In the case of BHL -v- Leumi ABL Limited the High Court has found against Leumi ABL Limited, the lender of an invoice discounting facility, and held that a lender must be rational when exercising its contractual discretion to charge collection fees under its Receivables Finance Agreement. These clauses have long been a subject of controversy within the Receivables Finance Industry and this case illustrates the willingness of the courts to intervene.

Background

The claim concerned a clause in the Receivables Finance Agreement made between Leumi ABL Limited and Cobra Beer Limited which allowed Leumi ABL Limited to charge up to 15% of the sums collected by it following the exercise of its contractual right to take over collections in certain circumstances. The relevant clause provided that Cobra Beer Limited expressly acknowledged that this fee constitutes a fair and reasonable pre estimate of the likely costs and expenses in providing this service.

In this instance, following Cobra Beer Limited being placed into administration, Leumi ABL Limited took over collections and applied the collection charge at the full rate of 15% together with the costs it had incurred in engaging a third party collection agent, lawyers and the services of the principal credit controllers of Cobra Beer Limited. These third party costs were not challenged.

They collected approximately £8,000,000 and applied the collection charge at the rate of 15% which amounted to a collection charge of £1.2 million plus vat. As they had recouped sufficient sums to repay its capital exposure, the sums still due to it largely comprised of this collection charge.

The claimant had provided an indemnity to Leumi ABL Limited to pay on demand any sums due to it from Cobra Beer Limited pursuant to the Receivables Finance Agreement.

Demand was upon the claimant who challenged the amount of the collection fee and claimed payments it had already made had been paid by mistake and that Leumi ABL Limited was only entitled to the actual costs of collection and that the collection fee at the rate of 15% was in fact a penalty and that setting the fee at the maximum of the 15% allowed was a breach of its duty not to exercise its discretion in an arbitrary, capricious or irrational manner.

The Court accepted that the clause gave Leumi ABL Limited the power to set in advance a percentage fee which would apply to all later recoveries but that there had to be some qualification otherwise it could be exercised oppressively or abusively. The Court held that Leumi ALB Limited was entitled to estimated costs but had a duty when applying the collection fee to make a rational estimate of its internal costs, taken into account the size of the ledger, its exposures and time needed to collect the amounts due and that in this instance it had not done so. On the facts presented to it, the Court ruled that 4% was the maximum that should have been applied.

Comment

This case indicates that the courts appear increasingly willing to scrutinise discretionary powers in commercial contracts and no doubt will be followed by the ombudsman service who manage the complaints process for ABFA members.