1) African Export-Import Bank and Others (Respondents/Claimants) v 1) Shebah Exploration & Production Company Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Longmore,Lord Justice Henderson |
| Judgment Date | 28 June 2017 |
| Neutral Citation | [2017] EWCA Civ 845 |
| Docket Number | Case No: A3/2016/1497 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 June 2017 |
[2017] EWCA Civ 845
The Right Honourable Lord Justice Longmore
and
The Right Honourable Lord Justice Henderson
Case No: A3/2016/1497
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE PHILLIPS
Royal Courts of Justice
Strand, London, WC2A 2LL
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: 7 th June 2017
Judgment Approved
See Order at bottom of the judgment
Introduction
Ever since L'Estrange v Graucob [1934] 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 [2016] 2 All E.R. Comm 307.
Background Facts
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 1 st July 2011, for US$100 million and amended and restated on 11 th 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 1 st July 2011 and amended and restated on 11 th 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 11 th 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 2 nd 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 [1990] 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 [1999] 2 All E.R. 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...
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