High Court allows partial claim of default surcharge interest but rejects excessive enforcement costs in loan redemption dispute.

[2016] IEHC 67

THE HIGH COURT

COMMERCIAL

[2014/10816P]

BETWEEN

JOSEPH SHEEHAN

PLAINTIFF

AND

BRECCIA, IRISH AGRICULTURAL DEVELOPMENT COMPANY, BLACKROCK HOSPITAL LIMITED, GEORGE DUFFY, ROSALEEN

DUFFY AND TULLYCORBETT LIMITED.

DEFENDANTS

JUDGMENT of Mr. Justice Haughton delivered on the 5th day of February, 2016

Introduction

1. This judgment arises from a modular hearing of certain issues arising from amended pleadings as between the plaintiff and the first

named defendant (“Breccia”) only and is concerned with the figure at which the plaintiff as borrower is entitled to redeem certain

loans which, for the purposes of this modular trial, are assumed to be vested in Breccia.

Background Facts

2. The plaintiff is a consultant surgeon residing in the United States of America, and is one of the founding shareholders of Blackrock

Hospital Ltd. (“BHL”).

3. Breccia is a private unlimited company controlled by Lawrence Joseph Goodman (“Mr. Goodman”), and its directors are Mr. Goodman

and Catherine Goodman.

4. In 1983 the health insurer BUPA, in conjunction with four doctors, namely brothers Joseph Sheehan (the plaintiff) and James

Sheehan, George Duffy and the late Maurice Neligan, put together an investment package to build and develop the Blackrock Clinic,

which in due course became vested in BHL.

5. In 2006 BUPA agreed to sell its shareholding of approximately 56% of BHL to inter alia the plaintiff and Breccia. Financing for the

purchase of the shares was obtained from Anglo Irish Bank (“Anglo”). As an integral part of the purchase of the BUPA shareholding the

parties, including all existing shareholders and two guarantors, entered into a Shareholders Agreement dated 28th March, 2006. As

part of the Shareholders Agreement it was agreed that an annual dividend would be declared which would be used to pay the interest

on the Anglo loans until they matured, whereupon the entire facility would become immediately due and payable.

6. The plaintiff entered into two facilities with Anglo, the first on 28th March, 2006 (“the 2006 Facility Letter”) and the second on

12th November, 2008 (“the 2008 Facility Letter”, and together with the 2006 Facility Letter, “the “Facility Letters”). The plaintiff’s

borrowing was secured by a mortgage of his shareholding in BHL (“the Mortgage”); a deed of covenant entered into between Breccia

and Anglo, deeds of ‘cross guarantee’ and indemnity entered into by the other shareholders (Benray Ltd., James Sheehan, Rosemary

Sheehan and George Duffy), all dated 28th March, 2006; and a mortgage dated 24th August, 2006 of a house in Ballybeigue, Co.

Kerry. The plaintiff also entered into a guarantee on 28th March, 2006, cross guaranteeing the financial obligations of the other

shareholders who took out Anglo loans.

7. The plaintiff was advanced the principal amount of €11,188,256 pursuant to the terms and conditions of the 2006 Facility Letter,

and a further €6,342,000 pursuant to the terms and conditions of the 2008 Facility Letter. The Facility Letters provided for an annual

interest rate varying between 1.75% and 2.75% above the three month EURIBOR plus RAC.

8. For the purposes of this modular hearing it is agreed that the loans under the Facility Letters all fell due for repayment on 31st

December, 2010. Breccia asserts that under General Terms and Conditions which were incorporated into the Facility Letters the lender

has an entitlement to an interest surcharge of 4% per annum. Whether such a claim can be maintained is a central issue in this

modular hearing.

9. On 21st January, 2009 Anglo re-registered as a private limited company under the name “Anglo Irish Bank Corporation Ltd.”

Notwithstanding that the Facility Letters fell due on 30th December, 2010, Anglo did not demand repayment or initiate any

proceedings against the plaintiff. By special resolution dated 3rd October, 2011 Anglo’s name was changed to “Irish Bank Resolution

Corporation Ltd.” (“IBRC”). Pursuant to the Irish Bank Resolution Corporation Ltd. Act, 2013, on 7th February, 2013 the Minister for

Finance made the Irish Bank Resolution Corporation Act (in Special Liquidation) Order, 2013, providing for the appointment of Kieran

Wallace and Eamonn Richardson of KPMG as joint Special Liquidators of IBRC (“the Special Liquidators”) for the purpose of winding up

IBRC.

10. On 29th May, 2013 IBRC wrote to the plaintiff notifying him that the loan facilities under the 2006 Facility Letter were in default

and that IBRC were reserving their rights. They wrote again on 31st October, 2013 notifying him of the Special Liquidators’ decision to

sell his loans, and those of the fourth named defendant, George Duffy. On 8th November, 2013 the plaintiff wrote to the Special

Liquidators advising that he wished to redeem his loans, and they responded on 12th November, 2013 indicating that he could redeem

“at par at any time in the sale process”.

11. In March, 2014 the plaintiff made a bid to IBRC to buy his loans, and the loan of Mr. Duffy. This attempt to purchase was

unsuccessful, and is the subject matter of other pleas in these proceedings which are not the subject matter of this modular trial.

12. As the plaintiff’s loans did not sell in March, 2014, the Special Liquidators initiated a further sales process in respect of the

plaintiff’s loans (but not that of Mr. Duffy which had been redeemed) later that year. The plaintiff bid to purchase them, but was

outbid by Breccia. The validity of the purported purchase by Breccia of the plaintiff’s loans is also challenged in these proceedings.

For the purposes of this modular trial, it is assumed that the purchase of the plaintiff’s loans by Breccia was valid.

13. By letter dated 18th December, 2014 Breccia wrote to the plaintiff notifying him of the acquisition, inter alia, of the plaintiff’s

loans under the Facility Letters, and Breccia demanded “immediate payment and discharge of the sum of €16,144,572 under the BHL

Loan Agreement and the 2008 Loan Agreement and the sum of €6,734,852 under the Guarantee, being in total the sum of

€22,879,424”. The letter indicated that Breccia reserved the right inter alia to appoint a receiver in the event of non-payment and

was stated to be without prejudice to “any other rights or remedies we may have including….the right to make further demands in

respect of sums owing to us”.

14. Following receipt of this letter these proceedings were initiated by Plenary Summons issued on 22nd December, 2014, and on that

date the plaintiff applied for and obtained an interim injunction (Noonan J.) restraining Breccia from acting on foot of the letter of

demand of 18th December, 2014, or seeking to enforce any of the security held, or appointing a receiver.

