High Court Sets Aside Default Judgments Entered Against Guarantors Under A Facility Agreement On The Basis That Service Of The Claim Was Not Valid

The court found that a clause in the facility agreement which allowed the lender to appoint a replacement service of process agent was an unfair contract term under the Consumer Rights Act 2015

In a recent decision, the High Court has allowed an application to set aside default judgments obtained by a lender against guarantors in respect of unpaid sums under a facility agreement: Regera SARL v Cohen & Ors [2025] EWHC 2107 (Comm).

The application centred on the enforceability of a clause in the facility agreement which allowed the lender to appoint a process agent to receive legal documents on behalf of the guarantors. The clause in question provided for the borrower and guarantors to appoint a service of process agent, but contained a mechanism giving the lender a unilateral right to replace a process agent who could no longer act (if the borrower failed to appoint an alternative).

In the present case, the lender obtained judgment in default of the guarantors filing an acknowledgment of service. The guarantors applied to set aside the default judgment under CPR 13.2, on the basis that the time for filing an acknowledgment of service had not expired, because the proceedings had not been validly served. The lenders argued that CPR 6.11 provides for service of the claim form via a contractually agreed method, which was provided for by the facility agreement, namely by service on the replacement process agent. However, the court found that the lender failed to discharge the burden of proof on the balance of probabilities that the facility agreement which contained this clause was binding on the guarantors.

Importantly, the court found that the clause which governed the appointment of a replacement agent was unfair in any event and therefore not binding on the guarantors under the Consumer Rights Act 2015 (CRA). The court expressed a number of concerns, including that: (i) the clause regulated the service of process on the borrower and the guarantors but not the lender; (ii) the power of appointing a replacement was limited to the borrower and, failing any appointment by the borrower, the lender (with no involvement of the guarantors); (iii) proceedings could be served on a replacement agent on behalf of the guarantors without them being made aware of such an appointment; and (iv) the lender was not exposed to the same risks as regards the service of process as the guarantors which indicated that there was an imbalance in the parties' legal rights and obligations.

The court recognised that clauses appointing agents for service are commonly enforced and have not been treated as unfair in the context of contracts between commercial parties (for example, in Banco San Juan Internacional Inc v Petroleos de Venezuela SA [2020] EWHC 2145 (Comm) – see our blog post). It appears that the court's concern in the present case arose from the use of the clause in a consumer contract. While commercial contracts should remain unaffected by this ruling, this distinction should prompt banks to reassess the terms of process agent appointment clauses in consumer contracts, which are commonly used when dealing with international borrowers and guarantors.

We consider the decision in further detail below.

Background

In 2021, the claimant lender entered into a US$33 million facility agreement with the borrower. Under the loan facility, three guarantors provided personal guarantees capped at US$2.5 million each. The facility agreement contained a clause under which the borrower and the guarantors appointed a process agent for service in relation to any proceedings before the English courts. It also contained a clause providing that if the person appointed as process agent was unable for any reason to act, the lender could appoint another agent if the borrower failed to do so (the "replacement agent clause").

The borrower defaulted under the facility agreement and the lender commenced proceedings against the three guarantors in 2024. The process agent which had been appointed under the facility agreement had been dissolved and, as the borrower had not appointed a replacement, the lender purported to appoint a replacement agent. The lender served the proceedings on the guarantors by service on the replacement process agent.

The guarantors did not file an acknowledgment of service (or serve a defence) and the lender subsequently entered a default judgment against each of them in the sum of almost US$3 million (inclusive of costs). Two of the guarantors applied to set aside the default judgments pursuant to CPR 13.2 on the grounds that the time for filing an acknowledgment of service had not expired, because the service on the process agent was not valid; or alternatively under CPR 13.3 on the grounds that the guarantors had a real prospect of successfully defending the claim.

Decision

The court found that the guarantors were entitled to have the default judgments set aside pursuant to CPR 13.2, on the basis that service on the process agent was not valid, and therefore the time for filing an acknowledgement of service had not expired.

