COLLECTION FEES: THE PERIL OF NOT EXERCISING A CONTRACTUAL DISCRETION

Clive Freedman QC of 7 KBW, leading Simon Mills, instructed by James Southworth of Eversheds Sutherland, has succeeded in a claim of particular interest to the factoring and invoice discounting industry.  They acted for BHL, a company having a shareholding in the company which manufactures and supplies Cobra beer.  The action was about a clause in an invoice discounting contract which permitted Leumi ABL Limited (“Leumi”) to charge ‘up to 15%’ of sums collected by Leumi ABL Limited, a Bank Leumi subsidiary.  The clause permitted Leumi to take over collections in certain circumstances and to charge a collection fee.

These clauses have been subject to controversy in the industry.  It has been claimed that they are a way of obtaining profits instead of recouping the expense of collections.  In this case, the collections were about £8,000,000 and the fee charged comprised 15%, namely about £1.2 million plus VAT.

In BHL v Leumi ABL Limited [2017] EWHC 1871 (QB),  HH Judge Waksman QC rejected Leumi’s argument that it had made a sensible pre-estimate of its costs of collection.  He found that Leumi had charged the maximum 15% (in the scale of ‘up to 15%’) without any proper exercise of a discretion.  If the true actual cost was the basis, and applying an implied hourly rate to staff involved in collections, the amount would have been just over £33,000.   The Judge held that Leumi would have been entitled to estimated costs.  Applying a likely worst-case scenario, and looking at the matter conservatively in favour of Leumi, it could not have rationally applied a charge of more than 4% on collections.   

Thus, the Court found that the sum of £950,000 paid by BHL had been paid under a mistake of law in the belief that the sums were due to be paid, whereas in fact save for the 4%, the moneys were not due at all.  Accordingly, the Court allowed BHL a claim in unjust enrichment.  The Court gave judgment for a sum of £735,000 plus interest and the costs of the action including an interim payment on account of costs of £780,000.

The case is an example of fetters on a contractual discretion in the context of finance.  The Judgment provides an interesting analysis of how the discretion was not exercised properly.  The debate about collection fees in the industry may not be abated by this case. 

To view the judgment please click here.