15. The Statement of Claim herein was delivered on 9th February, 2015. The first and second named defendants’ Defence and

Counterclaim were delivered on 26th February, 2015. This includes a counterclaim for the two sums demanded in the letter of 18th

December, 2014.

16. By letter dated 25th May, 2015 Arthur McLean, the plaintiff’s solicitors, wrote to Matheson, solicitors for Breccia, requesting a

redemption figure in respect of the Facility Letters as “our client is in the process of refinancing his loans”. The reply dated 9th June,

2015 indicated a figure of €19,663,673.88, and that interest was continuing to accrue at a daily rate of €3,059.29. As this greatly

exceeded the amount in the demand letter in respect of the plaintiff’s loans Arthur McLean sought a breakdown. In response by a

letter of 19th June, 2015 Matheson explained that €16,198,273.71, excluding surcharge, was due under the Facility Letters at the

date of acquisition of the loans by the defendant; that surcharge interest at 4% from 31st December, 2010 amounting to

€2,822,957.05 was due under clause 5 of the General Conditions up to the date of acquisition; that further accrued interest gave a

subtotal of €19,359,220 as of 31st March, 2015; and that further interest in the sum of €211,090 between 31st March to 8th June,

2015 was due. Matheson stated that the interest was currently accruing on the total amount due at a daily rate of €3059.29. In

addition they indicated that the plaintiff would also have to pay all costs, charges and expenses incurred in connection with the

enforcement of the Facility Letters pursuant to clause 6.2 of the General Terms and Conditions, and the figure placed on this from the

date of acquisition of the loans up to 8th June, 2015 was €93,362.56.

17. As these claims to surcharge and costs of enforcement were disputed the parties agreed that it would be convenient to have

them determined in these proceedings as a modular trial. Accordingly, an amended Statement of Claim was delivered on 29th June,

2015. An amended Defence and Counterclaim was delivered on 8th July, 2015. The latter did not amend the figures claimed in the

original counterclaim, but in the course of the hearing before this court I was notified of agreement between the parties that the first

and second named defendants be permitted to further amend their pleadings to include in the counterclaim sums inclusive of

surcharge interest and enforcement costs.

18. The plaintiff continues to wish to redeem his loans under the Facility Letters. He asserts that he has lined up and continues to

have in place refinancing to enable him to achieve this, on the basis that the redemption figure does not include the 4% surcharge.

He also contests Breccia’s claim to “enforcement costs” as part of the redemption figure.

19. Following suggestions of the Court and a measure of agreement between the parties the redemption issues may now be stated as

follows:-

The Redemption Issues

A. Can Breccia contractually claim the redemption figures sought?

B. Is all or part of the redemption figure an “unlawful penalty”?

C. Has Breccia waived its right to claim all or part of the redemption figure?

D. Is Breccia estopped from claiming all or part of the redemption figure?

E. Can Breccia charge “enforcement” costs, charges and expenses, and if so, how much?

F. What is the correct redemption figure on 9th June, 2015 and as of today’s date?

G. What relief, if any, is the plaintiff entitled to in respect of the redemption issues?

20. Within issue A a question arose as to whether General Terms and Conditions were incorporated into the Facility Letters, and if so,

which version of such general terms. During the hearing this was resolved by agreement. The plaintiff now accepts that the General

Terms and Conditions incorporated into the 2006 Facility Letter and the 2008 Facility Letter were Anglo’s 2005 version of “General

Conditions Personal Loans” (“General Conditions”). I also note that the first and second named defendants do not dispute the

evidence given by the plaintiff that he neither received nor saw the General Conditions relating to personal loans. This however is

noted in the context that the plaintiff, along with other existing and incoming shareholders in 2006 had the benefit of independent

legal advice in and about the preparation and execution of the Facility Letters and security, and the Shareholders Agreement and

related documentation.

21. This modular trial was heard immediately after the trial of similar issues arising in High Court proceedings, record No. 2015/5122P

between John Flynn and Benray Ltd. and Breccia (“Flynn No.2”) concerning the original loan of Benray Ltd. from Anglo, guaranteed by

the first named plaintiff John Flynn, which loan had been acquired by Breccia. Judgment has yet to be delivered in that case. As there

was an overlap of issues and legal representation and to avoid unnecessary duplication it was agreed that legal argument in that case

would also apply to parallel issues arising in this module.

22. In the current proceedings evidence was given by the plaintiff and a banking expert, Mr. Vincent Fennelly, on the plaintiff’s behalf.

Much of the evidence outlined in the plaintiff’s Witness Statement dated 8th October, 2015 is in fact of little relevance to the

Redemption Issues, and to that extent I have disregarded it. Evidence was given on behalf of Breccia by Mr. Declan Sheeran, its

Company Secretary, and a banking expert, Mr. Conor O’Malley. I have also had the benefit of extensive written and oral legal

submissions from counsel.

Further Core Facts

23. The background facts related above were not disputed. To a large extent the relevant factual evidence was based on agreed

documentation. The main areas of factual dispute related to the estoppel issue and the extent to which the plaintiff could or did in

fact place reliance on representations made by Breccia or its predecessor (Anglo/IBRC or the Special Liquidators) as to the balance

due under the loan facilities at any given time, and whether the plaintiff acted to his detriment. The evidence given by the parties’

banking experts also differed in some respects and will be addressed under Issue B.

24. Under the 2006 Facility Letter Anglo agreed to lend monies to the plaintiff in accordance with the General Conditions. The

maximum amount of the loan was €11,188,256 and its purpose was to enable the plaintiff to subscribe for shares in BHL. It was to be

fully drawn down by 2nd September, 2006, and this in fact happened. Clause 6 provides:-

“Facility Interest Rate

Interest on all amounts outstanding under the Facility will accrue daily and be calculated by the Bank at an annual rate

equivalent to the aggregate of 1.75% (the “Margin”) above three month EURIBOR plus RAC and will be debited to the

Borrower’s account at the end of each calendar quarter.”

25. There was a provision allowing the parties to agree a fixed interest rate for a period, but this was not invoked.

26. Clause 7 provides (so far as is relevant):-

“7. Repayment

(a) All interest due and payable pursuant to this Facility shall be repaid (quarterly) from dividends paid on the Shares,

such dividends to be paid by direct debit by Blackrock Hospital Limited to a deposit account in the name of the Borrower

charged in favour of the Bank;

(b) The Facility shall be repaid on or before the 30th December 2010. In the meantime interest is to be funded on a

quarterly basis at the end of each calendar quarter;

(c) …

(d) This Facility shall become immediately due and payable and all Security granted hereunder shall become enforceable

on the occurrence of an Event of Default, as set out in clause 9.”

