Jim Stafford
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Earlier this month the High Court handed down judgment in two linked cases: Sheehan v Breccia and others, and Flynn and Benray Limited v Breccia. The judgment provides useful clarification as to whether banks/funds can claim "surcharge" interest and "enforcement" costs against borrowers.
Can a bank claim "surcharge" interest, and if so, how much?
The borrower argued that the Court should follow the decision in ACC Bank Plc. v. Friends First Managed Pension Funds Ltd. In that case, Finlay Geoghegan J., following the principles enunciated in Dunlop and Truck and Machinery Sales struck down a surcharge interest of 6% which on the evidence before her she concluded could not be considered to be a reasonable pre-estimate of the likely loss to ACC.
I set out below the key paragraph from the recent judgment that deals with the issue of surcharge interest:
Accordingly, I am of the view that it would not be appropriate to revisit the issue decided in ACC and followed and applied in AIB plc. v. Fahy. I am satisfied that the surcharge rate of 4% was a generic rate, and not a genuine pre-estimate of loss arising from default. The pre-estimate of probable loss in the event of default was part of the calculation of the ordinary interest (EURIBOR plus the margin rate). Both experts agreed that the surcharge provision was intended to deter borrowers from defaulting on their loans. This tends to be supported by the fact that in practice neither expert had come across any case in which a bank actually recovered (as opposed to claimed) a surcharge – save in the circumstance of a settlement agreement to pay a specific sum backed by agreement to pay a greater sum in the event of default. I accept that clause 5.1 was, as Mr. Fennelly put it, “a short sharp shock…to get your attention, to get you to conform” and as such a punishment for non-performance and I am satisfied that this was the dominant purpose of the provision. I find that in all the circumstance as judged at the time of the Facility Letters clause 5.1 was a penalty charge, and hence unenforceable. Accordingly, no surcharge interest should be included in the redemption figure proposed by the defendant.
Following the Breccia case the leading decision on penalties in loan agreements remains that of Finlay Geoghegan J in ACC Bank v Friends First Managed Pensions Funds Ltd and Ors . The court did not follow the recent decision of the UK Supreme Court in Cavendish Square Holding BV v El Makdessi/Parking Eye Ltd v Beavis .
In brief, therefore, Irish law will allow a "modest uplift" in an interest rate upon debtor default but anything beyond that is a penalty. In summary, in order for surcharge interest to be lawful, it should be a genuine pre-estimate of loss arising from a breach and not merely a generic rate.
The judge clarified that IF he was mistaken in not allowing the penalty interest, that if a creditor who notifies its borrower what is due and owing at a particular time, but does not include a claim for surcharge interest, cannot afterwards claim surcharge interest in respect of a breach up to the date of the notification. An unequivocal statement of the intention to charge surcharge interest is required. Generalised "reservation of rights"- type language may well not assist the creditor. A creditor can be held held to a statement of account issued to the borrower. This will happen even if the creditor's statement is relatively informal e.g. is not described as a "certificate".
Can a bank charge “enforcement” costs, charges and expenses, and if so, how much?
Yes, but only such costs as may be awarded to the bank, the same to be taxed in default of agreement, may be charged and added to the redemption figure. Reserved costs, and other possible future or “contingent” costs, may not be charged or factored into the redemption figure.
In brief, the case underlines that particular care is required when communicating statements of account to a borrower as the lender may be held to any inaccuracies.
The cases provide some welcome clarification to the law in this area, and provides guidance to banks/funds as to how they should draft their "demand" letters.
In practice, we note that banks do not generally claim for "surcharge" interest when issuing summary proceedings so as to avoid disputes over whether the charges are valid or not.
The full judgment may be accessed here:
http://www.courts.ie/Judgments.nsf/09859e7a3f34669680256ef3004a27de/92e64366af4a8dcb80257f5b0058611c?OpenDocument
Jim Stafford
Can a bank claim "surcharge" interest, and if so, how much?
The borrower argued that the Court should follow the decision in ACC Bank Plc. v. Friends First Managed Pension Funds Ltd. In that case, Finlay Geoghegan J., following the principles enunciated in Dunlop and Truck and Machinery Sales struck down a surcharge interest of 6% which on the evidence before her she concluded could not be considered to be a reasonable pre-estimate of the likely loss to ACC.
I set out below the key paragraph from the recent judgment that deals with the issue of surcharge interest:
Accordingly, I am of the view that it would not be appropriate to revisit the issue decided in ACC and followed and applied in AIB plc. v. Fahy. I am satisfied that the surcharge rate of 4% was a generic rate, and not a genuine pre-estimate of loss arising from default. The pre-estimate of probable loss in the event of default was part of the calculation of the ordinary interest (EURIBOR plus the margin rate). Both experts agreed that the surcharge provision was intended to deter borrowers from defaulting on their loans. This tends to be supported by the fact that in practice neither expert had come across any case in which a bank actually recovered (as opposed to claimed) a surcharge – save in the circumstance of a settlement agreement to pay a specific sum backed by agreement to pay a greater sum in the event of default. I accept that clause 5.1 was, as Mr. Fennelly put it, “a short sharp shock…to get your attention, to get you to conform” and as such a punishment for non-performance and I am satisfied that this was the dominant purpose of the provision. I find that in all the circumstance as judged at the time of the Facility Letters clause 5.1 was a penalty charge, and hence unenforceable. Accordingly, no surcharge interest should be included in the redemption figure proposed by the defendant.
Following the Breccia case the leading decision on penalties in loan agreements remains that of Finlay Geoghegan J in ACC Bank v Friends First Managed Pensions Funds Ltd and Ors . The court did not follow the recent decision of the UK Supreme Court in Cavendish Square Holding BV v El Makdessi/Parking Eye Ltd v Beavis .
In brief, therefore, Irish law will allow a "modest uplift" in an interest rate upon debtor default but anything beyond that is a penalty. In summary, in order for surcharge interest to be lawful, it should be a genuine pre-estimate of loss arising from a breach and not merely a generic rate.
The judge clarified that IF he was mistaken in not allowing the penalty interest, that if a creditor who notifies its borrower what is due and owing at a particular time, but does not include a claim for surcharge interest, cannot afterwards claim surcharge interest in respect of a breach up to the date of the notification. An unequivocal statement of the intention to charge surcharge interest is required. Generalised "reservation of rights"- type language may well not assist the creditor. A creditor can be held held to a statement of account issued to the borrower. This will happen even if the creditor's statement is relatively informal e.g. is not described as a "certificate".
Can a bank charge “enforcement” costs, charges and expenses, and if so, how much?
Yes, but only such costs as may be awarded to the bank, the same to be taxed in default of agreement, may be charged and added to the redemption figure. Reserved costs, and other possible future or “contingent” costs, may not be charged or factored into the redemption figure.
In brief, the case underlines that particular care is required when communicating statements of account to a borrower as the lender may be held to any inaccuracies.
The cases provide some welcome clarification to the law in this area, and provides guidance to banks/funds as to how they should draft their "demand" letters.
In practice, we note that banks do not generally claim for "surcharge" interest when issuing summary proceedings so as to avoid disputes over whether the charges are valid or not.
The full judgment may be accessed here:
http://www.courts.ie/Judgments.nsf/09859e7a3f34669680256ef3004a27de/92e64366af4a8dcb80257f5b0058611c?OpenDocument
Jim Stafford