When will the court rule that a lender's fee is unenforceable and, in effect, "rescue" a borrower from its obligation to pay an agreed fee which, with hindsight, looks like a bad bargain? That was the main issue in Edgeworth v Ramblas Investments  EWHC 150 (Comm).
1. The Facts
In the period running up to the collapse of Lehman Brothers, Royal Bank of Scotland stepped in to assist the financing of a sale and leaseback of the Madrid headquarters of Santander by a company called Marme Inversions 2007 S.L. (Marme). Substantial loans were made under a syndicated senior facility with RBS as agent, a junior facility between RBS and Marme's parent, Ramblas, and a personal loan from RBS to the two individuals who ultimately owned Marme and Ramblas. By an Upside Fee Agreement (the UFA) between RBS and Ramblas, a substantial fee would become payable to RBS if certain events occurred. As the transaction hit difficulties, non-payment of interest, which resulted a breach of the personal loan agreement, triggered an event of default under the junior facility. This, in turn, triggered a fee under the UFA, and it was this fee, in the principal sum of €105,201,089, that Ramblas disputed.
2. The main arguments
Ramblas raised two main defences. First, it claimed that as a matter of construction, no fee had actually become payable under the UFA. Second, it claimed that even if the fee had otherwise become payable, it was equivalent to a penalty, and so unenforceable under English law.
3. The court's findings
Both defences failed.
On the first, the fee was expressly made payable in whatever circumstances the junior loan became repayable, including any repayment falling due "following acceleration". The fact that the fee was described as an "upside fee", but was triggered in circumstances that were anything but "upside", did not entitle the court to disregard the clear terms of the UFA. It was a fee for the provision of services – arranging and providing the junior loan – and was not dependent on the success of the transaction. Moreover, given the challenging commercial background in which the arrangement had been negotiated, the construction RBS argued for was not an uncommercial one.
On the second, the underlying rationale behind the rules on penalties is that the court will grant relief if the amount to be paid in the event of breach is out of all proportion to the loss attributable to the breach. But even if a sum becoming payable is not a genuine pre-estimate of loss, it will not be a pernalty where it is commercially justifiable and it can be shown that its predominant function is not deterence.
But in this case, the fee would aways have been payable on repayment of the junior loan. The triggering event accelerated the time of payment, but did not increase Ramblas' overall obligation, and an acceleration clause is not generally regarded as being penal. In addition, the payment under the UFA was ultimately triggered by a breach of the personal facility, not by a breach by Ramblas of its loan agreement, and the rule against penalties could only have applied if Ramblas had breached its contractual obligations. If it was wrong about this, and the fee could somehow be treated as being triggered by a breach by Ramblas of its contractual obligations, the court would still have found for RBS. The fee had nothing to do with damages for breach, and the fact that it was triggered by an event of default involving a breach under the junior facility made no difference to the amount payable. Moreover, given the challenging commercial circumstances in which the financing was completed, and that the junior loan was in effect a bridging loan until other financing could be put in place, there was a clear commercial justification for a large fee, even if it was not a genuine pre-estimate of loss for breach.
Such cases turn on the documents and the facts. But lenders may draw some comfort from the court's willingness to uphold the fee arrangement on the basis first, that the contractual obligation was a clear one, second that the doctrine of penalties should not be extended to the acceleration of a payment obligation on default, and third that the court should not interfere with a commercial arrangement between substantial parties that had been freely negotiated, albeit in difficult circumstances.