27. In clause 9 “Events of Default” are set out and the first listed is:-

“(a) If in respect of sums due under or in connection with this Facility Letter, the Borrower fails to pay any sum due from

him within 14 days of the due date in each case at the time, in the currency and in the manner specified in this Facility

Letter.”

28. The General Conditions define “EURIBOR” to mean the European Inter Bank Market rate for the offering of deposits in euro

applicable on the “rate fixing day”, which is the second business day before each quarterly interest period. The reference to “RAC”, is

a reference to “reserved asset costs”. While this can lead to the addition of very small increases above the margin and EURIBOR

rates, the parties agreed that it has no particular relevance to the issues in this case and could effectively be disregarded in

calculating the redemption figures. The General Conditions most relevant are the following:-

“5. Default Charges

5.1. Any monies due by the Borrower to the Bank and for the time being unpaid will bear a surcharge interest at the rate

of 4% over the Facility Interest Rate or at the Bank’s discretion at a rate equivalent to the aggregate of 4% over the

Facility Interest Rate on the due date calculated on a daily basis from the due date to the date of actual payment after

as well as before any demand is made, any judgment obtained hereunder or the bankruptcy or insolvency of the

Borrower….

6. Additional Costs

…

6.2. The Borrower shall pay to the Bank forthwith upon demand all costs, charges, and expenses (including legal and other

professional fees and expenses, stamp duties and registration or other duties and any V.A.T.) incurred by the Bank in

connection with the preparation and execution of the Agreement and the Security Documents and the obtaining of any

valuation required under any Security Document and all costs incurred by the Bank in the enforcement of the Agreement

(including any costs incidental to the sale of any assets held as security by the Bank) and the security comprised in the

Security Documents….

15. Miscellaneous

15.1. No failure, delay or other relaxation or indulgence on the part of the Bank in exercising any power, right or remedy

shall operate as a waiver thereof nor shall any single or partial exercise or waiver of any power, right or remedy preclude

its further exercise or the exercise of any other power, right or remedy. Any right or power which may be exercised or any

determination which may be made under the Security Documents by the Bank may be exercised or made in its absolute

and unfettered discretion and it shall not be obliged to give reasons therefor.”

29. By further Facility Letter dated 12th November, 2008 Anglo agreed to lend to the plaintiff a maximum amount of €6,342,000,

subject to the same General Conditions. This Facility Letter was to replace previous Facility Letters of 7th June, 2006, 16th February,

2007, 25th October, 2007 and 22nd May, 2008, but was not a replacement for and was expressed to be in addition to the 2006

Facility Letter. It was broken down into four Facilities:-

Facility A for €2,115,000 to renew an existing facility that was fully drawn down;

Facility B for €3,015,000 to renew an existing facility;

Facility C for €1,010,000 to renew an existing facility; and

Facility D for €202,000 to provide the plaintiff with “an open bridging facility to fund professional fees”.

30. Facilities A and B were to carry interest at a 1.75% margin above the three month EURIBOR plus RAC. Facility C was to carry

similar interest but with a margin of 2.25%. Facility D was to carry similar interest but at a margin of 2.75%. The repayment date for

Facility A was stated to be 31st December, 2010, for Facilities B and C 30th June, 2009, and for Facility D 31st January, 2009.

31. Unlike the 2006 Facility Letter, the 2008 Facility Letter at clause 9 specifically noted:-

“The Borrower shall also be liable to discharge all costs, charges and expenses detailed in Clause 6 of the General

Conditions. Default interest shall be payable on unpaid amounts at the rate set out in Condition 5 of the General

Conditions.”

32. The General Conditions which apply to the 2006 Facility Letter also applied to the 2008 Facility Letter. The plaintiff signed his

acceptance to the Facility Letters.

33. Under the Mortgage “Secured Liabilities” is defined to include all monies for the time being due to the Bank under “any Financing

Agreement”, which clearly encompassed the Facility Letters and all sums due thereunder. In clause 2.1 the plaintiff covenanted to

pay the “Secured Liabilities” together with interest “…and such interest shall be compounded (with such rest days as the Bank may

determine) in the event of it not being punctually paid and shall itself bare interest…”.

34. A point of importance is that neither party adduced any direct evidence as to the factual basis or background to the “default

charges” clause, or the factual basis for the setting of the rate in clause 5.1 at 4%.

35. Although Facility D under the 2008 Facility Letter is stated to be repayable “on or before 31st January, 2009”, and Facilities B and

C “on or before 30th June, 2009”, no point concerning these earlier maturation dates was made in these proceedings. All parties have

proceeded on the basis that all the facilities became due on 31st December, 2010, and I therefore approach the modular hearing on

the same basis.

36. There was no evidence that Anglo made any demand for payment, or sought to apply any surcharges on the relevant accounts

after the maturation dates – notwithstanding that the bank statements show that the balance on Facility B exceeded €3 million and

Facility C exceeded €1 million.

37. Anglo did send a letter dated 24th December, 2010 to the plaintiff, shortly before the 2006 Facility Letter and Facility A under the

2008 Facility Letter were due to mature. This related to the 2006 Facility Letter “including any amendment, variation, restatement,

and/or replacement of same”, and noted that the Facility was due to expire on 30th December, 2010 (along with other facilities

granted to other shareholders, repayment of which was guaranteed inter alia by the plaintiff). It warned that if the loans were not

repaid Anglo reserved its rights and remedies under the Facilities. It also requested that the plaintiff furnish his original share

certificates and blank executed/transfer forms. Without prejudice to its rights it noted that “…the Bank is continuing its discussions

with the Borrowers and the Guarantors with regard to refinancing the facilities to the Borrowers under the Facility Letters”, and it

requested a detailed proposal. In the meantime it made it clear that it was reserving its rights, including any additional rights it might

have, and it emphasised that the letter “does not constitute a waiver of any right”.

38. It is notable that this letter anticipated possible default in non-payment but did not call in the loan. Also, it is questionable

whether it could be said to have related to the 2008 Facility Letter, which was not a “variation, restatement and/or replacement” of

the 2006 Facility Letter but was “in addition”. The letter also made no mention of default interest.

39. 30th December, 2010 came and went and Anglo did not demand repayment of the loans. It is clear from the bank statements

furnished thereafter to the plaintiff by Anglo/ IBRC, and later IBRC “in Special Liquidation”, that no surcharge was ever mentioned or

added to the amounts stated to be due. Each statement shows the debiting of what may be termed “normal interest” i.e. interest on

the outstanding balance at the EURIBOR rate plus the relevant marginal rate. The statements all record as “Rate change” any

changes in the normal interest rate. Such changes occurred in accordance with the Facility Letters on a three monthly basis,

reflecting changes in the EURIBOR rate. The statements also show that after 31st December, 2010 the accounts continued to receive

credits. This is because monies due to the plaintiff by way of dividend from BHL continued to be paid into the relevant loan accounts

to offset, in whole or in part, the normal interest charges. Notwithstanding the technical default, all the loans continued to operate

after 31st December, 2010 as they had done prior to that time. The plaintiff said he received bank statements at different times

quarterly or every two months.

