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Sheehan v Breccia – Key Decision on Surcharge Interest in Loan Agreements

19 February 2016

On 5 February 2016 the Commercial Division of the High Court (Haughton J) handed down judgment in two linked cases: Sheehan v Breccia and others, and Flynn and Benray Limited v Breccia. The facts of the cases are complex but the judgments raise important issues for banks, asset managers and loan purchasers. This note summarises the key issues. A more detailed note of the decisions will follow.

Key Points
The key takeaways from the judgments are as follows:

  • A clause providing for surcharge interest that effectively doubled the interest payments is a penalty and is therefore unlawful.
  • In order for surcharge interest to be lawful, it should be a genuine pre-estimate of loss arising from a breach and not merely a generic rate.
  • The leading decision on penalties in loan agreements remains that of Finlay Geoghegan J in ACC Bank v Friends First Managed Pensions Funds Ltd and Ors [1]. The court declined to follow the decision of the UK Supreme Court in Cavendish Square Holding BV v El Makdessi/Parking Eye Ltd v Beavis [2]. In brief, therefore, Irish law will allow a "modest uplift" in an interest rate upon debtor default but anything beyond that is a penalty.
  • A creditor who notifies its borrower what is due and owing at a particular time, but does not include a claim for surcharge interest, cannot afterwards claim surcharge interest in respect of a breach up to the date of the notification. An unequivocal statement of the intention to charge surcharge interest is required.  Generalised "reservation of rights"- type language may well not assist the creditor.
  • In this regard a "conclusive evidence" clause in a loan or mortgage can be employed against the creditor so that the creditor is held to a statement of account issued to the debtor. This will happen even if the creditor's statement is relatively informal e.g. is not described as a "certificate".
  • Clauses in a loan or mortgage document obliging the debtor to pay the creditor's enforcement costs cannot be enforced insofar as they are inconsistent with costs orders actually made by the court. To allow otherwise would breach public policy. Furthermore, in this case the creditor was prevented from including in a claim under the loan/security documents "contingent" costs arising on an assumed successful appeal by the creditor.

In brief, the case underlines that particular care is required when communicating statements of account to a borrower as the lender may be held to any inaccuracies. Finally, the Court of Appeal may well rule on the surcharge interest/penalty issue in the light of the recent decision of the UK Supreme Court in Cavendish.

For further information on any of the above matters, please speak with your usual Maples and Calder contact.

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[1] [2012] IEHC 435

[2] [2015] UKSC 67


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