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[View ICLR summary:  WLR(D) 431]
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||Neutral Citation Number:  EWCA Civ 845
||Case No: A3/2016/1497
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
THE HONOURABLE MR JUSTICE PHILLIPS
 EWHC 311 (Comm)
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE LONGMORE
THE RIGHT HONOURABLE LORD JUSTICE HENDERSON
|| 1) AFRICAN EXPORT-IMPORT BANK
2) DIAMOND BANK PLC
3) SKYE BANK PLC
||- and -
||1) SHEBAH EXPLORATION & PRODUCTION COMPANY LIMITED
2) ALLENNE LIMITED
3) DR AMBROSIE BRYANT CHUKWUELOKA ORJIAKO
Mr Richard Gillis QC (instructed by Winston & Strawn London LLP) for the Appellants/Defendants
Mr Tom Smith QC & Mr Ryan Perkins (instructed by Baker & McKenzie LLP) for the Respondents/Claimants
Hearing dates: 7th June 2017
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
See Order at bottom of the judgment
Lord Justice Longmore:
- Ever since L'Estrange v Graucob  2 KB 394 in which a certain Mr A. T. Denning persuaded the Court of Appeal that, provided the terms of an exclusion clause were clear enough, any liability for breach of contract can be excluded, there has been pressure to outlaw unreasonable terms of exclusion if they are contained as part of a contractor's standard terms of business. Eventually Parliament passed the Unfair Contract Terms Act 1977 ("the Act") which provided by section 3:-
"(1) This section applies between contracting parties where one of them deals as a consumer or on the other's written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term –
(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or
(b) claim to be entitled (i) to render a contractual performance substantially different from that which was reasonably expected of him, or (ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,
except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."
- The main question in this appeal is the meaning to be attributed to "deals … on the other's written standard terms of business".
- The appeal is against an order of Phillips J (sitting in the Commercial Court), on an application for summary judgment for sums due for repayment under a facility agreement whereby the claimant banks agreed to advance US$150 million to the first defendant. The judge's decision is now reported at  2 All ER Comm 307.
- The first claimant (Afrexim) is a financial institution with its headquarters in Egypt. Its primary objective is to finance trade in the African continent. The second and third claimants (Diamond and Skye) are Nigerian banks. All three banks are lenders under a pre-export finance facility agreement, which was originally made on 1st July 2011, for US$100 million and amended and restated on 11th May 2012 for US$150 million (the "Facility Agreement").
- The first defendant (and now appellant (Shebah)) is incorporated in Nigeria. Shebah is engaged in oil exploration and production in Africa, and is the borrower under the Facility Agreement. The second appellant (Allenne) is incorporated in the British Virgin Islands, and is an affiliate of Shebah. The third appellant (Dr Orjiako) is the President of Shebah. Both Allenne and Dr Orjiako are guarantors of Shebah's obligations under the Facility Agreement. Allenne provided its guarantee under the Facility Agreement itself (Clause 18). Dr Orjiako provided his guarantee under a separate deed of guarantee, which was originally made on 1st July 2011 and amended and restated on 11th May 2012 (the "Personal Guarantee").
- The Facility Agreement had two purposes: (a) to enable Shebah to refinance some of its pre-existing debt; and (b) to provide Shebah with working capital, including funding for an oil production programme at the Ukpokiti oil field in Nigeria (the "Ukpokiti Project"), from which Shebah was entitled to 80% of the revenue.
- It is not in dispute that the claimants each advanced US$50 million to Shebah under the Facility Agreement (for a total of US$150 million). It is also not in dispute that Shebah has defaulted on all its capital payment obligations under the Facility Agreement other than making a repayment of US$6.1 million to the claimants in June 2012. The claimants have accelerated Shebah's entire debt pursuant to Clause 24.17 of the Facility Agreement (such that it is immediately due and repayable), and have made demands on Allenne and Dr Orjiako under their respective guarantees. In the court below, the appellants sought to argue that the claimants could not rely on the acceleration or the demands. This argument was rejected by the judge, and has not been renewed. It is also not in dispute that, aside from the alleged counterclaims now sought to be asserted by the defendants by way of set-off, the entirety of the sums claimed by the claimants are due and payable by the appellants.
- The claimants originally commenced proceedings in the Commercial Court on 11th March 2014 to recover the sums due under the Facility Agreement. They agreed to discontinue those proceedings after the defendants agreed to repay all of the sums due under the Facility Agreement in two tranches (the "Discontinuance Agreement"). However, the defendants failed to make any payments in accordance with the terms of the Discontinuance Agreement.