40. By letter of 29th May, 2013 IBRC wrote to the plaintiff in relation to the 2006 Facility Letter and the Loan Facility made by Anglo

to George Duffy on the same date and in relation to the guarantees and indemnities signed by both the plaintiff and Mr. Duffy at that

time. This letter is headed “Reservation of Rights Letter”. After reciting the appointment of the Special Liquidators it notified the

plaintiff of default in the following terms:-

“The loan facilities under the Facility Letters have expired and have not been repaid, (“the Defaults”).”

It then went on to reserve IBRC rights in relation to the defaults in any actions it might take or remedies it might pursue.

This letter also did not refer to the 2008 Facility Letter and made no reference to any default interest.

41. By letter dated 31st October, 2013 the Special Liquidators of IBRC informed the plaintiff that a decision had been taken by them

to sell his loans, that is to say that all the loans under the Facility Letters, and also connected loans (arising from the financing of the

purchase of their BUPA shares in 2006). This effectively included only the plaintiff’s loans under the Facility Letters and the loan of

Mr. Duffy, as Breccia had repaid its own Anglo loan and Benray’s Anglo loan had already transferred out of IBRC. The letter informed

that these loans had “a par value of approximately €24 million” as of 31st August, 2013. The penultimate paragraph of the letter

stated:-

“It is important to note that your obligations to IBRC and your payment terms under your loan agreements will remain the

same regardless of who acquires your Loans from the Special Liquidators. You should continue to make payments under

your loan agreements in the agreed amounts and on the agreed dates. It remains open to you to repay your Loans in full

at any time prior to your Loans being sold.”

42. In response to this the plaintiff wrote to the Special Liquidators on 8th November, 2013 stating “…we wish to redeem our loans

and terminate all security interest”.

43. The Special Liquidators replied by letter dated 12th November, 2013 stating:-

“We note that you say you wish to redeem your loan in full. That is always available to you and you can redeem this at

par at any time in the sales process. If you wish to pay off your loan in full please contact [X]…who will provide the

amount outstanding by you.” [Emphasis added]

44. The plaintiff then entered the bidding process, and on 13th March, 2014 made a bid of €24 million for his own loans and Mr.

Duffy’s loan based on funding to be provided by Talos Capital Ltd. That funding was dependant upon the plaintiff’s special purpose

vehicle acquiring the loans of both the plaintiff and George Duffy together with all the security for those loans and also on the basis

that Benray’s loan, then held by NALM Ltd., would be redeemed. However, when Mr. Duffy’s Anglo loan was independently redeemed

(by Tullycorbett Ltd., a company controlled by Mr. Duffy, with funding provided by Breccia) the plaintiff’s funding ceased to be

available and the special purpose vehicle company JCS incorporated for the purposes of the transaction was unable to complete the

acquisition.

45. The Special Liquidators again attempted to sell the loans comprised in the Facility Letters as “Tranche No.5”, part of “Project

Amber”, a sale of various loans in August-September 2014. The plaintiff and Breccia both became bidders in Phase II and were

therefore privy to the sales documentation and information disclosed confidentially in the Data Room. The Special Liquidators invited

“Phase II” offers “based on the Gross Loan Balance as set on 31st July, 2014”. Data on the loan furnished by the Special Liquidators

indicated that the “Asset Total Debt Par Value” on 31st July, 2014 was €16,144,572 (this is also the amount for which Breccia

demanded repayment from the plaintiff in respect of his loans in their letter of 18th December, 2014). The Data also stated “Projected

Completion Asset Total Par Debt Value” for a completion date of 10th December, 2014 at €16,258,469.

46. On 10th October, 2014 the plaintiff made a bid offer of €16,850,000. This offer was based on funding that the plaintiff intended to

obtain from RoundShield Partners LLP, a group of equity funders. The letter from these funders which accompanied the plaintiff’s bid

offer referred to “a possible €20.5 million loan”, and emphasised that it “should not be construed or deemed to be a firm commitment

to lend on behalf of the Fund”, and that the “terms and conditions set forth herein are guidelines and only upon issuance of a

commitment and completion of due diligence can exact terms be determined, though if the parties agreed to work together the

indicative terms will then be subject only to completion of satisfactory due diligence”.

47. By letter dated 17th October, 2014 the Special Liquidators informed the plaintiff that his bid had not been successful. They were

not in a position to release the name of the successful bidder – it was in fact Breccia – but they noted that the successful bidder’s

offer was “not conditional on any funding” whereas they had noted that the plaintiff’s bid “did not have committed funding”. By letter

of 10th December, 2014 the Special Liquidators formally notified the plaintiff that on 17th October, 2014 they had agreed to sell the

Facility Letters to Breccia, and that the transfer took effect on 10th December, 2014. They stated inter alia that:-

“Notwithstanding the Sale, you are expected to continue to make payments in accordance with the terms of the Facility

Documents.

You will soon be issued with a closing statement for your commercial loan facilities. For the avoidance of doubt the

amounts owed under the facility have been transferred to the Purchaser and continue to be payable.”

48. The spreadsheet provided by the Special Liquidators to Breccia in connection with the acquisition of the loans shows that the

Gross Loan Balance at the date of purchase was €16,198,274, and at 10th December, 2014 being the date of completion further

interest of €60,195 had accrued giving a Gross Loan Balance of €16,258,469. It is common case that none of these figures include

any default surcharge interest; and Mr. Sheeran when giving evidence on behalf of Breccia agreed that the completion statement did

not refer to any surcharge interest.

49. Aside from the references to surcharge interest in the facility letters Breccia was not in a position to dispute the plaintiff’s

evidence that surcharge interest was not mentioned in any communications that he had with Anglo IBRC or the Special Liquidators,

prior to the correspondence of Matheson on Breccia’s behalf in June, 2015.

50. By letter dated the 18th December, 2014 Breccia wrote to the plaintiff notifying him that on 10th December, 2014 Breccia had

been assigned by the Special Liquidators the Facility Letters and associated security, and that by an earlier loan sale dated 23rd May,

2014 Breccia had been assigned the Benray Loan Agreement dated 28th March, 2006 and the associated guarantees. Breccia referred

to having made demand on 8th August, 2014 on Benray for payment of sums due by it in connection with the Benray Loan Agreement,

in respect of which there had been no payment. The letter then stated:-

“Breccia hereby makes demand on you for immediate payment and discharge of the sum of €16,144,572 under the BHL

Loan Agreement and the 2008 Loan Agreement and the sum of €6,734,852 under the Guarantee, being in total the sum of

€22,879,424.

