Ireland: Irish Court Of Appeal Rules On Default Interest And Loan Enforcement Issues

A series of judgments handed down by the Court of Appeal on 30 July 2018 in linked litigation (Sheehan v Breccia/Flynn and Benray v Breccia) deals with important issues arising in loan default scenarios, particularly where the loan has been traded in the secondary market. The implications of these decisions require careful consideration in the context of broader finance and commercial arrangements under Irish law.

The key issues addressed by the court are as follows:

  1. Whether a borrower's agreement to pay default interest under Irish law was unenforceable because it was not a genuine pre-estimate of loss caused by default (the "Penalty Issue");
  2. Whether the purchaser of the loan was estopped (by reason of correspondence with the borrower) from claiming default interest (the "Estoppel Issue");
  3. Whether an express "reservation of rights" clause in the loan purchaser's demand letter preserved its ability to claim default interest (the "Reservation of Rights Issue"); and
  4. Whether the borrower's agreement to pay the lender's enforcement costs breached public policy (the "Enforcement Costs Issue").

Brief Summary of Factual Context

The facts were complex but may be summarised as follows. The parties were shareholders in a company operating a private medical clinic in Dublin (the "Company"). The key protagonists were two individuals and a corporate entity ("Breccia"). The individuals (the "Borrowers") had financed their investment with borrowings from Anglo Irish Bank plc (the "Bank"). One of the Borrowers structured his investment through a private limited company. The security provided by the Borrowers included a mortgage over their respective shareholdings in the Company. The facility agreements included a provision for additional interest to be paid on a Borrower default, and an agreement that the Borrowers would pay and indemnify the lender against all costs incurred by the Bank in enforcing the loan.

The Bank went into liquidation. One Borrower's loan was put up for sale by the Bank's liquidators, the loan of the other Borrower transferred to a subsidiary of NAMA (Ireland's "bad bank") and was put up for sale by it. Breccia successfully outbid the Borrowers for both of the loans. Breccia's objective was to gain control of the shares pledged by the Borrowers as security for their loans.

Shortly after it acquired the loans, Breccia issued a formal demand for repayment of principal and contractual interest against each of the Borrowers. Breccia subsequently demanded payment of default interest, and a sum of money purportedly representing Breccia's enforcement costs. (In round figures, default interest and enforcement costs increased the repayment amount over and above principal and normal contractual interest by €2.5 million in the case of one Borrower, and €4.5 million for the other). The Borrowers resisted Breccia's claims for default interest and enforcement costs on a number of bases. These included that the default interest was a penalty and was therefore unenforceable, that Breccia was estopped from claiming default interest, and that the clause obliging the Borrower to pay the lender's enforcement costs contravened Irish public policy. The judgments arise from an appeal of a number of earlier decisions handed down by Haughton J on the points in the Irish High Court Commercial Division.

The Penalty Issue

The Court of Appeal adopted a traditional analysis of the penalty issue: a contractual provision requiring a party in breach to make an additional payment will be unenforceable unless it is a "genuine" advance estimate of the loss likely to arise upon breach. The court declined to follow recent precedent from the United Kingdom Supreme Court updating the law on penalties so that a clause providing for payment on breach would only be struck down if it was unconscionable and disproportionate.1

The court held that the default interest (4% over the contractual rate) was a penalty. In doing so, the court held that the default interest provision could not have been a "genuine" pre-estimate by the parties of loss arising from breach: this was primarily because the clause was contained in the Bank's standard terms and conditions.

The court also held that where default involves a failure to pay a defined monetary amount, a contractual obligation requiring the defaulting party to pay extra is very likely a penalty. It is difficult, therefore, to see how normal default provisions in loan agreements and other financial contracts (such as swaps, prime brokerage agreements, repos, and derivatives transactions) can survive the traditional doctrine on penalties, even where such default payments are relatively modest, and are really intended to reflect an increased credit risk arising from default.

The court strongly hinted that the traditional principles may need to be updated but took the view that this is a matter for the Irish Supreme Court.

The Estoppel Issue

The court also held that Breccia was estopped from claiming default interest. A full discussion on estoppel and its operation under Irish law is beyond the scope of this briefing note. However, in general, estoppel may operate where a party makes an express or implied representation which is intended to affect the legal rights between the parties, and which is relied on by the other party to its detriment. In the present case, the Borrowers had been in default for some time and until receipt of a letter from Breccia's solicitors they had not been informed that they would have to pay default interest. When they were bidding to buy back their loans the Borrowers were not told that default interest would have to be paid. As the purchaser of the loans, Breccia was bound by these implied representations that default interest would not be claimed. TheBorrowers relied on these implied representations to their detriment. Each of the Borrowers had approached a third party financier to support their bids to buy their respective loans and this involved them incurring expense and contractual commitments.