- In these circumstances, the claimants commenced fresh proceedings on 2nd June 2014 to recover the sums which remained outstanding under the Facility Agreement.
- Only two issues now survive for consideration.
- First, the defendants assert that they have counterclaims against the claimants in the total sum of approximately US$1 billion ("the alleged counterclaims"), as explained in paragraph 8 of the judgment. The defendants contend that they are entitled to set off the alleged counterclaims against their accepted liabilities to the claimants under the Facility Agreement and the Personal Guarantee, so as to discharge those liabilities.
- The claimants allege that the defendants are not entitled to set off the alleged counterclaims against their liabilities under the Facility Agreement and the Personal Guarantee. The claimants rely for this purpose on Clause 32.6 of the Facility Agreement, which provides as follows:-
"All payments to be made by an Obligor under the Finance Documents shall be calculated and be made without (and free and clear of any deduction for) set-off or counterclaim."
- Clause 9.1 of the Personal Guarantee contains the same language. It is not in dispute that these contractual provisions are effective under the general law of contract to exclude the defendants' rights of set-off, see HSBC v Kloeckner & Co AG  2 QB 514. The claimants' position, therefore, is that summary judgment should be granted against the defendants, regardless of whether the alleged counterclaims exist.
- In response to the argument, the defendants have sought to rely on section 3 of the Act as set out in paragraph 1 above. They assert that they were dealing on the claimants' "written standard terms of business" within section 3 of the Act, so that the claimants cannot rely on Clause 32.6 of the Facility Agreement except insofar as that provision satisfies the requirement of reasonableness (as defined in section 11 of the Act). The claimants accept that, if the parties were indeed dealing on the claimants' standard terms of business, summary judgment cannot be obtained in the current proceedings, although they apparently reserve the right to issue fresh summary proceedings in relation to the reasonableness question in due course.
- The judge held that the defendants did not have a "realistic prospect of establishing at trial" that they were dealing on the claimants' written standard terms of business within section 3 of the Act.
- Secondly, the defendants assert that the present proceedings were brought in breach of an oral agreement whereby the claimants allegedly agreed not to commence proceedings against the defendants pending the conclusion of negotiations between the defendants and another Nigerian bank ("Zenith") to refinance the Facility Agreement. On this basis, the defendants contend that the present proceedings should be stayed or that they have a counterclaim on this basis in addition to their other counterclaims (the "Zenith Issue").
- The judge held that it was not "not arguable" that the present proceedings were brought in breach of any oral agreement.
The requirements of the Act
- Before the Act can be held to apply and require an inquiry into the reasonableness of any particular term, the party relying on the Act must establish (the onus of proof being on that party, see British Fermentation Products Ltd v Compair Reavell Ltd  2 All ER Comm 389, at para 49) that:-
i) the term is written;
ii) the term is a term of business;
iii) the term is part of the other party's standard terms of business; and
iv) that the other is dealing on those written standard terms of business.
- Normally there will be little controversy about the first two requirements and there is none in the present case. The other two requirements require some elaboration.
- The third requirement that the term is part of the other party's standard terms of business means that it has to be shown that that other party habitually uses those terms of business. It is not enough that he sometimes does and sometimes does not. Nor is it enough to show that a model form has, on the particular occasion, been used; the party relying on the Act has to show that such model form is habitually used by the other party. This requirement has been correctly stated by judges in the Technical and Construction Court for example by HHJ Bowsher QC in the British Fermentation case at para 46:-
"I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of model forms drafted by an outside body. However, if the Act ever does apply to such model forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the model form is invariably or at least usually used by the party in question. It must be shown that either by practice or by express statement a contracting party has adopted a model form as his standard terms of business. For example, an architect might say, "My standard terms of business are on the terms of the RIBA Form of Engagement". Without such proof, it could not be said that the form is, in the words of the Act, "the other's" standard terms of business."
I would respectfully approve that passage.
- The fourth requirement is that the deal must be done on the written standard terms of business. That raises the question whether the Act applies in cases where there has been negotiation between the parties the result of which is that some but not all the standard terms are applicable to the deal. In St Albans City and District Council v International Computers Ltd  4 All E R 481 (the only other case, so far as counsel were aware, which has come before this court on this issue since the Act was passed), the party relying on the Act submitted that, if there were any negotiation of any kind, the Act could not apply. That broad submission was rejected by this court in an obiter passage of the judgment of Nourse LJ with whom Hirst LJ and Sir Iain Glidewell agreed, but Nourse LJ went on to approve (at page 491g) the statement of Scott Baker J at first instance that the deal in that case had been done on the defendant's standard terms of business because those terms remained "effectively untouched" by the negotiations that had taken place. That leaves open the question of the correct approach when some of the standard terms are not part of the deal.
