Summary: An asset-based lender failed to properly exercise its discretion when setting the level of a collection fee payable by its customer under a receivables finance agreement.

This case highlights why it is important for asset-based lenders to carefully consider the rationale for any fees that they charge their customers. If their agreements allow them to decide the actual level of the fee to charge, we are reminded that there are likely to be limits on how they exercise this discretion.

The case is of particular relevance in the context of invoice discounting and receivables financing but the same principles would seem equally relevant to other types of fees and other forms of financings as well.


In 2008, Cobra Beer Limited (“Cobra”) entered into a receivables finance agreement (the “RFA”) with Leumi ABL Limited (“Leumi”). In the following May, on the same day Cobra entered into administration as a result of financial difficulties suffered after the global economic downturn, BHL, an associated company, also entered into an indemnity agreement with Leumi. Under the terms of the indemnity agreement, BHL agreed to indemnify Leumi in respect of any sums due under the RFA. Following a letter of demand issued to Cobra shortly before its administration, Leumi took over the collection of Cobra's receivables on its sales ledger. The monies owed included not only the monies advanced to Cobra pursuant to the invoice discounting in the first place, but also certain additional fees charged by Leumi. In particular, a collection fee. The RFA stated ‘if Leumi requires the Client to repurchase any Receivables and the Client fails to do so within 7 days of such demand, Leumi will be entitled to charge the Client an additional collection fee at up to 15% of amounts collected by Leumi thereafter’ (emphasis added) (the “Collection Fee Provision”).

Leumi charged the full 15% and made a demand under the indemnity agreement for it. By April 2010, BHL had paid £950,000 in collection fees to Leumi. Subsequently BHL then commenced proceedings against Leumi claiming that the level at which the collection fee had been charged was unlawful and the £950,000 paid by BHL was recoverable as having been paid under a mistake of law.

The decision

His Honour Judge Waksman QC, sitting in the Mercantile Court, initially considered whether the Collection Fee Provision was a so-called “penalty” (penalty clauses being unenforceable under English law). In the leading case of Cavendish Square v Makdessi [2015] UKSC 67, the test for determining if a clause amounts to a penalty is that it must be “a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.

The court found that the Collection Fee Provision was not a penalty clause for the following reasons:

  1. The obligation of Cobra to pay the collection fee “was a primary and not a secondary obligation”, since it was not akin to a sum payable instead of damages and Cobra was given the choice about whether or not to buy the ledger back from Leumi (and the collection fee would not arise if it did so).
  2. Even if such obligation was secondary, the amount to be charged was not excessive as “it was not a fixed sum or even a particular formula but a fee to be arrived at in the exercise of a discretion” which could not be exercised irrationally (see below). Moreover, Leumi had “a clear legitimate and commercial interest” in recovering the costs it incurred to collect the receivables.
  3. Lastly, “Cobra was a large commercial entity and negotiated the RFA on an arms-length basis even if its terms were standard”.

Did that mean though that Leumi could charge 15% regardless of the circumstances?

The court felt the “target” of the provision was the recovery of further costs and expenses (over and above solicitor and other third party costs that were dealt with elsewhere) to be incurred by Leumi as the now collector of the receivables. Since this provision gave Leumi a power to set in advance a percentage fee, which would apply to all later recoveries, there had to be some qualification, otherwise it could be exercised oppressively or abusively. In the court’s judgment, this was a case where (whether as a matter of construction or the implication of a term) a discretion such as this must be exercised in a way which is not arbitrary, capricious or irrational in the public law sense. It followed the Supreme Court decision in Braganza v BP Shipping [2015] 1 WLR 1661. On the evidence, the court found that there had been no proper exercise of the discretion. Accordingly, BHL was entitled to the return of the £950,000 less such sum as Leumi might have lawfully charged.

BLP comment

The key question in this case was not whether Leumi was entitled to charge a collection fee, which remains a topic of considerable debate within the industry, but rather what percentage should Leumi be able to charge, if acting rationally, to cover its anticipated costs of collecting out its position. Based on the circumstances in this case, the court determined that it was rational for Leumi to charge no more than 4% on collections. When an asset-based lender exercises a discretion to set the level of a fee such as this, it would therefore make sense for it to ensure it can demonstrate (with appropriate evidence) a rational basis for arriving at the figure or formula it decides upon.

There is also an interesting drafting point here. Whilst the drafting may have saved the Collection Fee Provision from being a penalty through the use of the words “up to 15%”, the effect of this was to introduce (maybe inadvertently) the requirement for Leumi to exercise a discretion to fix the percentage rationally in accordance with the Braganza case.