The Reservation of Rights Issue

Breccia's initial demand for payment did not claim payment of default interest but included a statement that Breccia reserved its rights to claim further sums owed to it. The court considered that it was "fanciful" to consider that this would have alerted the Borrowers to the fact that default interest would be claimed, and was ineffective to negate prior implied representations that it would not. The court went so far as to say that having indicated what was due, Breccia could not resile from that figure.

The Enforcement Costs Issue

Many finance agreements and security documents include a provision requiring a defaulting borrower/ security provider to pay the costs of enforcement in a default or enforcement scenario.

The court distinguished between enforcement costs incurred by a lender outside of litigation (on the one hand), and costs incurred in the course of litigation (on the other). A contractual provision obliging a borrower to pay a lender's enforcement costs outside the context of litigation is effective. However, where a borrower disputes the amount, he can require the amount to be independently adjudicated.

The position regarding litigation costs is more difficult and raises a public policy issue, namely the courts' primacy in determining how costs of litigation are to be paid. This jurisdiction cannot be ousted by contract. More precisely the issue here is the potential conflict between an agreement by a borrower to pay a lender's costs incurred in enforcing payment even if a court has directed the lender to pay the borrower's costs at a specified level (or gives an order in the usual terms that costs be taxed in default of agreement), or has an order that the borrower is to pay no costs.

The court held that a contractual provision requiring a borrower to pay a lender's enforcement costs could not nullify a court's power to direct a lender to pay costs (or a portion of costs, or a portion of costs to be determined by taxation) in court proceedings, or to direct that no costs should be paid by the borrower. The appropriate practice is for the lender, at the end of court proceedings, to draw to the court's attention the existence of the borrower's agreement to pay the lender's enforcement costs: the court would then have to take this into consideration when exercising its jurisdiction to make an order dealing with the question of costs.

Key Takeaways

These are the key takeaways from the case:

  1. The court declined the opportunity to update the law on penalties so that it operates sensibly in the context of finance transactions where default invariably involves a failure to pay a definite sum, notwithstanding that default interest may be relatively modest and is designed to reflect an increased credit risk.
  2. The law in Ireland on default interest in loan agreements and other financial contracts is not on a par with the more liberal position in the UK, and will remain that way unless and until updated by a decision of the Irish Supreme Court. This is not something that will occur in the short term.
  3. For now, if a default interest provision is contained in standard terms and conditions, it will be considered to be a penalty.
  4. As a matter of practicality, where a lender wishes to proceed by way of a facility letter plus standard terms and conditions, and where the standard conditions include a default interest clause, it would be advisable to exclude the default interest provision in the standard terms, and for the facility letter to provide for a bespoke default interest clause.
  5. Where lenders or other commercial parties are seeking to include default interest provisions, these ought to be bespoke negotiated terms which have regard to the damage or injury caused by any default, in order to give them the best chance of not being considered a penalty. Consideration might also be given to including language that each party to the agreement agrees that the negotiated term is a genuine pre- estimate of the losses which would occur on a default, and a term to the effect that the defaulting party acknowledges that the negotiated provision is not a penalty. The strength of each parties' bargaining position and whether there has been a true negotiation and engagement on the terms of a genuine pre-estimate of losses on default will still likely fall to be considered in any dispute on the issue, but it may be of assistance to lenders, particularly, in non-consumer lending, to include such provisions if they wish to seek default interest.
  6. Great care needs to be taken in framing letters of demand as they may create an estoppel, and may prevent a lender from changing the basis upon which it has demanded payment. Statements in such correspondence bind not only the original lender but also any purchaser or assignee of the loan.
  7. Standard reservation of rights language may well be ineffective to counteract any express or implied representation contained in correspondence.
  8. A clause in a loan agreement or other financial contract which obliges the borrower or bank counterparty to pay the bank's costs where legal proceedings ensue will only be enforceable to the extent expressly permitted by the court.

Footnotes

1 Cavendish Square Holding BV v El  Makdessi/Parking Eye Ltd v Beavis [2015] UKSC 67.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions