Lending focus – March 2021 – 3 / 7 观点
A recent High Court decision is a useful refresher on the equitable defences a borrower could raise for failure to pay. Here, we address the debtor's defences and counterclaims relating to unconscionable bargain, economic duress and penalties.
Bordeaux businessman Michel Ohayou (M) owned/managed several companies holding interests in real estate, including Silverstone Capital Management SARL (S) and Yellowstone Capital Management SA (Y). On 18 January 2018, S borrowed USD 105,300,000 from Adare Finance DAC (Adare) to acquire the equity interest in the Waldorf Astoria hotel in Jerusalem. On 27 April 2018, Adare lent S a further USD 8 million, to fund the acquisition of an apartment block in Jerusalem. These loans were guaranteed by M.
The relationship between M and Adare soured, with the former alleging that Adare was simply looking for opportunities to hike up its interest rates by alleging that events of default had been triggered when this was not so, or when the breaches were minor and inconsequential. M therefore decided to refinance the loans to end his relationship with Adare.
It proved difficult to raise the entire amounts outstanding from elsewhere. The parties eventually agreed upon a partial refinance. A syndicate of new lenders would advance sufficient capital to repay the majority of the existing loans (the New Loan). The remaining USD 12 million was novated to another of M's companies, Y. This was restated as three fully-drawn loans under the terms of a new agreement between Adare as lender and Y as borrower (the New Facility Agreement).
The terms of the New Loan contained various conditions precedent to drawdown, including the registration of first-ranking security in favour of the syndicate. A deadline for lodging conditions precedent was stipulated and Adare was to receive its significant partial repayment within two business days of fulfilment of the CPs. If not met, the parties agreed that the refinancing would be aborted.
M did not pay the extension fee by the agreed date because of Israeli bank holidays and some administrative challenges at Jerusalem's land registry. Adare agreed to extend the deadline, but only if it received an additional fee to compensate for the delay, payable by 18 November 2019 (the Extension Fee Deed). M failed to pay the extension fee. This was an event of default under the New Facility Agreement which entitled Adare to accelerate.
Adare accelerated, declaring all amounts under the New Facility Agreement immediately due and payable. It also made demand under the guarantee. Neither Y or M paid the outstanding amounts.
Adare commenced proceedings and requested summary judgment.
M submitted a defence and counterclaim alleging:
The terms of the Extension Fee Deed amounted to an unconscionable bargain. Adare knew that M and Y were "in a situation of extreme vulnerability". They needed the time extension and had no choice but to do a deal with Adare, on any terms.
Adare's conduct amounted to lawful act economic duress, because it was applying lawful pressure for illegitimate reasons. M and Y had no choice but to agree to pay the extension fee. All the parties knew the monies were sitting in an escrow account and that the deal would close in only a matter of days, once the bank holidays were over, and the minor administrative challenges at the land registry were resolved.
Failure to pay the extension fee under the terms of the Extension Fee Deed permitted Adare to accelerate the monies owing under the New Facility Agreement. This was disproportionate and constituted an unenforceable penalty.
A contract can be set aside as an unconscionable bargain if:
M had no real prospect of succeeding on this ground. Firstly, he was a sophisticated businessman and he had legal advisers. While the defendants were in the unenviable position of needing the time extension, this was not Adare's doing. The Extension Fee Deed had been the product of commercial negotiation and M and Y could have walked away if its terms were unpalatable.
To constitute lawful act economic duress:
The Judge stated there was no evidence to support the allegation that Adare acted in bad faith, or that it did not act within the basic norms of commerce. In this case, Adare had foregone its own lawful rights to accommodate M, who could not satisfy the conditions precedent by the agreed deadline. The failure to do so was unconnected with Adare in any way. Furthermore, the defendants themselves came up with the idea of the extension fee.
The Judge was not persuaded by the defendants' argument concerning lawful act economic duress.
A provision is penal in nature:
The Judge agreed with Adare's arguments that the right to accelerate the New Facility Agreement for non-payment under the Extension Fee Deed was not a penalty. Firstly, this was a commercially negotiated solution, and both parties were sophisticated businessmen who had been legally advised. Secondly, the extension itself was an "indulgence to suit the Defendants". Finally, the acceleration provision was not disproportionate – it merely required the repayment of sums due at an earlier date (see ZCCM Investments Holdings Plc v Konkola Copper Mines Plc  EWHC 3288 (Comm)).
Adare was awarded summary judgment.
To discuss any of the issues raised in this article in more detail, please reach out to a member of our Banking & Finance team.