Termination Fees – All May Not Be As It First Appears
The High Court’s recent decision in BHL v Leumi ABL Limited  EWHC 1871 (QB) has considered the effect of a clause by which a financier claimed to be entitled to charge a fee of up to 15% on recoveries made by it under a receivables financing agreement following a breach of that agreement by the customer.
Cobra Beer Ltd (“Cobra”) entered into a receivables financing agreement (the “RFA”) with Leumi ABL Limited (“Leumi”) whereby Cobra assigned its unpaid invoices to Leumi against which Leumi paid Cobra a discounted value to provide immediate cashflow for Cobra’s working capital.
A year later, Cobra went into administration. In order to facilitate Cobra’s continued trade in the course of the administration, BHL (a company associated with Cobra), agreed to indemnify Leumi for any sums due to Leumi under the RFA. Just prior to Cobra’s administration, Leumi had served a letter of demand on Cobra stipulating that Cobra must repurchase all of the receivables funded by Leumi.
The demand went on to inform Cobra that if the receivables were not repurchased within 7 days, Leumi would proceed to collect the receivables itself. The relevant termination clause in the RFA stated that if it were obliged to collect the receivables, “Leumi will be entitled to charge [Cobra] an additional collection fee at up to 15% of amounts collected by Leumi thereafter” and that “[t]his collection fee is in addition to any other fee payable by [Cobra] to Leumi under the [RFA and Cobra] expressly acknowledges that such fee constitutes a fair and reasonable pre-estimate of Leumi’s likely costs and expenses in providing such service to the Client”.
Leumi went on to collect the receivables at various junctures and charged a fee equal to the full 15% as per the terms of the RFA. Despite protesting at the time that the fee charged was excessive, BHL paid it nevertheless on the basis of believing the same to be due. BHL did later challenge Leumi’s right to retain the fees paid on various grounds including that the fees amounted to a penalty (and were therefore unenforceable) and / or that they were paid under a mistake of law and were therefore recoverable.
In a long judgement, the court reached a number of conclusions, notably the following:
- Penalty: the termination clause gave Leumi a legitimate entitlement to be paid its costs following the customer’s default and a discretion to set in advance a percentage fee for those costs which would apply to later recoveries. However, that discretion had to be exercised in a way which was not ‘arbitrary, capricious or irrational’ (in accordance with a recent case where such duty had been referred to as the ”Braganza duty”);
- the termination clause was not a penalty because it was not a pre-determined sum (by virtue of the words “up to”), but rather was an amount to be arrived at through the exercise of Leumi’s discretion. However, such discretion had to be exercised be in line with the “Braganza duty”;
- Discretion: on the facts, it was held that Leumi had simply charged 15% without any consideration of what its actual costs of recovery were. Leumi was therefore in breach of the “Braganza duty”. Despite this failure, the court concluded that Leumi was still entitled to its actual recovery costs under the RFA. The court, having heard expert witness testimony and other evidence concerning Leumi’s costs, determined that these could not amount to more than 4% of each collection;
- Mistake: on the facts, the court also held that the fees had been paid on the basis of a mistake of law by both Leumi and BHL. Consequently, BHL were entitled to recover any balance of fees it had paid in excess of the rate of 4%.
A particular point to take from this is that the Courts remain willing to scrutinise decisions which lenders make in respect of charging fees, especially when those fees involve an element of discretion being exercised. Lenders should, therefore, take care to ensure that they exercise their discretion in line with the “Braganza duty” principles.
A prudent lender observing such principles will be able to provide evidence to demonstrate that they have thought about how much to charge based around their actual costs, taking into account all relevant factors, should a challenge be made by a borrower.
The case has a much broader potential ambit than just receivables and other debt financing arrangements as the principles stated in the decision are sure to apply to a range of commercial dealings involving termination (and other) fee arrangements.