- Here there is also some first instance authority. Shortly after the Act was passed Lord Dunpark in McCrone v Boots Farm Sales  SLT 103 had to construe the phrase "standard form contract" in the part of the Act which applied in Scotland. He said (page 105):-
"It is, in my opinion, wide enough to include any contract, whether wholly written or partly oral, which includes a set of fixed terms or conditions which the proponer applies, without material variation, to contracts of the kind in question."
- In Hadley Design Associates v Westminster City Council  EWHC 1617, HHJ Seymour said at para 78:-
"The concept underlying the provisions of Unfair Contract Terms Act 1977 s.3, in my judgment, is that there should exist a stock of written, no doubt usually, at any rate, printed, contract conditions which was simply drawn from as a matter of routine and intended to be adopted or imposed without consideration or negotiation specific to the individual case in which they were to be used. That seems to me to be the force of the words "written" and "standard" in the expression "written standard terms of business". In other words, it is not enough to bring a case within Unfair Contract Terms Act 1977 s.3 that a party has established terms of business which it prefers to adopt, as, for example, a form of draft contract maintained on a computer, or established requirements as to what contracts into which it entered should contain, as, for example, provision for arbitration in the event of disputes. Something more is needed, and on principle that something more, in my judgment, is that the relevant terms should exist in written form prior to the possibility of the making of the relevant agreement arising, thus being "written", and they should be intended to be adopted more or less automatically in all transactions of a particular type without any significant opportunity for negotiation, thus being "standard"."
- In Yuanda (UK) Co Ltd v WW Gear Construction Ltd  Bus LR 360 Edwards-Stuart J adopted the same approach at para 21:-
"The conditions have to be standard in that they are terms which the company in question uses for all, or nearly all, of its contracts of a particular type without alteration (apart from blanks which have to be completed showing the price, name of the other contracting party and so on). One encounters such terms on a regular basis-whether when buying goods over the internet or by mail order or when buying a ticket for travel by air or rail."
- I would also approve these first instance decisions and hold that it is relevant to inquire 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. If there have been substantial variations, it is unlikely to be the case that the party relying on the Act will have discharged the burden on him to show that the contract has been made "on the other's written standard terms of business".
- The judge recorded the common ground that the Facility Agreement was based on the form of syndicated facility agreement, recommended by the Loan Market Association ("the LMA") as a starting point for negotiation, the objective of which was to balance the interests of both borrowers and lenders. The LMA's own User Guide emphasises that it is impossible to use the form without amendments and additions. The judge also recorded (para 16) that the final form of agreement was produced following negotiations which took place between the parties and their respective solicitors, Clifford Chance LLP then acting for the claimants and Winston & Strawn London LLP acting then as now, for the defendants:-
"i) The initial draft was sent by Afrexim to Shebah on 1 April 2011.
ii) On 13 May 2011 Winston & Strawn sent a 'redline' re-draft (heavily marked with their proposed revisions) to Afrexim, copied to their client, Shebah. Winston & Strawn stated that although they had had input from Shebah, the draft remained subject to further comments or amendments from Shebah.
iii) On 16 May 2011 Winston & Strawn referred in an email to the fact that they were discussing the draft with Clifford Chance the following day.
iv) On 24 May 2011 Afrexim sent a revised draft to Shebah and Winston & Strawn, the covering email referring to the fact that one change which was not incorporated in the draft was that a floating rate of interest would be retained, but that there would be a side-letter setting a ceiling at 10% as per the parties' last call.
v) On 25 May 2011 Winston & Strawn referred in an email to the fact that the account structure for the facility (which had been added by them in the 13 May draft) had been "agreed commercially". Winston & Strawn added that a further revised draft of the Facility Agreement would be circulated once they had Shebah's further instructions.
vi) Although the details are not in evidence, there must have been further discussions leading to the final version of the original Facility Agreement, executed on 1 July 2011."
- The judge then cited Hadley and Yuanda and said that there was simply no basis for inferring that any of the claimants habitually put forward the LMA form as a basis for their syndicated loan transactions. He could not draw any inference as to what starting points may have been taken into other transactions, involving other permutations of lenders and other lawyers, and said that that was confirmed by the evidence of Ms Anjuli Patel of Baker McKenzie, the solicitors now acting for the claimants. Paragraph 5 of her second witness statement said:-
"In his skeleton argument for the previous adjourned hearing of the application, the defendants' counsel asserted that the Facility Agreement constituted the claimants' "written standard terms of business". Based on inquiries I have made of the claimants I can confirm that this assertion is incorrect. The Facility Agreement entered into between the claimants and the first defendant is not a standard form loan agreement and was not on the standard terms of business of any of the claimants. None of the claimants have written standard terms of business for this type of syndicated lending transaction. Since the claimants entered into the Facility Agreement as a syndicate, being a mixture of Nigerian and international banks, they do not have a set of standard terms common to all three banks. The documentation for such transactions is negotiated and agreed on a transaction by transaction basis."