If you fail, refuse or neglect to make immediate payment and / or to discharge the sums demanded, Breccia reserves the

right to exercise the power of sale and / or the power to appoint a receiver and all other powers conferred on Breccia

under the Mortgage without further notice to you.

This demand is without prejudice to and shall not be construed as a waiver of any other rights or remedies which we may

have including, without limitation, the right to make further demands in respect of sums owing to us.

Yours faithfully

Declan Sheeran

For and on behalf of Breccia”

51. It is the figure of €16,144,572 that is primarily relevant to this modular trial, as the second figure related to the amount claimed

as being due under the guarantee of Benray’s obligations.

52. On receipt of that letter the plaintiff instituted these proceedings and on 22nd December, 2014 during a vacation sitting the

plaintiff applied for and obtained interim orders from Noonan J. restraining Breccia from acting on the demand in the letter of 18th

December, 2014, from seeking to enforce any of the security attaching to the plaintiff’s loan facilities including the selling or

transferring or encumbering of the plaintiff’s shareholding in BHL, and from appointing a receiver. That interim injunction was due to

expire on 12th January, 2015, but did not proceed because Breccia gave undertakings in similar terms pending the trial of the action.

53. One issue of controversy that arose in relation to the letter of 18th December, 2014 was why the sum claimed under the Facility

Letters was limited to a figure of €16,144,572. Related to this was the question whether Breccia intended at the time of that letter,

and in pursuance of “any other rights or remedies which we may have” to make a further demand in respect of surcharge interest or

indeed generally under the Facility Letters. Leaving aside the issue of surcharge, the figure of €16,144,572 was the figure for

indebtedness provided by the Special Liquidators as of 31st July, 2014, and considerably less than the “Gross Loan Balance” notified

by the Special Liquidators to Breccia on the acquisition date, in the sum of €16,258,469. In his evidence Mr. Declan Sheeran on behalf

of Breccia agreed that the letter of 18th December, 2014 had been drafted by Matheson, Breccia’s solicitors, but approved by him. He

explained that he had been made aware by Breccia’s solicitors of the judgment in Irish Bank Resolution Corporation Ltd. v. Morrissey

[2014] IEHC 470. In that case, as in the present case, General Condition 19.2 provided:-

“Interest shall accrue and be calculated on the basis of a 360 day year, save for drawings in Sterling or other currencies

where a 365 day year is standard market practice.”

54. Finlay Geoghegan J. held there that when construed with the Facility Letters it was not correct to calculate interest as accruing

on each day of the calendar year. As the correct calculation would have reduced the interest charge in the present case Mr. Sheeran

explained that “…we didn’t re-calculate or re-apply any rate of interest, what we did was we made an allowance for any potential

overcharging of interest to Dr. Sheehan by reference to IBRC using the 360 day basis.” (Day 3 p. 86). In his Witness Statement

(para. 20) Mr. Sheeran stated that in light of the uncertainty over the precise amount of interest he “…considered it to be prudent to

make a demand which was less than the amount which Breccia had been informed was the “gross loan balance” on the Acquisition

Date in order to, as far as possible, reduce the likelihood of any challenge being raised by Mr Sheehan in relation to the amount which

had been demanded.”

55. Under cross-examination Mr. Sheeran said that when Breccia acquired the plaintiff’s loans he was aware that surcharge interest

could be applied under the General Conditions, and that he believed that Breccia had an entitlement to surcharge interest at 4% prior

to the issuance of the Letter of Demand of 18th December, 2014. When asked why this entitlement was not indicated in the letter he

responded “I don’t believe that we were under any obligation to report our intention to apply it” (Day 3 p. 73) and (Day 3 p. 74):-

“…in relation to the issue of the demand letter, the quantum of the demand was pitched marginally below the par value of

the loan as set out by the Special Liquidator and that was done to ensure that, I guess, the integrity of the enforcement

process couldn’t be in any way I suppose derailed by a claim that surcharge interest ought not to apply.”

56. He denied that the letter was misleading because it reserved the right to recover more, and because there was no

correspondence from the borrower, who had the benefit of legal advice, querying the amount of the demand. Mr. Sheeran also agreed

that before the Letter of Demand issued he/Breccia could have calculated the surcharge interest, but “the reason why we didn’t was

because we did not want the enforcement process to be stalled or derailed by reference to an objection to the application of

surcharge interest” (Day 3 p. 76). When it was put to Mr. Sheeran that an additional claim for surcharge interest at 4% could have

been indicated, without specifying a figure, his response was “[w]ell, with respect, that ought to have been clear from the facility

letter and the general conditions that Dr. Sheehan accepts he’s bound by.” (Day 3 p. 77)

57. When it was put to Mr. Sheeran (Day 3 p. 79):-

“…that surcharge interest was something, as in the Flynn case, that you came up with when redemption was imminent in

order to frustrate the redemption and to wear down Dr. Sheehan in his attempts to redeem his loans and thereby to deter

his financiers…”,

Mr. Sheeran responded:-

“That’s incorrect. I would add to that that in the letter requesting the redemption figure there was no reference to any

impending redemption or availability of finance to redeem the loans or anything of that nature.” (Day 3 p. 79).

That reply was in fact incorrect as the plaintiff’s solicitors’ letter of 25th May, 2015 first requesting a redemption figure notified that

“our client is in the process of refinancing his loans secured against the shares in Blackrock Hospital…”.

58. Later in his evidence Mr. Sheeran accepted that the workings behind the redemption figure now postulated by Breccia were based

on estimates of the surcharge interest that applied from December, 2010 up to 2014. The following evidence was then given (Day 3

pp. 95-96):-

“A. …but had the borrower made a full redemption on the day that we had communicated to him what the redemption

figure is I don’t believe at that point we would have had scope to re-work our redemption figures.

Q. Why?

A. Because we had stated in the letter that that’s what the redemption figure was.

Q. But didn’t you state in your letter of 18th December what the demand figure was?

A. Yes.”

59. By their letter dated 25th May, 2015 Arthur McLean on behalf of the plaintiff sought details of the redemption sum payable, as of

27th May, 2015. They specifically requested that Breccia differentiate between the plaintiff’s loans, and the loans of Benray Ltd., and

that Breccia set out “…the interest charged thereon since your client required those loans from the date of acquisition from IBRC (in

Special Liquidation) together with the daily accrual from Wednesday 27th inst.”

