Porter Capital Corporation v Zulfikar Masters

Under Connecticut law, contractual interest is simple unless clear words provide for compounding. Language providing that interest accrues, is charged daily or is collected monthly does not, without more, authorise compound interest.

A contractual requirement to reimburse legal expenses on demand may coexist with a separate indemnity imposing liability without demand. A guarantee covering contingent and unliquidated liabilities may extend to reasonable enforcement expenses arising under that indemnity.

Security given for a guarantor’s obligations may also be security for the principal debtor’s obligations where the guarantee secures those obligations. A guarantor who has consented to its release is not discharged by the creditor’s release of that security.

A factoring company advanced money to a pharmaceutical company under a Commercial Financing Agreement governed by Connecticut law. The defendant, a shareholder in the pharmaceutical company, guaranteed its obligations through a Performance Covenant and Waiver.

Following the company’s bankruptcy, the factor obtained judgment against other guarantors and settled proceedings against one of them. It continued its English claim against the defendant. After trial, a deputy High Court judge made declarations concerning the extent of the guaranteed debt and ordered an account and an interim payment.

The parties brought cross-appeals concerning seven matters: over-advances, compound interest, legal expenses, release of security, calculation of rebate periods, interest on fees, and default interest. The central question was the proper construction of the two contractual documents under Connecticut law.

1. Both appeals were allowed in part and otherwise dismissed. The contractual definition made an over-advance the negative balance in the single Reserve Account established by the agreement. The higher rate under the over-advance clause applied only to that negative balance, although the associated processing fee could be calculated on the whole over-advance loan.

2. Connecticut law presumed simple interest unless the contract clearly provided for compounding. Neither the provision that interest should accrue on an over-advance balance nor Exhibit B’s requirement that interest be charged daily and collected monthly contained sufficiently clear words. Only simple interest was therefore payable.

3. The legal-expenses clause requiring reimbursement “on demand” required a written demand before the borrower became liable under that clause. A separate clause nevertheless created a distinct indemnity liability for enforcement costs without requiring demand. Its overlap with the specific reimbursement clause did not cause the general provision to yield because the two liabilities were of different legal kinds. The guarantee covered contingent, unliquidated and undetermined liabilities, including attorneys’ fees. Reasonably incurred legal and collection expenses were therefore recoverable from the guarantor, with the amount to be determined at a further hearing. Delivery of the underlying bills was not a prerequisite to liability.

4. The other guarantors’ property was indirectly security for the borrower’s obligations because it secured their guarantee of those obligations. The defendant had contractually consented to the release of such security without notice or further assent. Its release therefore did not discharge his guaranteed liability.

5. For a rebate available where an invoice was paid “between 1-30 days”, payment made 30 days after issue qualified. The first terminal day was excluded from the calculation.

6. An unpaid underwriting or other fee was an obligation but was not an advance. Exhibit B authorised interest only on advances, so it did not authorise interest on unpaid fees.

7. The finding that the factor had established a prima facie debt was no longer challenged. The declaration awarding default interest under the unenforceable penalty provision was inconsistent with the judge’s other declarations. Only the contractual rates under the ordinary advance or over-advance provisions were recoverable for the relevant period.

1. Court of Appeal (Civil Division): In [2016] EWCA Civ 5, both cross-appeals were allowed to the extent identified in the judgment and otherwise dismissed. The lower court’s declarations were amended accordingly, and the amount of recoverable legal expenses and over-advance interest remained for a further hearing.
2. High Court, Chancery Division: Mr Nicholas Strauss QC, sitting as a deputy High Court judge, determined 15 contractual issues after trial, made 13 declarations, ordered an account and later ordered an interim payment of US$650,000. The account and interim-payment orders were stayed pending appeal.