- Phillips J (who has great experience in relation to banking law and credit facility agreements) recorded that Mr Gillis QC on behalf of the defendants had criticised that evidence, because Ms Patel had not stated what enquiries she had made and of whom, but said that he considered her evidence to be straightforward evidence, given on the basis of instructions which came as no surprise to him.
- He further held that there was no evidence that the claimants habitually or in this case refused to negotiate the terms of the LMA form and gave specific examples of alterations to the form made at the request of the defendants. He added (para 24):-
"… I recognise that it might, in theory, be possible to demonstrate that one party to such negotiations has used the industry standard form as the basis for a set of terms it treats as its own and that it will not in reality countenance substantive changes, but that would be an uncommercial and highly unlikely approach. Parties such as the defendants in this case cannot expect to avoid summary enforcement of the terms of the contract they have entered by asserting, on the basis of little more than speculation, that their counterparty was engaged in such conduct."
- Mr Gillis submitted that the judge:-
i) adopted the wrong starting point in saying that the question of dealing on standard business terms was straightforward. It was a complex area of law which non-English parties would find difficult to understand and would need to have explained to them;
ii) gave too much credence to Ms Patel's evidence which was of a conclusory nature without providing the detailed factual information from which a judge could decide whether her conclusions were right or wrong; the claimants had held their cards too close to their chest in a case where, at any rate, some disclosure of their previous lending arrangements was required; and
iii) should have held that, if an allegation is made by one party that a contract was in fact on the other's standard business terms and if that other gives no evidence of other similar contracts made in the past, disclosure will be required and the case is unsuitable for summary judgment.
He further submitted that the amendments or variations of the LMA form achieved by the defendants were not of real significance.
- Mr Tom Smith QC for the claimants supported the judgment and added that none of the LMA model forms (at the time there were 6 and now there are many more) could accurately be described as any person's standard terms of business because there was always a need for substantial adaptation and amendment.
- I cannot accept Mr Gillis's submissions. In order to show an arguable defence (or a real prospect of defending the claim), defendants (on whom there is an onus of proof) must cross the threshold of arguability. It is striking that, in response to the claimants' reliance on clause 32.6 of the Facility Agreement, the defendants themselves filed no evidence to the effect that they believed the agreement was made on the claimants' standard terms of business and it is, in any event, difficult to see that they could have had any such belief when they were dealing with three different parties in a syndicated loan agreement one of whom is Egyptian and the others of whom are Nigerian. The only assertion to that effect was made in a skeleton argument of counsel and it was only in response to that assertion that Ms Patel filed evidence which, as the judge said, was straightforward and unsurprising evidence to receive in the Commercial Court.
- A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. This cannot be difficult in a proper case since anonymised requests about prospective terms of business can be made and participants in the credit market may well have knowledge of how particular lenders go about their business. It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.
- Nor can I accept that complexity (or otherwise) of the concept of standard business terms has any relevance to the question of summary judgment. Mr Gillis made detailed submissions on the first instance cases of Pegler Ltd v Wang (UK) Ltd  EWHC 137 (TCC) and Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd  EWHC 76 (TCC) in which the respective judges (after trial) had to decide the extent to which the other party's standard terms were incorporated into contracts which also provided that the first party's terms were to prevail in case of conflict. No doubt intricate arguments were made in those cases in relation to the question which terms were actually part of the contract. But once it was decided what were the terms of the contract, it was not difficult to decide whether the terms being relied on were standard business terms of that party and, in any event, no difficulties of the sort encountered in Pegler v Wang are present in the current case. It is perhaps not surprising that Phillips J felt no need to consider that cases in his judgment.
- Even if all this is wrong so far, I would also uphold the judgment on the basis that there were in fact detailed negotiations in the present case which render it impossible to say that either the LMA model form was, or the terms ultimately agreed were, the claimants' standard terms of business. One only has to look at the 'redline' re-draft referred to in paragraph 16(ii) of the judgment to see how substantial the negotiation was. Of course, some of the proposed amendments were not agreed but many were; the three amendments particularly mentioned by the judge in paragraph 25(iii) of his judgment were undoubtedly of some considerable substance. Mr Gillis submitted that they did not go to exclusion of liability but they do show that there was a substantial negotiation which suffices to demonstrate that the terms ultimately agreed were not standard business terms. It certainly cannot be said that the terms were "effectively untouched" to use the phrase of Scott Baker J approved by Nourse LJ in the St Albans case.