60. Matheson solicitors replied on 9th June, 2015 stating that the amount due under the Facility Letters:-

“as at 8th June, 2015 is €19,663,673.88 which amount includes accrued interest, costs, charges and expenses incurred

under or in connection with the enforcement of the Agreements, and, the security comprised in the Agreements.

Interest will continue to accrue on the total amount due and owing at a daily rate of €3,059.29 until such time as the

total amount due is discharged.”

61. This figure in fact included surcharge as well as enforcement costs, but no break-down or calculations. These were requested by

Arthur McLean in a letter of 9th June, 2015.

62. By letter dated 19th June, 2015 Matheson responded more fully. They referred for the first time to clause 5 of the General

Conditions and surcharge interest, and stated:-

“The amount of €16,198,273.71, excluding surcharge interest, was due and owing from your client under the Facility

Letters (the “Loans”) as at the date of acquisition of the Loans by our client. Our client has calculated the amount of

surcharge interest which accrued on the Loans from 31 December 2010 to the date of acquisition of the Loans to be

€2,822,957.05 in accordance with clause 5 of the General Terms. Accordingly, as of the date of acquisition of the Loans,

the amount required to be paid in order to redeem the Loans was €19,021,230.76.

Interest continued to accrue and capitalise on the Loans from the date of acquisition such that the amount due in

respect of the Loans as of the end of the most recent Interest Period, ie, 31 March 2015 was €19,359,220 (inclusive of

principal and interest). Additional interest in the amount of €211,090 accrued between 31 March 2015 and 8 June 2015.

Interest is currently accruing on the total amount due and owing at a daily rate of €3,059.29.

Pursuant to clause 6.2 of the General Terms your client must pay all costs, charges and expenses (including, but not

limited to, legal and other professional fees and expenses) incurred in connection with the enforcement of the Facility

Letters and the General Terms and the security comprised in the Security Documents (as defined in the General Terms)

are payable by your client. Our client has incurred costs and expenses of, not less than, €93,362.56 since the date of

acquisition of the Loans up to 8th June 2015.”

63. This letter, sent by email, also made reference for the first time to clause 6.2, but did not break down the enforcement cost

figure claimed. A breakdown was given with Matheson’s further letter of 23rd October, 2015, as follows:-

Legal Costs Breakdown up to 8 June 2015

Matheson Legal Fees €68,561.91

Disbursements €200.65

Counsel Fees €24,600.00

Total €93,362.56

64. By further letter sent by email by Matheson to Arthur McLean solicitors on 3rd November, 2015 (the second day of the modular

hearing), the figures in respect of the enforcement costs were updated from 8th June in the following terms:-

“Since 8 June 2015 we have incurred substantial additional fees including, but not limited to the following:

• Taking instructions in relation to and dealing with the discovery application;

• Taking instructions, liaising with counsel and attending in court in relation to your client’s application to amend your

client’s statement of claim;

• Taking instructions, liaising with counsel and drafting defence which was delivered on 8 July 2015;

• Dealing with the discovery process;

• Dealing with, including preparing for, all matters relating to the redemption figure issue module of the proceedings;

• Voluminous correspondence with plaintiff’s solicitor; and

• General advice to our clients in relation to the proceedings.

Our client has incurred costs of €313,036 (exclusive of VAT, disbursements and counsel fees), in the period from 8 June

2015 to 29 October 2015.”

65. In the course of cross-examination of Mr. Sheeran it was confirmed that the figure of €313,036 is in addition to the figure of

€93,362.36 up to 8th June 2015, which was also exclusive of VAT. Mr. Sheeran also confirmed that in addition there will be VAT,

further disbursements since 8th June, 2015 and counsels’ fees for the modular hearing which have yet to be billed. Mr. Sheeran stated

in evidence that the figure of €93,362.56 had been paid by Breccia to Matheson. With regard to the update in the letter of 3rd

November, 2015 he stated that the “majority of it has been paid”, and that the balance of it billed up to 30th September would be

discharged by 23rd November, 2015 (Day 3 p. 45).

Issue A: Can Breccia contractually claim the redemption figures sought?

66. This question concerns firstly whether under the Facility Letters the plaintiff agreed contractually to pay, in certain circumstances

of default, surcharge interest and the costs of enforcement. As interpreted by the plaintiff it raises a further question: is Breccia as

successor in title to Anglo constrained in enjoying such contractual rights, or the amount that it may recover, by virtue of the

provisions of the Shareholders Agreement and in particular clause 3.4.3 and 3.4.5?

67. As to the first, the parties have now agreed that the General Terms and Conditions attached to the 2006 Facility Letter, and

which they also agree apply to the 2008 Facility Letter, were Anglo’s “General Conditions Personal Loans, 2005 version”. It is no

longer contested that under clause 5 headed “Default Charges”, and in particular clause 5.1, it was provided that monies for the time

being due by the borrower to Anglo would “bear a surcharge interest at the rate of 4% over the Facility Interest Rate or at the Bank’s

discretion at a rate equivalent to the aggregate of 4% over the Facility Interest Rate on the due date calculated on a daily basis”. It

is also no longer disputed that under clause 6.2 it was provided that the borrower has a contractual obligation “upon demand” to pay

to Anglo inter alia “all costs incurred by the Bank in the enforcement of the Agreement (including any costs incidental to the sale of

any assets held as security by the Bank) and the security comprised in the Security Documents.”

68. It is not disputed, notwithstanding that the plaintiff neither received nor saw these General Conditions at the time, that they

were incorporated into and formed part of the 2006 Facility Letter, and also formed part of the 2008 Facility Letter. In addition the

plaintiff expressly agreed in the 2008 Facility Letter in clause 9 that clauses 5 and 6 of the General Conditions would apply.

69. For the purposes of this modular trial it was not contested that the loan agreements and the security provided by the plaintiff

were capable of assignment by Anglo. As outlined above, Anglo’s name ultimately changed to IBRC and it was pursuant to the IBRC

Act, 2013 and the corresponding Order of the Minister for Finance dated 7th February, 2013 under that Act that the Special

Liquidators were authorised to and did conduct a sale of inter alia the loans comprised in the Facility Letters, and the accompanying

security. By Loan Sale Deed dated 17th October, 2014 between IBRC and Breccia the loans and security were sold to Breccia. By

Deed of Transfer dated 10th December, 2014 made between IBRC and Breccia, Breccia acquired all the rights, interest and title of

Anglo/IBRC in the Facility Letters, and in all of the security provided in connection with those loans. Accordingly, by these acts and

assurances for the purposes of this module it is to be assumed that the contractual rights of Anglo under the Facility Letters became

vested in Breccia.

