are you missing a trick?
In business products and markets can change
and evolve quickly. Conversely people find comfort in what they
know and often fear change.
There is little doubt that the global
financial market has undergone unprecedented change over the last
year or so, as has the market for many businesses and as a result
many businesses have seen their resources stretched in whole new
directions and like never before.
At the same time there have been many changes
in the legal landscape in which financiers operate some of those
changes arising before the current market difficulties, some during
it and some more are in the pipeline. In the process financiers may
not have been looking at their underlying legal documentation or
processes and consequently those documents or processes may not be
affording them all the benefits that they could and arguably should
be.
Here are some of the things that financiers
should have included in their documents:
breach fees
In 2003 the case of Jeancharm Ltd v Barnet
City FC made it clear that when parties to a contract are
negotiating and agreeing liquidated damages clauses for breach of
that contract that the parties must give consideration to the
damages likely to flow from that breach and draft the clauses with
that in mind. A clause which provides for damages which are greater
than a genuine pre-estimate of the loss a party is likely to suffer
as a consequence of a breach by the other party is likely to be a
penalty and unenforceable.
This case was one where the parties were
deemed to be of similar bargaining strength. Financiers,
particularly in the present market, are likely to be seen to have a
position of strength in bargaining and so it is more important that
any clauses dealing with payment of additional fees or enhanced
interest on late payments are not recorded as being a penalty
arising from a breach.
Where such clauses deal with liquidated
damages for taking on an additional obligation because of an event
of termination following that breach (for example the taking over
of collection of debts in a receivables finance agreement from the
client following the client's breach) then in order to avoid
challenge the provision needs to be a reasonable pre-estimate of
the likely loss to the financier (which will typically be a
reflection of its anticipated cost of funds (as they will not have
been repaid on demand), additional administrative and management
time costs and so on).
additional administration / monitoring
Equally, the same comments apply in respect of
fees that are to be charged for a client where the finance
agreement may not be terminated because of such breach but where
the fee to administer or monitor the facility post a client breach
have increased.
These fees can be considered penal and
therefore set aside if they are found to be liquidated damages.
Whilst it is more likely perhaps that if a
client breaches a facility the financier will expend greater time
and cost monitoring and administering the facility and it is right
that it should be compensated for that, after all following a
client breach the risk profile of a facility has arguably changed,
it is nevertheless important in order to avoid challenge that those
fees/costs are properly set out in the financing agreement, as are
the events giving rise to them, so that the financier and client
can be seen to have agreed them at the time of entering into the
contract and as such have contractually provided for them.
what is charged for?
In a competitive market place being able to
recover certain expenses may be more important to some than
headline funding rates. However, it is not uncommon to have express
clauses providing for fees to be payable for, amongst other
things,
- Account management, if this is greater than normal or following
a prescribed event;
- Audit costs, usually beyond a prescribed minimum per annum or
following a prescribed event;
- Verification of receivables (for invoice discounting
facilities) usually beyond a prescribed minimum per annum or
following a prescribed event;
- Foreign Exchange transactions and losses, and sometimes with a
built in administration fee for handling/processing too.
introducers commissions
Financiers often rely on introducers for their
business. How though can the financier be sure that its agreement
will not be set-aside for want of something the introducer should
have done with regard to the introduced client?
The case of Wilson v Hurtanger (2007)
confirmed that where the introducer is being paid a fee for the
introduction to the financier of his client, the introducer does so
as the agent of that client and therefore must disclose that he is
receiving a commission from the financier to his client – the
principal. Failure to do so could render the financier's agreement
void and hence put the financier at risk.
It is difficult for the financier to ensure
the introducer has made such a disclosure and so the safer route is
that the financier should disclose in its own agreement that it may
pay a commission or fee to the introducer that introduced the
client to the financier. In this way, the payment of the
commission is disclosed and the risk of the finance agreement being
set-aside is removed.
process monitoring
Outside of the legal documents the financier
should also be monitoring its processes. For example, it follows
from the above that a financier should not be charging a client a
'breach fee'. No letters, emails or telephone calls should record
that a financier is doing so, this wording smacks of a client being
penalised and is likely to be challenged.
Steps should be taken and training conducted
to ensure that documents are properly referred to and their effect
not misrepresented. Failure to achieve this equally makes documents
liable to be set-aside as the obligation that the respondent may
have been told the document created may have been very different to
what it said on its face. Guarantees, indemnities and warranties
are perhaps the most susceptible to such misrepresentation and may
have little or no value if successfully challenged on this
basis.
In summary therefore, protect the integrity of
your agreements and legal documents. Ensure they are fit for the
purposes you expect them to deliver and as the market changes make
sure that you consider whether your documents and processes need to
change with it.
