BHL v Leumi ABL Ltd [2017] EWHC 1871 (QB) serves as an interesting illustration of how the Court can import public law principles to the exercise of a commercial party’s contractual discretion, here in the context of a bank exercising its discretion under a receivables finance agreement. Applying the principles most recently set out by the Supreme Court in Braganza v BP Shipping [2015] UKSC 17, the Court conducted an analysis of whether the bank’s discretion was exercised in a way which was not arbitrary, capricious or irrational in the public law sense (the so-called Braganza duty).

Since the financial crisis, we have seen examples of this principle being applied to scrutinise the exercise of contractual discretion in a financial services context: Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116Euroption Strategic Fund Ltd v Skandinaviska Enskilda Banken AB [2012] EWHC 584 (Comm)Marex Financial Ltd v Creative Finance Ltd & Anor [2013] EWHC 2155 (Comm) (read our e-bulletins for Euroption and Marex).

However, BHL provides an unusual example where the Court found that the bank’s discretion was exercised in breach of the duty. Financial institutions should therefore be alive to potential judicial scrutiny of how their contractual discretion is exercised in relation to counterparties. It would be prudent to consider and document the decision making process where the exercise of such contractual discretion is involved. For example, where there is a contractual right to charge a percentage fee “up to” a particular level, the decision-maker should be able to justify why the fee was imposed at the chosen level within that spectrum.

The Court of Appeal has refused permission to appeal.


The case considered the construction of a receivables finance agreement (“RFA“) entered into on 11 April 2008 by Cobra Beer Limited (“Cobra“) – the maker of a well-known brand of beer – and the defendant, Leumi ABL Ltd (the “Bank“), which provided for the Bank to act as Cobra’s invoice discounting provider.

Following serious financial difficulties, Cobra entered into administration on 29 May 2009 (with significant sums owed to it by customers, but in turn, owing substantial sums to the Bank under the RFA). The Bank took over the collection of Cobra’s receivables, triggering a clause in the RFA providing that the Bank was “entitled to charge [Cobra] an additional collection fee at up to 15% of amounts collected by [the Bank]…”. The Bank applied a 15% collection fee to amounts collected, in addition to other monies owning under the RFA (including monies advanced to Cobra pursuant to the RFA discounting, and other fees). This collection fee fell within BHL’s indemnity obligations.

Following demands made by the Bank for payment, BHL (a shareholder of the Cobra entity and guarantor of the payments under the RFA) paid a total of £950,000 in relation to outstanding collection fees. Subsequently, BHL commenced a claim seeking reimbursement of the £950,000 on the basis that the collection fees were not actually payable and BHL had been operating under a mistaken belief that they were payable.


The Court found in favour of BHL and held that the collection fees had been paid under a mistake of law such that they should be repaid.

In doing so, the Court considered (and rejected) arguments that the mistaken payments had arisen as a result of the construction of the clause in question and that the clause amounted to a penalty clause. In relation to the former, the Court concluded that the 15% provision did not merely operate as a ceiling to the Bank’s right to recover its actualcollection costs. Such an interpretation was inconsistent with other clauses in the contract, which made clear where a right to recover was limited to actual costs. In relation to the latter, the Court considered the clause in light of Makdessi v Cavendish Square Holdings BV [2015] UKSC 67 (read our blog post) and determined that: (a) the clause gave rise to a primary, rather than a secondary obligation (such that it could not engage the penalty clause principle); and (b) it was not a fixed and penal fee, but one which was instead tempered by the need for the contractual discretion to be exercised in accordance with the Braganzaduty.

Accordingly, the Court turned to consider the exercise of the Bank’s discretion in charging the full 15% fee. In considering the context of the Braganza duty, the Court first considered the ‘target’ of the clause. The Bank argued that the fee had no ‘target’ at all, that it was not to be considered by reference to the Bank’s anticipated costs and expenses. It said, once triggered, the clause entitled the Bank to charge what it liked, subject only to the 15% ceiling. The Bank therefore sought to argue that it had an untrammelled discretionary power.

This interpretation was rejected as being commercially absurd. The Court found that the ‘target’ of the clause was the recovery of future additional costs and expenses to be incurred by the Bank in its capacity as collector of the receivables (not already claimed elsewhere under the RFA). Since this provision gave the Bank a power to set in advance a percentage fee, which would apply to later recoveries, there had to be some qualification thereto, otherwise it was an entirely open discretion which could be exercised oppressively or abusively.

The Court explained that the Bank’s discretion was qualified in the sense that the power had to be exercised in a manner that was not arbitrary, capricious or irrational in the public law sense, meaning that the Bank should have had regard to relevant and not irrelevant materials and then performed a proper estimating exercise. This type of contractual discretion was most recently articulated by the Supreme Court in Braganza v BP Shipping [2015] UKSC 17:

The fulfilment of that duty will entail a proper process for the decision in question including taking into account the material points and not taking into account irrelevant considerations. It would also entail not reaching an outcome which was outside what any reasonable decision-maker could decide, regardless of the process adopted. However, the duty does not mean that the court can substitute what it thinks would have been a reasonable decision.”

Fulfilling the Braganza duty would therefore require a process, and the particular exercise in the instant case would have involved estimating the likely costs of the collection. While the Bank had suggested that a number of factors were taken into account when deciding the fee, the evidence illustrated that there was in fact no real consideration of the matter and that – as a matter of practice – the Bank had “always” charged the maximum where it was permitted to do so “up to” a particular percentage. The Court found that this was not a real exercise of discretion at all.

The Court went on to say that if there had been an exercise of the discretion, it was wholly arbitrary, irrational and manifestly failed to take into account important factors, such as calculating the Bank’s likely costs and expenses or to using data from its experience of previous collect-outs.

Having found that the sum of £950,000 was not payable, the Court held that the payments by BHL had plainly been paid under a mistake of law.


This decision will be of note to draughtsmen, the business and to litigators, given the lessons which should be drawn from the case in relation to how the contractual discretion can be scrutinised by the Court. The facts of BHL are, no doubt, extreme. However, the Court’s willingness not only to apply public law standards to a commercial setting (not in itself necessarily controversial), but to find that a bank had fallen short of those standards, is striking.

Harry Edwards
Harry Edwards
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Ceri Morgan
Ceri Morgan
Professional Support Lawyer
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