70. As to the second question – whether Breccia is contractually constrained by virtue of the Shareholders Agreement – this was

comprehensively addressed in argument in Flynn No.2, and is more fully covered in the judgment that I will shortly deliver in that case.

As exactly the same contractual terms and considerations apply in the present case I have come to the same conclusion.

Accordingly, this question need only be addressed briefly in this judgment.

71. Clause 3.4.3 of the Shareholders Agreement provides that where one promoter (such as the plaintiff) “does not perform his

obligations” under the relevant Anglo loan facility then another promoter (such as Breccia) “may perform such obligations” in

accordance with the procedure set out in clause 3.4.5. Under that clause if and to the extent that an “Overpaying Promoter” pays

monies or incurs expenditure “which should have been paid or incurred by another Promoter” those amounts can be recovered “on

demand” from the underpaying promoter as a simple contract debt. If not paid then interest accrues at a specified rate (2% over

Bank of Ireland’s standard overdraft rate, or (if there is none) 10% over the European Central Bank base rate). If not paid within six

months of demand a “Transfer Notice” is deemed to be served triggering a sale of the underpaying promoter’s shareholding in BHL in

accordance with pre-emption provisions in clause 8, and BHL must reimburse the overpaying promoter out of the proceeds of sale.

72. These provisions were considered in Flynn and Benray Ltd. v. Breccia and Michael McAteer [2015] IEHC 547 (“Flynn No.1”) and in

my judgment I found that Breccia was not entitled to recover monies due under loans from Anglo by an underpaying promoter, or to

enforce a sale of such promoter’s shares, otherwise than in accordance with clauses 3.4.3 and 3.4.5, and clause 8.2 – 8.4 inclusive.

The plaintiff relies on that decision in support of his contention that contractually the amount that Breccia can include in the

redemption is no more than it could recover under clause 3.4.5. As the argument might apply in this case, it would seek to limit the

redemption figure to the monies actually paid by Breccia to acquire the plaintiff’s loans.

73. I reject that argument. The term “such obligations” in clause 3.4.3 clearly refers to a promoter’s legal obligations under their Anglo

loan facilities. There is no evidence that Breccia has “performed” the plaintiff’s obligations under the Facility Letters, and equally no

evidence of Breccia paying monies or expenditure “which should have been paid or incurred by” the plaintiff. The acquisition of the

loans by Breccia does not equate to performing the plaintiff’s obligations or invoking clause 3.4.5. What the clause 3.4.3 “obligations”

are, in terms of what monies are required to redeem the Facility, falls to be determined in this modular hearing, and the plaintiff’s

argument is therefore a circular one.

74. In order to invoke clause 3.4.5 Breccia would, in a distinct transaction, need to pay to itself “the monies or…expenditure which

should have been paid or incurred by…” the plaintiff, and then demand payment. Absent such identifiable payment by Breccia clause

3.4.5 does not apply. Breccia, as I observed in Flynn No.1 (at para. 267), can sit back and do nothing, and need not invoke clause

3.4.3. As I held (in para. 266) “Breccia’s primary relationship and dealings with Benray/Mr. Flynn (and other Promoters/shareholders) is

first and foremost as another Promoter and shareholder under the Shareholders Agreement.” Implicit in this is that Breccia has a

secondary relationship governed by the Facility Letters. I accept that under these Breccia is entitled to furnish what it regards as the

correct redemption figure without reference to what might or might not be recovered or reimbursed if it invoked clauses 3.4.3 and

3.4.5. Accordingly, the redemption figure is not contractually limited to what might or might not be recovered under clause 3.4.5.

Issue B: Is all or part of the redemption figure an “unlawful penalty”?

75. The plaintiff contends that the surcharge provision in clause 5.1 is unlawful because it constitutes a “penalty” clause. Reliance is

placed on the propositions stated by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd. [1915] AC 79,

at p. 86:-

“1. Though the parties to a contract who use the words “penalty” or “liquidated damages” may prima facie be supposed

to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment

stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.

2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of

liquidated damages is a genuine covenanted pre-estimate of damage (Clydebank Engineering and Shipbuilding Co. v. Don

Jose Ramos Yzquierdo y Castaneda [[1905] AC 6]).

3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided

upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the

contract, not as at the time of the breach (Public Works Commissioner v. Hills [[1906] AC 368] and Webster v. Bosanquet

[[1912] AC 394]).

4. To assist this task of construction various tests have been suggested, which if applicable to the case under

consideration may prove helpful, or even conclusive. Such are:

(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with

the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury

in Clydebank Case).

(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a

sum greater than the sum which ought to have been paid (Kemble v. Farren [6 Bing. 141]). This though one of the most

ancient instances is truly a corollary to the last test.…

(c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of

compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others

but trifling damage" (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. [11 App. Cas. 332]).

On the other hand:

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach

are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is

probable that pre-estimated damage was the true bargain between the parties (Clydebank Case, Lord Halsbury; Webster

v. Bosanquet, Lord Mersey).”

76. Counsel for the plaintiff submits that these well-known principles have been followed and approved by the Supreme Court in this

jurisdiction – see Barron J. in Pat O’Donnell & Co. Ltd. v. Truck and Machinery Sales Ltd. [1998] 4 IR 191, p. 214 et seq. with whom

O’Flahery and Lynch JJ. agreed. The plaintiff argues that the 4% rate of surcharge interest is not a valid pre-estimate of loss but

rather is a penalty for non-performance, and that its dominant purpose was to deter the borrower from breach.

77. Counsel relied particularly on the decision of ACC Bank Plc. v. Friends First Managed Pension Funds Ltd. & Ors [2012] IEHC 435,

applying these principles in the banking sector to default surcharge interest, and which counsel submits represents the established

jurisprudence of this court. In that case, Finlay Geoghegan J., following the principles enunciated in Dunlop and Truck and Machinery

Sales struck down a surcharge interest of 6% which on the evidence before her she concluded could not be considered to be a

reasonable pre-estimate of the likely loss to ACC if the facility under consideration was to go into default. Finlay Geogheghan J. was

influenced by the size of the increase in that case, which had the effect of almost doubling the applicable interest rate when

considered at the time of the loan. Nor did she consider that it could be regarded as a minimal increase such as the 1% additional

interest found to be acceptable and enforceable by Colman J. in Lordsvale Finance v. Bank of Zambia [1996] QB 752 where he

regarded 1% as being commercially justifiable by reference to the borrower in default being regarded as a greater credit risk. I will

return to ACC in greater detail later in this judgment. The plaintiff also relies on the decision in AIB plc. v. Fahy [2014] IEHC 244, in

which O’Malley J. followed ACC in holding that a surcharge of 12% was not a genuine pre-estimate of loss.