The key question for the court was whether the guarantors were properly served under CPR 6.11, which provides for service of the claim form via a contractually agreed method. The lender's position was that the facility agreement provided for service on the replacement process agent and that this clause applied to the guarantors. The guarantors put forward a number of arguments as to why they were not properly served, which are considered in further detail below.

Parties to the facility agreement

The guarantors argued that they were not parties to the facility agreement, so that service on the process agent was invalid. In particular, they did not intend to be legally bound by the facility agreement as it was still subject to amendment and there was no single, authoritative version at the point of signature. The court found that the lender had not discharged the burden of proof on the balance of probabilities that the facility agreement was binding on the guarantors and decided that this was an issue which should be tried.

Appointment of replacement process agent

The guarantors submitted that the purported appointment of the process agent was not effective because the lenders failed to notify them properly as required under the facility agreement (as amended).

The court noted that the facility agreement provided for a mechanism whereby a process agent who could no longer act was replaced by an agent appointed by the borrower within 5 days and, failing such appointment, by the appointment made by the lender. There was no provision which required the process agent (original or replacement) or the borrower or the lender to notify the guarantors of any service of process. Nor was there any express provision which required the appointment of a replacement process agent to be notified to the guarantors. The court did not consider there to be any requirement to notify the guarantors, given that the borrower was deemed to be their agent under the facility agreement and any notification given by the lender to the borrower was treated as notification to the guarantors themselves.

In this case, notification of the appointment of the process agent was provided to the borrower and the guarantors. Although the guarantors questioned the adequacy of the notice provided to them, there was no question raised as to the adequacy of notice provided to the borrower. As such, the court found that the lender had discharged the burden of proof based on the balance of probabilities and the guarantors were not entitled to succeed in their application under CPR 13.2 on this ground.

Fairness of the replacement agent clause

The guarantors said that the replacement agent clause was an unfair contract term and not binding on them under s.62(1) of the CRA. Ss.62(4)-(5) of the CRA provides that:

The court had considerable concerns about the fairness of the replacement agent clause in the context of a consumer contract, although it noted that the court had in the past considered such provisions to be fair in the context of a contract between commercial parties (for example, in Banco San Juan v Petroleos de Venezuela). The court expressed the following concerns:

1. The clause relating to the service of process agent regulated the service of process on the borrower and the guarantors but not the lender.
2. The mechanism for the appointment of a replacement agent could operate without any notice being given to the guarantors.
3. The power of appointing a replacement agent was limited to the borrower and, failing any appointment by the borrower, the lender. The guarantors were not involved, even by way of receiving notification of the appointment. Accordingly, a replacement agent could be appointed without the guarantors being made aware.
4. Proceedings could be served on a replacement agent on behalf of the guarantors without them being made aware of such an appointment. This could lead to the entry of default judgments against the guarantors without the guarantors being aware of the service of process in the first place.
5. Absent the replacement agent clause, where the appointed process agent was no longer able to accept service, legal proceedings would have to be served on the guarantors directly so that they would become aware of such proceedings.
6. The fact that the lender was not exposed to the same risks as regards the service of process as the guarantors indicated that the replacement agent clause created an imbalance in the parties' legal rights and obligations.
7. The imbalance was significant because, if the clause was held to be valid, then proceedings could be validly served on the guarantors without them knowing (with the risk of entry of default judgments), but the lender faced no such risk.

Accordingly, the court found that the replacement agent clause was unfair and not binding on the guarantors pursuant to the CRA. It could therefore not be relied on to validate service of the proceedings on them.

Enforceability under consumer credit legislation

The court was not sufficiently convinced that the facility agreement including the guarantees was unenforceable under consumer credit legislation, so as to justify upholding the guarantors' application under CPR 13.2 on this ground.

Real prospect of successfully defending the claim

Had the guarantors not succeeded in their application under CPR 13.2, the court would also have set aside the default judgments under CPR 13.3, on the basis that they had a real prospect of successfully defending the claim. This application was fact specific and is not considered further in this blog post.

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