BHL was successful in its claim against Leumi ABL Limited (Leumi) on the basis that Leumi had not been entitled to charge a collection fee of 15 per cent under a receivables finance agreement (RFA). The issue was not whether Leumi was entitled to charge a collection fee, but rather what percentage Leumi could rationally charge to cover its likely costs and expenses. This decision has implications both for the receivables finance industry and, more widely, for the exercise of discretionary powers under a contract in a commercial context.

The owner and director of BHL was Lord Bilimoria, the founding shareholder of Cobra Beer Limited (Cobra). In April 2008, Cobra entered into the RFA with Leumi, pursuant to which Cobra assigned its unpaid invoices to Leumi at a discount for immediate cash. Cobra experienced financial difficulties and entered into administration on 29 May 2009. On the same day, Cobra Beer Partnership Ltd, in which BHL was a shareholder, acquired the Cobra business, and BHL gave an indemnity pursuant to which BHL agreed to indemnify Leumi in respect of sums due under the RFA.

Leumi then took over the collection of Cobra's invoices and, in doing so, charged certain additional fees under the RFA. One fee in particular, which lies at the heart of this case, was a "collection fee" of up to 15 percent on all invoices.

Leumi collected invoices to the value of £8.1 million, yielding a collection fee of £1.2 million. On 11 November 2010 and 9 May 2011, Leumi issued demands to BHL for outstanding collection fees of £400,000 and £550,000, respectively. BHL complained that the fees were excessive but, believing the payment to be due under the RFA, paid them. Leumi claimed this left a further sum outstanding of over £400,000 (later corrected to £271,382.69).

In April 2012, BHL issued its claim against Leumi, alleging that: (i) Leumi was not entitled to charge a collection fee at 15 per cent; (ii) BHL had paid £950,000 of collection fees by mistake of law; and so (iii) Leumi should repay the sum. Leumi counterclaimed for the balance of collection fees.

Accordingly, the court had to determine to what Leumi was entitled under the RFA (including whether the collection fee was an unenforceable penalty) and, if Leumi was entitled to less than the sum that had been paid, whether BHL had overpaid on the basis of a mistake of law.

The RFA entitled Leumi to charge "an additional collection fee at up to 15% of amounts collected", and stipulated that "such fee constitutes a fair and reasonable pre-estimate of Leumi's likely costs and expenses in providing such service". BHL alleged that this allowed Leumi to claim only its actual costs and expenses, which were to be calculated after the exercise had ended and were subject to a cap of 15 per cent; whereas, Leumi contended that it was entitled to charge any fee it wished, subject only to a maximum of 15 per cent. As a matter of practice, in similar circumstances Leumi had always charged the maximum where an agreement provided that its fee could be up to a particular percentage, including in the present case.

The judge did not agree with either party's interpretation, however. Instead, relying on the wording of the clause and what he deemed to be the "target" of the provision, the judge determined that Leumi had a discretion to charge a fee based on estimated or actual costs, but which could go no higher than 15 per cent. This discretion was to be exercised, following the principle in Braganza v. BP Shipping [2015] 1 WLR 1661, in a way which was not arbitrary, capricious or irrational in the public law sense (the Braganza Duty).

The judge's decision on the construction of the clause brought into play BHL's secondary argument that the collection fee was an unenforceable penalty. However, the court disagreed on the basis that: (i) the collection fee was not akin to a sum payable instead of damages and therefore was a primary and not a secondary obligation; (ii) even if it was a secondary obligation, it was not a fixed sum but a fee to be arrived at in the exercise of discretion and, in any event, there was a legitimate interest in being compensated for costs; and (iii) Cobra was a large commercial entity that had negotiated the RFA on an arm's-length basis. Accordingly, the clause in question was not a penalty.

Having found Leumi was acting under a discretion, the court considered whether Leumi had properly exercised that discretion. The court found, broadly, that Leumi (i) did not attempt to calculate the likely costs and expenses of the collection exercise; (ii) did not consider whether the collection process would be carried out by third parties and charged under an alternative clause in the RFA; and (iii) acted too quickly in setting the charge. Accordingly, the court considered that Leumi did not exercise the discretion granted under the relevant clause at all and that, even if it did, its exercise of the discretion was wholly defective.

On that basis, it was then left for the court to consider what Leumi would have been entitled to had it properly exercised its discretion. The court first considered what Leumi's actual costs were. This was not because the clause provided for actual costs but in order to provide a useful sense-check for the exercise of discretion. In the absence of any contemporary records, the court relied on a salary-implied hourly rate to conclude that the actual costs were £33,260.

The judge then had to determine the highest percentage fee which Leumi could have charged without being in breach of its Braganza Duty. Taking a holistic approach and giving Leumi the benefit of the doubt, the judge held that 4 per cent was the maximum Leumi could have charged. Accordingly, BHL had overpaid by £735,000 and Leumi was owed nothing for its counterclaim.

Having determined that Leumi was entitled to less than what was actually paid, the court had to consider whether BHL had overpaid on the basis of a mistake of law. The contemporaneous correspondence showed that BHL believed that the collection fee was payable, and Lord Bilimoria gave oral evidence to the effect that he was mistaken. Further, the mistake was a plausible one to make, and BHL was given advice confirming that the collection fee was payable. Accordingly, the court found that there was a mistake and, but for the mistake, the payments would not have been made. BHL was therefore entitled to recover £735,000 from Leumi and was awarded interim payment on account of costs of £780,000.

Collection fees have been the subject of much controversy in the receivables finance industry. Whilst this case is unlikely to quiet the debate, the days of flat-rate collection fees of up to 15 percent are likely to be over.

More broadly, this case is an interesting example of the increasing extent to which courts are willing to challenge the exercise of discretionary powers in a commercial context. Whilst the law in this area is not yet settled, commercial entities should be aware that, if there is any optionality in a contract (for example, charging collection fees of up to 15 percent), the courts may scrutinise the course of action ultimately taken. On that basis, businesses would be well advised to document thoroughly any decisions made in relation to elective contractual rights so that they can demonstrate a rational basis for their actions.