The judgement in BHL v Leumi ABL Limited  EWHC 1871 (“BHL”) has been seen by many as another example of courts enquiring more readily into commercial terms agreed by large corporate entities and scrutinising the exercise of contractual powers. Whilst this will provide some optimism for those seeking to challenge a discretion exercised by an innocent party (such as clients or an administrator or liquidation in an insolvency scenario), it is likely to be of some concern to an asset-based lender (“ABL”), whose established practices of charging the full amounts under the terms of their agreements with clients (indeed, it was seen in BHL that Leumi would generally only ever charge 15%, or whatever other maximum they could charge under the agreement) are now in some doubt.
On balance, requiring commercial decision-makers to follow a process when exercising its discretion may not be too heavy a burden. The issue in BHL was that Leumi followed no process at all when determining a fee of 15%. In practice, may lenders will already have some data or appreciation of the client’s business and likelihood of collection of receivables (particularly where the client relationship has been on going for some time), and an ABL’s experience of dealing with collect-outs in previous matters will enable it to form a reasonable belief as to what the likely costs and expenses will be without extensive analysis.
Indeed, in BHL, the court went to lengths to stress that perfection is not required, and a ‘margin of flexibility’ was permitted since an ABL ‘cannot know in advance precisely what [its] costs will be’. Clearly therefore, courts will continue to allow plenty of latitude where discretions are exercised, particularly in a fast-moving situation and when the party empowered to exercise a discretion is entitled to look after its own interests. Nevertheless, the ABL must always ensure it does not lose sight of the purposes of the discretion: to allow for the recovery of costs and expenses actually incurred. To this end, some genuine analysis will always be required, even if this means postponing exercising the discretion until more information about the collect-out is known.
Would it be in an ABL’s interests to continue to give itself freedom by simply imposing a fixed fee without a discretionary element, thereby bringing the clause outside of the Braganza duty? Arguably not. Firstly, it would be hard to link a pre-agreed fixed fee to a legitimate ‘target’. In this sense, if the charge was set too high, it would be open to a client to argue the charge was a penalty rather than linked to a genuine pre-estimate of the costs and expenses of a collect-out. Ultimately, in BHL, it was only the fact that the clause provided for the exercise of a discretion that it avoided falling foul of the test set out in Cavendish Square. Had the fee been set at a flat 15%, it seems likely the charge would have been an unenforceable penalty. Equally, a clause providing for a fixed fee set to low would not give an ABL the flexibility required, and would have the undesirable effect of leaving it out of pocket on a complex, time consuming collect-out.
Conversely, would it be in the interests of the ABL to simply charge for its actual fees and expenses incurred in the collect-out? This is likely to be equally unattractive, as detailed records of time spent on the collect-out would need to be kept (as opposed to applying a ‘broad-brush’ approach when exercising a discretion), and would also have the downside of meaning that the ABL would not have the security of setting charges in advance, instead recovering them in arrears as a percentage of the receivables already collected and leaves it open to the client to dispute the charge levied.
In any event, it is generally thought that as a result of the judgments in BHL and also recently in Watson & Ors v Watchfinder.co.uk Ltd  EWHC 1275 that the Braganza duty will transcend collection fee arrangements, and will also apply to other areas of a lender’s discretion, such as increasing interest rates in a commercial lending facility, or determining the value of a borrower’s assets. It will be in an ABL’s interests therefore to take note of the evolving case law in this area, and, if it has not done so already, ensure protocols are established setting out requirements on staff to help spot and exercise contractual discretions, taking advice where required.
BHL is a cautionary tale warning against failing to recognise the exercise of a discretion, and to outline the standards expected of large commercial entities when exercising that discretion. Clearly, genuine and considered thought will be required (and need to be recorded in the event of a later dispute). Perfection, however, is not required. For the time being at least, the courts will continue to give plenty of latitude to commercial decision makers, and provided lenders act reasonably, ensure thought is applied before setting the charge taking into account all relevant factors and do not view the charge as a primary source of profit, it is expected an ABL will avoid breaching the Braganza duty and the costly implications that can arise.