Jeffrey Alpert, a partner in the Banking & Financial Services Law Group at Torkin Manes LLP in Toronto, Canada, discusses BHL v. Leumi ABL and raises questions from a Canadian law perspective.
BHL v. Leumi ABL Limited  EWHC 1871 (QB) is a factoring case which was decided at the end of July 2017 by the High Court of Justice, Queens Bench Division, in London, England. Although the decision is not binding on the Canadian courts, it raises some interesting questions of law that may apply to factoring agreements in Canada.
THE COURT'S REASONING
The Court first considered the "target" or the "purpose" of the collect-out clause. The Court held that the target of the clause was the recovery of future costs and expenses to be incurred by the Factor as the now collector of the receivables. The provision allowed the Factor to charge a fee, which was meant to represent or capture or estimate in some way the Factor's future costs and expenses in collecting the receivables. The language suggested that the fee could be charged prior to the Factor incurring these costs. There was obviously a margin of flexibility given to the Factor, since by definition, the Factor could not know in advance precisely what those collection costs would be.
Since this provision gave the Factor the power to set in advance a percentage fee, which would apply to all future recoveries, there had to be some restriction or qualifications on this discretion. Otherwise, this discretion could be exercised oppressively or abusively.
The Factor had a duty to follow a proper process in making its decision on the fee to be charged, including taking into the account the material points and not taking into account irrelevant considerations. According to the Court, the Factor needed to identify:
It appeared from the evidence that the Factor had, as a matter of practice, always charged the maximum of 15% where the provision gave a fee which could be up to 15%. Since the Factor was automatically charging the maximum of 15%, the Court found that there was absolutely no exercise of discretion at all by the Factor, which was contrary to the law.
Since the Factor had failed to exercise the discretion under the clause, the Court proceeded to examine the situation from the Factor’s point of view and tried to determine what collection fee the Factor could have decided to charge if the Factor had exercised the discretion lawfully. The issue was not the calculation of the actual collection expenses incurred by the Factor. Rather, the issue was the determination of the proper percentage for the fee to cover the Factor’s estimated collection expenses, if the Factor had exercised this discretionary power in a rational and reasonable manner.
The Court considered expert evidence as to the complexity of the collection and the likely timeframe for the recovery of the debts. Based on this evidence, the Court held that 4% was the maximum collection fee that the Factor could have charged in order to comply with the Factor's duty to exercise its discretion in a lawful manner.
So, what does this all mean for factors in Canada? In my opinion, this case has much wider implications for factors than the particular clause in question regarding the discretion to charge a percentage for a collection fee. It stands for the proposition that factors are required to act rationally and reasonably when exercising their powers or charging certain fees under a factoring agreement. If the factor attempts to exercise these powers arbitrarily and does not behave in a commercially reasonable manner, there is a real risk that the factor's actions may be challenged by its client or by the client's guarantor. If this happens, then there is also a risk that the Court may refuse to enforce these provisions in the factoring agreement. No one wants to get involved in a lawsuit, which can be very costly. If the factor loses, then not only will the factor have to pay its own legal expenses, but it may also be ordered to pay the legal expenses of the other party.
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