This case concerned a receivables financing agreement (the RFA) originally made between Leumi ABL Limited (Leumi) and Cobra Beer Ltd (Cobra) in April 2008. Under the terms of the RFA, Cobra assigned its unpaid invoices to Leumi, who paid Cobra 90 per cent of the value of the invoice to fund Cobra’s working capital. Cobra remained responsible for collections in respect of unpaid invoices but amounts actually received from customers went to Leumi. Cobra was restructured in May 2009 and, as part of this process, group company BHL agreed to indemnify Leumi for any sums due under the RFA.

As Cobra was by this point in administration, Leumi exercised its right to require Cobra to repurchase its receivables. As Cobra failed to do so within seven days, Leumi was entitled to collect the receivables and to charge a fee for doing so of up to 15% of the receivables collected. Leumi began collecting in June 2009 and by September had received sufficient sums to repay its capital exposure, but Leumi also levied a collection fee at the maximum 15%, amounting to £1.2 million plus VAT. It demanded this sum from BHL under the indemnity.

BHL paid Leumi £950,000, complaining that the fees were excessive and extortionate. After Leumi demanded the remaining amount due, BHL engaged lawyers and contended that Leumi had not been entitled to charge the full 15% on three alternate grounds:

  • it was only entitled to charge its actual costs and expenses of collection, subject to a ceiling of 15%;
  • the clause was an unenforceable penalty; or
  • the RFA gave Leumi the discretion to charge a fee of up to 15%, but it had not properly exercised this discretion.

The first two arguments were rejected by the judge. The former was rejected on the construction of the RFA drafting, the latter as the requirement to pay a collection fee was a primary rather than a secondary obligation, and in any event because the purported penalty was not a fixed sum intended to penalise Cobra/BHL but a fee to be arrived at through the exercise of discretion.

The judgment therefore focused on the discretion argument.


The judge found that in the absence of clear language to the contrary, Leumi’s discretion was qualified by a common law duty of good faith and so had to be exercised in a manner which was not “arbitrary, capricious or irrational… taking into account the material points and not taking into account irrelevant considerations”. This was referred to as ‘the Braganza Duty’, after Braganza v BP Shipping [ 2015 ] 1 WLR 1661.

The evidence showed that Leumi “always charged the maximum where the provision gave a fee which could be “up to” a particular percentage”, suggesting there had been no exercise of discretion. Further, the judge felt that had discretion been exercised it was in breach of the Braganza duty as Leumi did not appear to follow any kind of rational process by establishing the amount it needed to raise in the collections process, how long this might take, its likely internal costs for collections over such period and accordingly a suitable fee, expressed as a percentage of collections. The judge referred particularly to Leumi’s extensive experience of ‘collect outs’ which would have enabled it to carry out this analysis.

The judge also suggested that Leumi should have waited until the end of June before determining the fee payable, as at this point it would have been clearer how the collections process was panning out.

Ultimately, the court determined that 4% was the most Leumi could have conscionably charged, and as such BHL had overpaid by over £700,000. Leumi was ordered to repay BHL this amount plus interest and costs.


The RFA is an important lesson for those drafting receivables financing agreements: by including an element of discretion here, the draftsman had precluded the argument that the fee was a penalty but instead, and perhaps unwittingly, incorporated a Braganza duty into the agreement.

Given the judge’s finding that collection fees are not an unenforceable penalty, asset based lenders may feel emboldened to charge a fixed collection fee (albeit set at a sensible amount) on the basis this can always be waived or reduced in practice.

When exercising a discretion, lenders need be able to evidence that some kind of process was followed. Per the judge’s suggestions, they might consider a delay in setting a fee until they have a clearer idea of likely costs, and should draw on previous experience in doing so.

This case will be of interest in the wider banking and finance market, and is indeed relevant to commercial contracts generally, suggesting that courts can and will impose fetters on contractual discretion. The consequences of this can be very expensive.

BHL v Leumi ABL Limited [2017] EWHC 1871 (QB)