Oil and Gas: An Inel-UCTA-ble Consideration for Exclusion Clauses

The arguments concerning the applicability of an exclusion clause in the face of extreme conduct by the party relying on that clause are familiar to most practitioners in the oil and gas sector. What is perhaps less familiar is the potential impact of the Unfair Contract Terms Act 1977, especially where one party is dealing on its standard terms.

The Court of Appeal has considered this matter recently in African Export-Import Bank (and Others) v. Shebah Exploration & Production Company Limited (and Others) [2017] EWCA Civ 845. This is only the second time that the courts have been asked to consider what “dealing on standard terms” means, since UCTA came into force. The case also considers whether an industry standard form could be considered to be a party’s “standard terms”.

Background

In 1934, a certain Mr. Alfred Thompson 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: L’Estrange v. Groucob [1934] 2 KB 394.

In 1977, Parliament passed the Unfair Contract Terms Act (“UCTA”), Section 3 of which sought to prevent the reliance by a contractor on an exclusion clause where the same appears in the contractor’s “standard terms of business”, except insofar as the term is reasonable.

In June 2017 the Court of Appeal was asked to consider how UCTA should apply to an exclusion clause in a USD 150 million facility agreement (the “Facility Agreement”) between Egyptian and Nigerian banks on the one hand (the “Banks”) and an African oil and gas E&P company on the other (“Shebah”).

Facts

Shebah and the Banks executed the Facility Agreement, which was based on a Loan Market Association industry model form (the “LMA Form”). The purpose of the Facility Agreement was: (a) to enable Shebah to refinance some of its pre-existing debt; and (b) to provide Shebah with working capital, including funding for the Ukpokiti oil field in Nigeria.

Shebah fell behind with repayments and the Banks accelerated the entire debt. It was not in dispute that the Banks were entitled to accelerate the debt. Aside from alleged counterclaims, it was not in dispute that the sums claimed by the Banks were due.

One of the counterclaims was that the Banks owed USD 1 billion for an alleged breach by the Banks of an oral agreement not to accelerate the debts before a certain time, leading to the potential loss by Shebah of its concession rights. Shebah sought set-off of this claim against the Banks’ claim.

The Banks relied on Clause 32.6 of the Facility Agreement, which excluded Shebah from relying on a right of set-off. (Note: the clause was not seeking to exclude the Banks’ liability entirely, but only to exclude Sheba’s right to set-off.) Shebah in turn argued that Section 3 of UCTA prevented the Banks from relying on Clause 32.6 except to the extent that it was reasonable.

The Commercial Court found for the Banks on an application for summary judgment. Shebah appealed.

Decision

The Court of Appeal noted that before Section 3 of UCTA can be held to apply (and so require an inquiry into the reasonableness of any particular term), the party relying on UCTA (in this case, Shebah) must prove the existence of four characteristics, the first two of which ((i) that the term is written; and (ii) it is a term of business) are not controversial.

The Court of Appeal was instead primarily concerned with the remaining two questions: (i) whether the exclusion clause formed part of the Banks’ “standard terms of business”; and (ii) whether the Banks were “dealing on those standard terms of business”.

Standard Terms of Business

It was decided that Shebah must show that the Banks “habitually used” the terms of business. It was not enough to show that a model form had been used. The use must be habitual in the sense of “invariably” or “at least usually”. This can be shown either by practice or by express statement by the contracting party.

The Commercial Court found no evidence that the Banks habitually used the LMA Form.

The Court of Appeal agreed, adding that Shebah filed no evidence to the effect that they believed the agreement was on the Banks’ standard terms. Indeed, it was difficult to see how they could do so on a syndicated loan with Egyptian and Nigerian banks.

Dealing on Standard Terms of Business

The deal must be done on the written standard terms of business. The question here is whether 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.

The only other case on this point since UCTA came into force was St. Albans City DC v. International Computers Ltd [1996] 4 All ER 481. In that case, the Court of Appeal held that the deal had been done on the defendant’s standard terms because those terms remained “effectively untouched” by the negotiations. There thus remained an open question as to the approach to take where some of the standard terms are not part of the deal.

The Court of Appeal decided that it was relevant to inquire whether there have been “more than insubstantial variations” to the terms that 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 UCTA will have discharged the burden of proof to show that the contract has been made “on the other’s written standard terms of business”.

The Court of Appeal noted the Commercial Court finding that the User Guide to the LMA Form itself states that the LMA Form cannot be used without amendment. Furthermore, the Court of Appeal considered that it could not be right that any defaulting borrower could simply assert that business was being done on standard terms and that the lender then has to disclose the terms of other transactions it has entered into before he is entitled to summary judgment.

There were detailed negotiations between the parties, which rendered it impossible to say that either the LMA Form was, or the terms ultimately agreed were, the Banks’ standard terms of business. Some of the agreed changes were of considerable substance. It could not be said that the terms were “effectively untouched” and so St. Albans City was distinguished.

The Banks could thus rely upon the set-off exclusion clause.

Comment

The oil and gas industry has not traditionally concerned itself much with the implications of UCTA. Most parties to oil and gas contracts will be sophisticated commercial parties with the benefit of legal advice, which acts as an argument against the application of legislation primarily designed to protect consumers. Furthermore, it was until recently generally understood that oil and gas indemnity regimes would fall outside of UCTA.

However, practitioners in the industry will be aware that UCTA became more of a concern to oil and gas contracts following the decision of the Supreme Court in Farstad Supply A/S v Enviroco Limited [2010] UKSC 18, where the Supreme Court showed a willingness to interpret indemnity provisions as exclusions, deciding that the provisions act as indemnities when being used to allocate responsibility for “third party exposure” but when the provisions were being used to regulate “direct exposure to the other contracting party”, the provisions would operate as exclusions. To the extent the indemnities are acting as exclusions, UCTA is relevant – and not just Section 3 as covered by this case, but also, for example, the sections covering exclusion of liability for negligent loss or damage to property (Section 2(2)).

Some oil and gas companies and contractors are willing to rely on the industry standard forms (e.g. the LOGIC suite of contracts, Oil and Gas UK model forms and AIPN model forms). Others may use their own standards; many of these may, in turn, be based upon the industry standard forms.

In this case, the Court of Appeal declined to engage with the Banks’ argument that a contract based on the LMA Form can never be made on standard business terms because there is always a need for adoption and amendment. It was held – obiter – that such an argument goes too far; if the industry standard was used by a party and amendments were not countenanced, it would be difficult to say that the terms were not that party’s standard terms. Ultimately, this was a question to be “left for another day”.

It seems from this decision that where commercial parties use an industry model form as the basis for a complex financial contract, executed after the usual process of negotiation, it would require cogent evidence to raise a case that the contract was made on the written standard terms of one of those parties within the meaning of Section 3 of UCTA. Although standard forms are widely used in the oil and gas industry, these are often only a basis for negotiation, with substantial changes being made – it would be rare to find such a standard “effectively untouched” by the parties. In fact LOGIC and AIPN model forms generally require significant elements remaining to be agreed by negotiation or selection of optionality.

As such, it seems unlikely that a contract incorporating an industry model form will fall within the scope of UCTA. However, it appears to remain a possibility if one of the parties habitually uses such contract.

It is also worthy of note that the Court of Appeal made it clear that there is no requirement that negotiations must relate to the exclusion clause, if UCTA is not to apply.