The Unfair Contract Terms Act 1977 is a powerful way to avoid exclusions of liability. Its power, however, is tempered by need for one party to deal with the other ‘as a consumer or on the other’s written standard terms of business’ (s. 3(1)).
The concept of “standard terms of business” was undefined at the appellate level. Clarity and guidance have now come from the Court of Appeal in African Export Import Bank & ors v Shebah Exploration and Production Co Ltd & ors  EWCA Civ 845.
The Defendants were borrowers and guarantors from the Claimants under a Facility Agreement and personal guarantees (‘the Agreements’). The borrower defaulted on their repayment obligations and the Defendants accepted that they were liable for the entirety of the debt. They sought to set off those claims against their own counterclaims. The Agreements, however, contained materially identical clauses excluding any right to set off or counterclaim against any payments owed to the Claimants.
The Claimants sought summary judgment, which the Defendants resisted on the basis that they were dealing with the Claimants on their ‘written standard terms of business’ and thus they could not rely on the above exclusion clause unless they satisfied the Act’s ‘requirement of reasonableness’. It was accepted that if the clause was covered by the Act, the requirement of reasonableness issue could not be disposed of in that summary judgment application.
Phillips J below held that the Defendants had no real prospect of successfully establishing at trial that they were dealing with the Claimants on their written standard terms of business, and granted the application for summary judgment.
The Law of Written Standard Terns of Business
Longmore LJ reviewed the first instance decisions in this area and concluded that a party has to show, inter alia, that: the terms are part of the other side’s standard terms of business; and that the deal was done on those terms. “Standard terms of business” require a party to prove that the other side ‘habitually uses those terms of business’. Occasional or even ‘model form’ use is insufficient. The use has to be invariable, or at least usual.
To show that the deal was done on those written standard terms of business it is not enough that the other side has a set of established terms of business that they prefer to adopt. Rather, the terms have to be adopted ‘without any significant opportunity for negotiation’. The Court’s inquiry is therefore into ‘whether there have been more than insubstantial variations to the terms which may otherwise have been habitually used by the other party to the transaction’. Substantial variations make it unlikely that a contract has been made on a party’s written standard terms of business.
Applying the Law
Although the Facility Agreement was based on a form, it was one that was considered ‘impossible’ to use without amendment and alteration. The deal was negotiated between parties using solicitors, going through careful red-lined redrafting as part of the negotiations. There were no sets of standard terms for the particular type of transaction in question, which is negotiated on a transaction-by-transaction basis.
There was therefore no basis to infer that the Claimants’ form was used ‘habitually’ by them, let alone that they had refused to negotiate its terms, either in this case or more generally. Indeed, here they had negotiated and altered its contents.
Moreover, there was no evidence of these being the Claimant’s standard terms of business. The burden was on the asserting party to provide some evidence to support that contention. In the absence of doing so the Court considered the point ‘unarguable’. Mere assertion is not enough.
This case imposes a high threshold that is unlikely to apply in cases where parties are engaged in a true commercial negotiation. Significant negotiation and alteration to any part is likely to be sufficient to displace the Act, even if the negotiation does not itself deal with any exclusion clauses. It is therefore likely to be reserved to only the most one-sided agreements.