Commercial Court finds that defences to a claim for sums outstanding under finance agreements had no real prospect of success
In Adare Finance DAC v (1) Yellowstone Capital Management SA and (2) Michel Ohayon [2020] EWHC 2760 (Comm), the English Commercial Court granted the Claimant (Adare Finance DAC) its application for summary judgment of its claim against the Defendants (Yellowstone Capital Management and Michel Ohayon) for payment of sums outstanding under finance agreements, as it was not in dispute that Adare was owed this money under the relevant contracts, the Defendants’ various defences to the claim (including that the contract in question was unenforceable because it was an unconscionable bargain, obtained by economic duress or was an unlawful penalty) had no real prospect of success, and there was no other compelling reason for the trial to take place. The Defendants’ counterclaim was also struck out. In emphasising the narrow circumstances in which these defences are applicable, this decision provides welcome assurance to financial institutions that where a contract is freely entered into between commercially sophisticated counterparties, the English courts will not readily interfere with parties’ contractual rights.
The Court granted Adare’s application for summary judgment pursuant to CPR rule 24.2. After the Defendants agreed to refinance debt they owed to Adare by entering into a “New Facility Agreement”, they neglected to pay a fee required by an “Extension Fee Deed” which had been entered into to compensate Adare for a delay to the completion of the refinancing. Adare sought payment of this fee and, as the non-payment had triggered an event of default under the New Facility Agreement, also claimed the outstanding principal. There were four defences pleaded by the Defendants. Three of them were based on the overlapping doctrines of unconscionable bargains, economic duress, and unlawful penalties. Mr Peter MacDonald Eggers QC (sittings as a Deputy Judge of the High Court) ultimately decided in Adare’s favour on all these issues. The Judge also granted Adare’s application under CPR 3.4 for summary judgment in respect of the Defendants’ counterclaim for monies owed under the original facility agreements, on the basis that any liability of Adare under the original agreements had been discharged as a condition precedent to the refinancing.
The Extension Fee Deed was not an unconscionable bargain. The Defendants argued that Adare knew they were in a situation of extreme vulnerability as the deadline for their refinancing was approaching, and had knowingly exploited the Defendants’ vulnerability to force them to agree to the terms in the Extension Fee Deed. The Judge rejected this defence on the following grounds. Firstly, there was no evidence that the Defendants were in a “a position of endemic disadvantage or a weakness which is the product of extreme circumstances so as to engage the doctrine of unconscionable bargains”; to the contrary, they had the benefit of legal advice. Secondly, the difficult circumstances behind the Extension Fee Deed were not caused by Adare’s conduct but came from the Defendants’ decision to refinance. Thirdly, the Extension Fee Deed was the product of commercial negotiations between the parties, and its terms at least partly based on a proposal from the Defendants. Fourthly, there was “nothing to suggest that the Extension Fee Deed was itself unfair or unreasonable”, and the fee “was the product of a commercial negotiation between the parties.” Fifthly, simply because Adare enjoyed a commercial advantage over the Defendants was “not on its own sufficient to brand the Extension Fee Deed an unconscionable bargain.”
Adare’s conduct did not constitute economic duress. The Defendants argued that the Extension Fee Deed was unenforceable because Adare’s conduct in negotiating it constituted ‘lawful act economic duress’ – although Adare had not acted unlawfully by refusing to extend the longstop date of the New Facility Agreement unless the terms of the Extension Fee Deed were agreed, Adare’s refusal was motivated by “illegitimate reasons” and Adare did not act in good faith by exploiting the Defendants’ “extreme vulnerability”. Per the requirements set out in Times Travel (UK) Ltd v Pakistan International Airlines Corp [2019] EWCA Civ 828, the Defendants argued that Adare had used ‘illegitimate pressure’ to cause them to enter into the Extension Fee Deed. In assessing what constitutes illegitimate pressure for the purposes of establishing economic duress, the Judge, citing David Richards LJ in Times Travel, held that “in order to constitute lawful act economic duress, the pressure in the form of the relevant party exercising a lawful right must be exerted in bad faith, rather than in good faith” (not subjected to a test of reasonableness) and that bad faith involves conduct which “all can agree is unacceptable and which is a fact capable of proof”. The Judge held that, even if it were true that Adare knew that the Defendants were in a situation of extreme vulnerability, and exploited that vulnerability to induce the Defendants to agree to the unreasonable demand of agreeing to the Extension Fee Deed, this was insufficient to constitute lawful act economic duress. Central to this finding was the fact that apart from the alleged extreme vulnerability of the Defendants, and Adare’s alleged knowledge of that condition, there were “no relevant facts pleaded in support of the allegation that [Adare] acted in bad faith…”.
Cross-default provision was not a penalty clause. The Defendants argued that a provision whereby a default under the Extension Fee Deed resulted in a cross-default, such that all monies owed under the New Facility Agreement would become payable, was an unlawful penalty clause. The Judge found that the provision was not penal and was legally enforceable, which was underpinned by the fact that “the parties were commercially experienced and sophisticated and benefited from legal advice”. The Extension Agreement was agreed “by way of an indulgence” to enable the Defendants to complete the refinancing. Furthermore, the New Facility Agreement merely required the repayment of sums that were due to Adare (albeit at an earlier date than they would have been due absent the Defendants’ default).
In the absence of a viable defence, the Court found that there was no compelling reason to have a trial, as Adare’s claim was a monetary claim. The Judge noted that whilst there may be circumstances where the Court is satisfied that the defence has no real prospect of success but there is still a compelling reason for trial, such a case would be “exceptional” and “out of the ordinary”. The Judge concluded that there was no compelling reason for the trial to take place: “this is a monetary claim for sums outstanding under financial agreements to which there is no justiciable defence.” This case will be of interest to financial institutions, as it emphasises the narrow circumstances in which the English courts will interfere with financing agreements that have been entered into between sophisticated parties who have had the benefit of legal advice.
Jonathan Watson, Associate in London
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