Most lenders have standard terms of business which they use for mainstream “vanilla” transactions. However it can be harder to decide what constitute standard terms where a lender uses industry-based documents.
The distinction can be important as it sets the context as to whether any of the terms of the agreement are open to attack under the Unfair Contract Terms Act 1977 (UCTA). This is the background to a recent decision of the Court of Appeal which has caused a ripple of interest through the finance community because the standard terms referred to are one of the Loan Market Association (LMA) forms of agreement.
The borrowers were involved in oil exploration and production in Africa. The lenders were three banks who made a US$100 million facility available to the borrower – later increased to US$150 million. The borrowers did not make the repayments. Under the terms of the facility agreement the loan became immediately repayable and the lenders took action to recover the debt.
The borrowers alleged they had a counterclaim against the lenders and that they could set this off against the amount owed. This was despite the fact that the facility agreement had a clause excluding set-off. The borrowers claimed that the facility agreement was made on the lenders’ standard terms which meant it had to comply with section 3 of UCTA. If this were the case, the clause would only be valid if it satisfied the reasonableness test in section 11 of UCTA.
This went to the High Court which noted that the facility agreement was based on an LMA template form. LMA forms of agreement are frequently used as the basis for loan agreements between banks and customers on larger transactions. Various email exchanges were produced in court which showed the final version was heavily negotiated. Even the LMA’s own user guide said it was impossible to use the form without amendments.
Based on this the court did not agree that the loan was made on standard written terms of business and so it did not need to satisfy the UCTA reasonableness test.
The borrowers appealed but were unsuccessful.
The Court of Appeal expanded on what standard terms are. In the Court’s opinion it was not enough that they were sometimes used. The key point being that it must be standard practice these terms are used without any significant negotiation. In the court’s words ‘…it has to be shown that the other party habitually uses those terms of business‘.
The Court also considered the wider issue of whether UCTA applies where there has been negotiation between the parties and some but not all of a lender’s standard terms are included. Again, the Court considered it to be crucial that the borrower proposed many amendments which were agreed and incorporated into the final facility agreement.
Both at trial and on appeal it was relatively easy for the Courts to conclude that the parties were not doing business on standard terms. It was clear from the various email exchanges that substantial negotiation had taken place. The fact that the facility agreement was between three banks made it highly unlikely this would be a standard agreement.
Interestingly, the Court noted that, in theory, the LMA form of agreement could be shown to be treated by a lender as its standard terms, but only if the lender habitually used the form and would not in reality countenance substantive changes. This was clearly not the case here and, in the current market, this would (as the first judgement says) be an uncommercial and highly unlikely approach.
Whilst this case is helpful, it is important to bear in mind that it turned on the facts. However it does underline the fact that a lender’s standard terms are not restricted to just the lender’s own template documents. If a lender regularly uses a third party’s documents (such as those of the LMA or, in an asset finance context, those of the Consumer Credit Trade Association, the CCTA) then these may be regarded as being standard documents for the purposes of UCTA if the lender is not willing to enter into negotiation on their terms.