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What Are ‘Standard Terms of Business’? Court of Appeal Ponders

The law frowns on unreasonable contractual terms contained within standard terms of business – but what exactly does the latter phrase mean? The Court of Appeal considered that issue in an important test case that will be required reading for anyone involved in the lending industry.

A consortium of three banks had lent $150 million to a company engaged in an oil production programme in Nigeria. The company defaulted and, following litigation, it no longer disputed its obligation to repay the loan in full. An associated company and an individual who had each guaranteed repayment of the loan also accepted that they were liable to make repayment.

The company and the guarantors, however, had put forward counterclaims against the banks, said to be worth $1 billion, and sought to set those claims off against the debt. The banks pointed to an exclusion clause in the loan agreement that stated that sums repayable would be calculated without any deduction in respect of set-offs or counterclaims.

It was submitted by the company and the guarantors that the exclusion clause was of no effect by virtue of Section 3 of the Unfair Contract Terms Act 1977. Section 3 provides that, where contractors deal with consumers on standard terms of business, the former cannot rely upon such terms to exclude or restrict liability in respect of any failure to perform their contractual obligations. Such terms also cannot be used to justify contractors rendering a contractual performance substantially different from that which is reasonably expected of them.

The company’s and the guarantors’ arguments in respect of Section 3 fell on fallow ground, however, after a judge found that the relevant exclusion clause was not a standard term of business. Summary judgment was entered against them for the entire sum owing.

In dismissing their challenge to that ruling, the Court noted that the exclusion clause in question had been recommended by the Loan Market Association and was in common use in the industry. There was no evidence that the banks habitually refused to negotiate specific terms with borrowers and, in the instant case, detailed negotiations had in fact taken place. In those circumstances, it was impossible to say that the terms ultimately agreed were the banks’ standard terms of business and Section 3 could thus not be relied upon.