Contract terms: Room for interpretation

The Unfair Contract Terms Act 1977 (UCTA) prevents parties to a contract from excluding liability for certain matters. It does not impose a general prohibition on unfairness in contracts: it concentrates primarily on unfair exclusion clauses. It is important in relation to the exclusion of liabilities in domestic technology and construction contracts (it does not apply to international supply contracts).

Section 3 of UCTA provides for prohibitions on the parties where one party deals as a consumer or contracts on the other party’s “written standard terms of business”. In these circumstances section 3 imposes, among other things, a requirement of reasonableness on any clauses excluding or restricting liability for breach of contract.

The question is, what does “written standard terms of business” actually mean? It is not defined or explained in UCTA. Some contracts are clearly made on standard terms of business, including subcontracts, bonds and hire and supply contracts. Most building and engineering main contracts, however, are not made on the written standard terms of business of either party but will be either bespoke or based on the standard forms of an industry body.

It can be argued that a party has contracted on its “written standard terms of business” when it adopts a third party’s written terms as its own

So far the courts have regarded standard contract forms issued by producer organisations as not being written standard terms of either party. In cases such as Hadley Design Associates vs City of Westminster [2003] and Yuanda (UK) Co Limited vs WW Gear Construction Limited [2011] the courts have held that “written standard terms of business” means pre-existing written terms intended to be adopted more or less automatically in all transactions without any significant opportunity for negotiation and which are therefore not varied from one transaction to another.

It can be argued that a party has contracted on its “written standard terms of business” when it adopts a third party’s written terms as its own.

The courts have held, however, that if a model form is adopted such as, for example, the RIBA Form of Engagement, it must be shown that either by practice or by express statement the contracting party has adopted it as its standard terms of business. It is also recognised that written terms may remain “standard” even though there was some negotiation between the parties about amendments to the proposed contract provided the terms remain “effectively untouched” at the conclusion of such negotiations (for example, in St Albans City Council vs ICL [1996]).

So the question is, if a third party’s written terms are adopted, how far can negotiations on those terms go before they fall outside the “written terms of business” contemplated by section 3? The latest case to test this issue is African Export-Import Bank and Others vs Shebah Exploration & Production Company Limited and Others [2016]. This is a Commercial Court decision although it has obvious relevance to the construction industry.

If a third party’s terms are adopted, how far can negotiations on those terms go before they fall outside the ‘written terms of business’?

In this case, the standard document in question was a syndicated facility agreement recommended by the Loan Market Association. It was this document, negotiated between the parties, that the defendants argued constituted the claimants’ written standard terms of business. While we do not need to go into the facts of this case, if section 3 of UCTA had been engaged this would raise issues about the reasonableness of certain clauses in the contract which could only be resolved at trial. Given that this decision arose in the context of the claimants’ application for summary judgment this argument was in effect intended to frustrate that application.

The claimants brought evidence that they did not use any standard forms regularly and that the documentation for such transactions was negotiated and agreed on a transaction by transaction basis. There was, furthermore, no indication that the claimants had refused to negotiate nor that the negotiations had left the document “effectively untouched” as required to satisfy the test in St Albans.

The judge noted that in circumstances where commercial parties, represented by solicitors, have utilised a “neutral” industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, it will require “cogent evidence” to raise an arguable case that the resulting contract is made on the written standard terms of one of those parties. As a result, the defendants’ arguments failed and the claimants obtained summary judgment.

It seems unlikely that this is the last time that the limits of section 3 of UCTA will be tested. In the construction sector, which often uses model forms and standard written terms of business, a challenge under section 3 of UCTA will always be a possibility. Inevitably, these cases will be heavily fact-specific, but it is clear from this latest decision that the application of section 3 in the context of commercially negotiated contracts is not going to be easy.

Simon Lewis is a partner in the construction and engineering team at Bond Dickinson