives transactions or repurchase transactions respectively (point 2).

Of more interest is the question of whether a party could be said to “habitually” use either document (point 3).  On balance, given the preponderance of both in their respective markets (near total domination in the case of the ISDA Master Agreement), it would seem safe to assume that the risk of a court finding that either represented a party’s “standard terms of business” are higher than they are with respect to the LMA standard facility agreement and sufficiently high so that it would be best to assume that this test would be satisfied, at least in relation to the dealer community.

However, all is not lost.  In AIEB v Shebah, the court held that “if a lender habitually used a particular…form and refused to countenance any amendment, it would be difficult to say that a deal was not done on that lender’s business terms” (point 4).   Conversely, anything more than “insubstantial variations” will mean that execution has not taken place on a party’s “standard terms of business”.   Given (a) the amount of negotiation over both legal and credit-related terms within a typical ISDA Master Agreement negotiation, and (b) the tendency of recent years to import more ‘ISDA-like’ terms into GMRAs (which also end up being negotiated), one has to assume that the requirement detailed in point 4 above would not be satisfied in relation to either document.  If so, section 3 of UCTA would not apply to any limitation of liability.  So this seems likely to be a case of “nothing to see here”, but at least a question that was once a “known unknown” can probably now be regarded as a “known known”.

 

 

[1] EWCA Civ 845 (28 June 2017)

[2] See clause 10(j) of the 2000 GMRA and clause 10(k) of the 2011 GMRA

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