BHL v Leumi ABL Ltd

A contractual provision permitting a lender to charge a collection fee of up to a stated percentage may confer a discretion to estimate future internal costs, rather than a right to charge actual costs only or any sum chosen at will. The discretion must be exercised rationally and by reference to relevant material, including the likely receivables, likely costs and the timing of the collection process. A fee fixed arbitrarily is unenforceable to that extent. The provision was not a penalty because the fee was a primary obligation or, alternatively, a discretionary fee protecting a legitimate commercial interest. Where a payment was made under a genuine mistaken belief that the fee was contractually due, restitution may be recovered to the extent that the fee exceeded the sum lawfully chargeable.

BHL indemnified Leumi for sums owed by Cobra Beer Ltd under a receivables finance agreement. After Cobra entered administration, Leumi collected Cobra’s receivables and charged a 15 per cent collection fee under paragraph 2 of Schedule 6 to the agreement. BHL paid £950,000 towards the fee and later claimed repayment, alleging that the fee had been wrongly calculated and that the payments were made under a mistake of law.

The central issues were the proper construction of the collection-fee provision, whether the fee was a penalty, whether Leumi had exercised its contractual discretion lawfully, whether BHL’s payments were recoverable, and the date from which an enhanced discount charge was payable.

1. Construction. Paragraph 2 of Schedule 6 permitted Leumi to set, in advance, a percentage fee representing or estimating its future internal costs and expenses in collecting the receivables. It was not confined to actual costs calculated after completion of the collection process, and it did not confer an untrammelled power to charge any amount up to 15 per cent. The fee could be set after a short period of further information-gathering if that was prudent.
2. Contractual discretion. The discretion had to be exercised in a manner that was not arbitrary, capricious or irrational in the public-law sense. The decision-maker had to adopt a proper process, consider relevant matters and exclude irrelevant ones. The assessment required consideration of the receivables requiring recovery, the likely costs of collection, and those costs expressed as a percentage of the sum to be collected. The court could not substitute its own view of a reasonable fee, but could determine the lawful counterfactual where the discretion had not been properly exercised.
3. Application. Leumi’s decision to charge 15 per cent was arbitrary. It had not calculated likely costs, considered prior collect-out data, allowed for third-party collection costs or considered whether a short delay would produce better information. The maximum lawful fee was assessed at 4 per cent. BHL was therefore entitled to recover the £950,000 paid to the extent that it exceeded the fee lawfully chargeable.
4. Penalty. The fee was not a penalty. Cobra’s obligation was properly characterised as a primary obligation. Alternatively, the fee was a discretionary charge protecting Leumi’s legitimate commercial interest in recovering internal collection costs, and its potentially high ceiling did not make it penal.
5. Mistake and causation. BHL paid under a genuine mistaken belief that the collection fee was contractually due. The mistake caused the payments: absent that belief, BHL would not have paid. The appropriate causation test was the ordinary but-for test. The claim succeeded only for the excess over the sum properly chargeable.
6. Counterclaim. The enhanced discount charge was payable from 3 June 2009, when Leumi took over collection of the receivables and Cobra ceased to act as Leumi’s agent.

First-instance decision. The judgment states that consequential matters, including the form of order, would be addressed at the handing-down hearing.