​A lender failed to exercise a contractual discretion properly when deciding on what collection fees to charge under a receivables finance agreement which allowed collection fees of “up to 15%”. The court held that the bank should have only charged 4%, not 15%, and had to repay the difference. The case is a good reminder of how to exercise a contractual discretion properly: BHL v Leumi ABL Ltd [2017] EWHC 1871 (QB).

In 2008, Cobra Beer Limited (Cobra) entered into a receivables finance agreement (RFA) with Leumi ABL Limited (Leumi). Under the RFA, outstanding receivables owed by Cobra’s customers were used as collateral against the sums that Leumi lent to Cobra. The RFA allowed Leumi to charge a collection fee in certain circumstances of “up to 15% of amounts collected by Leumi”.

Cobra went into administration in 2009. Shortly before Cobra went into administration, Leumi began collecting the debts itself and charging the collection fee at the maximum rate of 15%.

A dispute subsequently arose about the amount of the collection fees that Leumi charged. The collection fees were covered by an indemnity from an associated company of Cobra, BHL. BHL paid a total of GBP950,000 to Leumi in relation to the outstanding collection fees. By May 2012, Leumi contended that it was still owed GBP490,000 and demanded further payment. BHL commenced a claim seeking return of the GBP950,000 on the grounds that it had made the payments in the mistaken belief that the sums were payable. Was Leumi able to charge the collection fee?

BHL argued that Leumi was not entitled to charge the full 15% collection fee on the basis that:

  • Leumi was only entitled to charge its actual costs and expenses of collection, and the reference to “up to 15% of the amounts collected” in the RFA was to a ceiling on the amounts that could be charged;
  • the collection fee was an unenforceable penalty; or
  • the discretion to charge up to 15% of the amounts collected had either not been exercised or, if it had, then it had been exercised improperly.

In the High Court, HH Judge Waksman QC rejected the first two arguments and held that Leumi was entitled to charge for its estimated costs of collecting the receivables. The fee was to be calculated at the outset as a percentage of up to 15% of the collected receivables going forward.

Discretion must be exercised properly

The judge, however, held that Leumi’s discretion to determine the fee amount must be exercised in a way which was not arbitrary, capricious or irrational in the public law sense, citing the Supreme Court’s decision in Braganza v BP Shipping [2015] 1 WLR 1661 (known as the Braganza duty).

Discharging the Braganza duty means the following:

  • There must be a proper process for arriving at a decision, including taking into account the material points and not taking into account irrelevant ones.
  • Not reaching an outcome which is outside what any reasonable decision-maker could decide, regardless of the process adopted.

Bank had failed to consider charging less

The judge found that Leumi had charged 15% without considering what the actual or likely costs of collection would be, and without even considering charging less than the maximum amount. Leumi had, therefore, failed to take into account important relevant factors, which meant that it was in breach of its Braganza duty.

On the facts, the judge concluded that 4% (or GBP320,000) was the absolute maximum that Leumi could have charged in order to remain in compliance with its duty. BHL had overpaid Leumi and the judge found that BHL’s overpayment was a mistake in law. Accordingly, BHL was entitled to recover the amount paid to Leumi in excess of the amount that Leumi could properly charge for the collection fee.

Penalty clause

Was the collection fee an unenforceable penalty? The judge thought not because:

  • the collection fee clause was a primary, not a secondary obligation, and it was not akin to a sum payable instead of damages;
  • even if the obligation to pay the fee was secondary, it was not a fixed sum or formula, but a fee to be arrived at through exercise of discretion by applying the Braganza duty. The fee was not penal nor extortionate and Leumi had a legitimate commercial interest in being compensated for its costs of the collect-out; and
  • Cobra was a large commercial entity and negotiated the RFA on an arms-length basis.

COMMENT

The case is a reminder to banks and other financial providers that decisions about fees, particularly in circumstances where the bank or financial provider has an element of discretion, may be subject to challenge in the courts. In this case, the bank had a contractual discretion to set the level of a collection fee “up to X amount”. In order to minimise the risk of a challenge in cases such as these, it is important that banks (when deciding on the level of fees to be charged) give proper consideration to the reason why fees ought to be set at that level and to document the basis for that decision. The bank must be able to demonstrate that charges have been properly considered in the relevant context and are not arbitrary amounts.

Interestingly, HH Judge Waksman QC has issued several recent decisions relating to the obligation in a commercial contract to exercise a discretion rationally and in a way that is consistent with the Braganza duty. Two other decisions are Watson & ors v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm) and Shurbanova v Forex Capital Markets Ltd [2017] EWHC 2133.

Notwithstanding the foregoing, the case is helpful to banks or financial institutions with similar fee arrangements in place on the basis that the relevant clause did not fall foul of the rule against penalties.

In fact, the bank’s contractual discretion to set the collection fee (applying the Braganza duty) was a point that was relevant to the judge finding that the clause was not an unenforceable penalty, on the basis that: (i) it was not a penal or an extortionate provision; and (ii) Leumi had a legitimate commercial interest in being compensated for its costs.