The High Court has granted a lender’s application for summary judgment in relation to its USD $10.5 million claim against a borrower and guarantor for outstanding sums due under finance agreements: Adare Finance DAC v Yellowstone Capital Management SA & Anor  EWHC 2760 (Comm).
The decision will be welcomed by financial institutions considering their enforcement rights under finance agreements given the court’s robust findings that the defences raised (unconscionable bargain and lawful act duress) were not applicable in the context of detailed financing arrangements. This is especially the case where these are the product of commercial negotiation where both parties are sophisticated, experienced and professionally advised.
The decision is also consistent with the trend in the court’s approach to dealing with novel arguments raised by claimants that seek to allege that financial institutions should not be able to rely on such agreements, or need to take action or refrain from exercising their contractual rights under financing documents because of some overarching legal theory (see, for instance, our banking litigation blog post on the case of Standish v RBS  EWHC 1829 (Ch) where the court struck out a claimant’s claim that an overarching implied duty of good faith meant that a lender should have refrained from exercising its strict contractual rights).
In such cases, the courts have demonstrated a reluctance to invoke overarching legal theories to set such agreements aside, or fetter the exercise of rights under those agreements. Instead, the courts’ approach demonstrates a willingness to respect the terms of such agreements which have been the product of commercial negotiations between the parties involved.
In 2018 the claimant investment company as lender provided USD $113.3 million in financing to a businessman (as guarantor) and one of his companies to purchase the equity interest in properties in Jerusalem. The financing took the form of two facility agreements which were guaranteed by a personal guarantee from the guarantor.
In August 2019, the money owing under the facility agreements was partially refinanced and a new facility agreement entered into. As part of the refinancing, USD $121.9 million was to be repaid using funds provided by the consortium of new lenders. The unpaid balance (USD $12 million), by way of novation, was to remain owing by one of the defendants Yellowstone Capital Management S.A. (a company beneficially owned and controlled by the guarantor). The guarantor guaranteed Yellowstone’s obligations under the new facility.
The money was deposited by the new lenders with an agent who held the amount in escrow, pending the satisfaction of various conditions of the refinancing (which needed to be satisfied by a certain date failing which the money would be returned to the new lenders). The conditions were not satisfied. Following negotiations between the lender and defendants (including their professional advisers), they agreed an extension fee deed to compensate the lender for not having received the money. Yellowstone agreed to pay a flat fee of USD $100,000 for a 6 day period plus a daily fee of approximately USD $33,000 thereafter until completion. The refinancing completed on 31 October 2019. However, Yellowstone did not pay the amounts payable to the lender. The lender served a notice of acceleration under the facility and also made a payment demand against the guarantee.
Subsequently, the lender brought a claim against the defendants for all outstanding sums due under the facility including the further negotiated fee. The defendants asserted that the agreement in relation to the further fee was an unconscionable bargain and therefore unenforceable, or alternatively was voidable and had been rescinded by reason of lawful act economic duress. The lender issued an application for summary judgment and an alternative application for striking out the defendants’ defence and counterclaim.
The court granted the lender’s application for summary judgment finding that there was no real prospect of the defendants succeeding on their defences, nor was there another compelling reason why the case should proceed to trial.
In reaching its decision, the court considered the following key issues:
Issue 1: Was the extension fee deed voidable on the basis of unconscionable bargain?
The defendants alleged that the lender’s financial advisers (i) failed to act within the basic norms of commerce and fair and honest dealing, (ii) conduct fell below the basic minimum standard of acceptable behaviour, and (iii) did not consider in good faith that it was entitled to require Yellowstone to execute the extension fee deed as a condition of extending the deadline for satisfying the conditions of the refinancing. As a consequence, the extension fee deed was rendered voidable and therefore had been rescinded. The defendants relied on the following facts in support of their argument:
- the lender’s advisers knew the defendants were in “a situation of extreme vulnerability” and had no choice but to agree on whatever terms were imposed in relation to the extension fee deed which dramatically altered the bargain agreed in relation to the new facility agreement;
- by designating the extension fee deed as a “Finance Document” under the new facility agreement, the lender had imposed a different bargain under which non-payment of an amount could trigger an earlier event of default; and
- the lender’s advisers extracted unconscionably large payments from the defendants under the extension fee deed.
The court dismissed the defendants’ arguments and held that the defendants had no reasonable prospect of succeeding on the allegation that the extension fee deed could be set aside on the basis of unconscionable bargain.