- There is, it may be added, no requirement that negotiations must relate to the exclusion terms of the contract, if the Act is not to apply; if there were any such requirement, it might be doubtful whether the Act applied to facility agreements at all, since they do not usually contain exclusion terms in the same way that traditional sale contracts or contracts providing travel or holiday services often do.
- I would therefore uphold the judgment on this aspect of the case and do not find it necessary to engage with Mr Smith's submission that a contract based on an LMA form can never be made on standard business terms because there is always a need for adoption and amendment. I suspect that the submission goes too far; if a lender habitually used a particular LMA form and refused to countenance any amendment, it would be difficult to say that the deal was not done on that lender's standard business terms. But a final decision on that question does not have to be made in this case and can safely be left for another day.
The Zenith issue
- This is an issue which depends on the particular facts of the case.
- The defendants assert that at a meeting on 16th May 2014 Dr Orjiako (the third defendant) made an agreement with Dr Oramah of Afrexim (the first claimant) that the claimants would participate in a new arrangement with Zenith if Zenith agreed Afrexim's terms and that meanwhile the claimants would refrain from litigation. The way in which the matter is put is set out in the draft defence and counterclaim:-
"76. During the meeting Dr Oramah and Dr Orjiako discussed the outstanding issues regarding Zenith's 9 May 2014 proposal. The purpose of the discussion was to determine whether Zenith's 9th May proposal provided an acceptable alternative to litigation. During the meeting, Dr Oramah agreed that Zenith's proposal would be acceptable to the claimants if certain amendments were made to it ("the 16 May Agreement"). Dr Oramah then dictated to Dr Orjiako the amendments that were required.
77. During the meeting Dr Oramah spoke to Dr Otti (at Diamond Bank). Dr Otti confirmed that Diamond Bank agreed with Dr Oramah. Dr Oramah was not able to contact Mr Timothy Oguntayo (the managing director of Skye) during the course of the meeting. Subsequently, however, Dr Otti confirmed to Dr Orjiako that he had spoken to Mr Oguntayo who had agreed that the matter would be resolved if Zenith issued the requested revised offer.
78. It was the clear understanding of the parties, and an implied term of the 16 May Agreement (implied to give effect to the intention of the parties) that the claimants would not commence litigation if Zenith was willing to agree the amendments required by the claimants within a reasonable period."
It is then said (para 82) that even though discussions were ongoing with Zenith the claimants wrongly issued the current proceedings.
- It is not alleged that the claimants were bound to make an agreement with Zenith; moreover Mr Gillis accepted before the judge and before us that the discussions with Zenith must be treated as being subject to contract. In these circumstances either Zenith or the claimants (or, indeed, the defendants) could withdraw from the negotiations at any time. There is, moreover, no evidence that Zenith did agree to the terms wanted by Afrexim and the other claimants within a reasonable time or at all.
- The claimants did in fact withdraw from the negotiations and issued the current proceedings on 2nd June 2014. They had in fact sent a letter on 16th May 2014 saying that the Zenith proposal was unacceptable. The defendants say that the agreement was made after the letter and superseded it. Even if that is right (and it is no doubt arguable) the fact remains that the claimants did withdraw by at latest 2nd June when they issued their proceedings. That was something which they were at all times entitled to do.
- The judge decided (para 37) that it was impossible to regard the discussions by Dr Orjiako as giving rise to a binding agreement of any nature and, in the light of the fact that they were subject to contract, that must be correct.
- The judge also held that the defendants never considered that any binding agreement had been made since they were content to serve an acknowledgement of service and agree directions for the service of evidence on the summary judgment application. It was only later that Dr Orjiako for the first time asserted the agreement relied on.
- I agree with the judge that it is not arguable that the claimants are in breach of contract in commencing proceedings.
- I would therefore uphold the judge's order and dismiss this appeal.
Lord Justice Henderson:
- I agree.
UPON READING the Appellants' Notice dated 7 April 2016
AND UPON HEARING Richard Gillis QC (Counsel for the Appellants) and Tom Smith QC and Ryan Perkins (Counsel for the Respondents)
IT IS ORDERED THAT:
1. The appeal is dismissed.
2. The Appellants shall pay the Respondents' costs of the appeal on the standard basis, to be assessed by detailed assessment if not agreed.
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