The court commented that in order for a contract to be set aside on the basis of unconscionable bargain, the following elements must be established:
- Inequality of bargaining power: The weaker party must be disadvantaged to an extent which renders it vulnerable to unconscientious conduct by the stronger party. Often, this will mean there is a substantial inequality of bargaining power. However, the nature of the weakness is also relevant, and mere impecuniosity is insufficient.
- Exploitation: The stronger party must have acted unconscionably by taking advantage of the weaker party’s disadvantage. Such conduct must “shock or offend the conscience of the Court.” This suggests some awareness (actual or presumed) of the weaker party’s disadvantage and cynical action taken by the stronger party to exploit that weakness.
- Unfair/unreasonable terms: The terms of the parties’ contract must be unfair and unreasonable. The degree of unfairness must render the contract “overreaching and oppressive”.
In the present case, in the court’s view, the defendants had not established any of the required elements to justify setting aside the contract as the facts demonstrated that there:
- Was no inequality of bargaining power. Neither defendant was in a position of endemic disadvantage or weakness. The guarantor was a sophisticated and experienced businessman well used to financial transactions, and was legally advised.
- Was no exploitation. The defendants agreed to the extension fee deed because the conditions required for release of the money were not satisfied. As a result, they had the choice of losing the benefit of the refinancing or agreeing an extension of time with the lender. Neither the fact the conditions were not satisfied, nor the difficult position the defendants found themselves in, was caused by the lender.
- Were no unfair/unreasonable terms. There was nothing to suggest the extension fee deed itself was “so unfair or unreasonable so as to be overreaching and oppressive”, particularly in circumstances where the persons involved were sophisticated and experienced. Also, the extension fee deed (and the fees payable) were the product of commercial negotiation, and at least some of the terms were proposed by the defendants. It was not imposed by the lender on the defendants, but was intended as a mutually beneficial commercial solution. The parties were free to enter into the contract, and the fact one party may have enjoyed a commercial advantage over another, was not sufficient for it to constitute an unconscionable bargain.
Issue 2: Was the extension fee deed procured by lawful act economic duress?
The defendants’ alternative case was that the lender’s conduct in forcing the defendants to enter into the extension fee deed constituted an exercise of lawful act economic duress (as per Times Travel (UK) Ltd v Pakistan International Airlines Corp  EWCA Civ 828; please see our litigation blog post, although we note that there is a judgment expected from the Supreme Court shortly on this particular case). As a consequence, the extension fee deed had been avoided.
The defendants alleged that whilst the pressure exerted by the lender upon Yellowstone was lawful, in the sense that the lender was not under a legal obligation to agree the extension sought by Yellowstone, it was applied illegitimately. The defendants relied on their alleged extreme vulnerability in suggesting that they could not bargain, nor did they have a practical choice but to enter into the extension fee deed in order to extend the deadline for satisfying the conditions of the refinancing, which substantially altered the bargain under the new facility agreement in that it brought forward the date on which an event of default could arise. Further, the defendants contended that the lender’s pressure was not exercised in the bona fide belief that it was entitled to the demand as the lender was aware of: (a) the refinancing; (b) the fact the money was in escrow; (c) there had been a delay in the refinancing and it was expected to complete shortly; and (d) that there was no evidence to suggest that the risk profile had changed in the relevant period.
The court rejected the defendants’ arguments and held that, even accepting the truth of the defendants’ allegation, they had not established lawful act economic duress.
The court noted the elements required for a party to succeed in raising economic duress (as set out by the Court of Appeal in Times Travel) included: (a) that there must have been significant illegitimate pressure applied to that party; (b) the pressure must be a significant cause which induced that party to enter into the contract; and (c) the practical effect of the pressure was that there was compulsion on, or a lack of practical choice for the party raising the defence. For lawful act economic duress to succeed, the pressure must be exerted in bad faith which should be assessed by reference to what “all can agree” is morally unacceptable conduct (per David Richards LJ in Times Travel), which is higher than a mere reasonableness standard.
Apart from the defendants’ alleged “extreme vulnerability”, no other pleaded facts supported the allegations advanced. Further, the fact that some of the terms of the extension fee deed had been proposed by the defendants (suggesting the defendants had considered their own financial position, rather than relied upon pressure from the lender) and the extension fee deed had been entered into in return for the lender foregoing its own legal rights under the new facility agreement, were inconsistent with the suggestion that the lender had acted in bad faith or failed to act “within the basic norms of commerce and fair and honest dealing”.