78. Counsel for the plaintiff contended that the decision in ACC being on similar facts and recent in origin effectively determines the

issue in this jurisdiction and should be followed by this court, on the basis of the principles of judicial comity enunciated by Clarke J. in

In the Matter of Worldport Ireland Limited (In Liquidation) [2005] IEHC 189 where he stated:-

“…It is well established that, as a matter of judicial comity, a judge of first instance ought usually follow the decision of

another judge of the same court unless there are substantial reasons for believing that the initial judgment was

wrong….Amongst the circumstances where it may be appropriate for a court to come to a different view would be where

it was clear that the initial decision was not based upon a review of the significant relevant authority, where there is a

clear error in the judgment, or where the judgment sought to be revisited was delivered a sufficiently lengthy period in the

past so that the jurisprudence of the court in the relevant area might be said to have advanced in the intervening period.

In the absence of such additional circumstances it seems to me that the virtue of consistency requires that a judge of

this court should not seek to second guess a recent determination of the court which was clearly arrived at after a

thorough review of the relevant authorities and which was…based on forming a judgment between evenly balanced

argument. If each time such a point were to arise again a judge were free to form his or her own view without proper

regard to the fact that the point had already been determined, the level of uncertainty that would be introduced would

be disproportionate to any perceived advantage in the matter being reconsidered…”.

79. Counsel for Breccia urged the court to take a different approach and sought to distinguish ACC. Counsel submitted that because a

variety of factors, which cannot be predicted with any precision at the time the loan agreement is entered into, determine the actual

loss that a bank may suffer in the event of default, precise pre-estimation of damage is impossible. In these circumstances the

bargain that the parties have made in relation to surcharge interest when there is default should be respected, provided the

surcharge is not extravagant or unconscionable, because it is commercially justifiable. He also argued that there was no evidence in

this case that 4% surcharge was extravagant or unconscionable at the time the Facility Letters were entered into.

80. Counsel argued that this approach was consistent with the judgment of Barron J. in Truck and Machinery Sales which did not

confine the test of whether a provision is a penalty clause to the question of whether it was a genuine pre-estimate of loss. He relied

on passages from the judgments of two other Law Lords in Dunlop quoted by Barron J. with approval at pp. 214-215 of his judgment:-

“In the same case Parker L.J. indicated the difference between these latter two paragraphs. He said at p. 97:-

“…where the damages which may arise out of a breach of contract are in their nature uncertain, the law permits

the parties to agree beforehand the amount to be paid on such breach. Whether the parties have so agreed or

whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each

particular case. There are, however, certain general considerations which have to be borne in mind in determining

the question. If, for example, the sum agreed to be paid is in excess of any actual damage which can possibly, or

even probably, arise from the breach, the possibility of the parties having made a bona fide pre-estimate of damage

has always been held to be excluded, and it is the same if they have stipulated for the payment of a larger sum in

the event of breach of an agreement for the payment of a smaller sum.”

In the course of his judgment Parmoor L.J. also indicates the difference between the two situations. He said at p. 101:-

“There are two instances in which the Court has interfered when the agreed sum is referable to the breach of a

single stipulation. It is important that the principle of interference should not be extended. The agreed sum, though

described in the contract as liquidated damages, is held to be a penalty if it is extravagant or unconscionable in

relation to any possible amount of damages that could have been within the contemplation of the parties at the

time when the contract was made…

The second instance in which the Courts have sanctioned interference is in the case of a covenant for a fixed sum,

or for a sum definitely ascertainable, and where a larger sum is inserted by arrangement between the parties,

payable as liquidated damages in default of payment. Since the damage for the breach of covenant is in such cases

by English law capable of exact definition, the substitution of a larger sum as liquidated damages is regarded, not as

a pre-estimate of damage, but as a penalty in the nature of a penal payment.””

Particular reliance was then placed on the following words of Barron J. at p. 215:-

“These two instances are quite different. In the first case, the damages would be uncertain and there may genuinely be a

difficulty in a pre-estimate of the damage which would occur in the event of breach. A latitude is allowed, but even then

the sum agreed must not be extravagant or unconscionable in relation to any possible amount of damages that could

have been within the contemplation of the parties at the time when the contract was made. If it is, it is regarded as a

penalty, and the plaintiff is left to prove the actual damage.

In the second case, no question of a pre-estimate of loss arises because the amount of the damages is treated as being

certain. As will be seen from the cases to which I shall refer the damages are regarded as certain because the only sum

allowed over and above the actual fixed sum is interest. This is allowed at the then subsisting commercial rate.

Accordingly if the agreed rate is in excess of that it will be treated as a penalty because any interest over the commercial

rate will in effect provide for the payment of larger sum in place of a smaller one.”

81. Counsel argued that default surcharge interest is one situation in which the latitude referred to by Barron J. should be allowed

because of the genuine difficulty in pre-estimating the loss that the bank may suffer if a borrower defaults. He noted that Barron J.’s

reference to ‘latitude’ is not mentioned anywhere in the judgment of Finlay Geoghegan J. in ACC. He also respectfully suggested that

Finlay Geoghegan J. proceeded on the assumption that surcharges may in principle be permitted, although she did not find the charge

justified in that case. He argued that the same applied to the decision of O’Malley J. in AIB plc. v. Fahy in that she stated, at para.

84:-

“I further accept that a bank is entitled in principle to charge surcharge interest where a borrower is in default.”

82. Counsel found support for his propositions in Lordsvale in which Colman J. reviewed the law and at p. 763 stated:-

“Where, however, the loan agreement provides that the rate of interest will only increase prospectively from the time of

default in payment, a rather different picture emerges. The additional amount payable is ex hypothesi directly proportional

to the period of time during which the default in payment continues. Moreover, the borrower in default is not the same

credit risk as the prospective borrower with whom the loan agreement was first negotiated. Merely for the pre-existing

rate of interest to continue to accrue on the outstanding amount of the debt would not reflect the fact that the borrower

no longer has a clean record. Given that money is more expensive for a less good credit risk than for a good credit risk,

there would in principle seem to be no reason to deduce that a small rateable increase in interest charged prospectively

upon default would have the dominant purpose of deterring default. That is not because there is in any real sense a

genuine pre-estimate of loss, but because there is a good commercial reason for deducing that deterrence of breach is

not the dominant contractual purpose of the term.

It is perfectly true that for upwards of a century the courts have been at pains to define penalties by means of

distinguishing them from liquidated damages clauses. The question that has always had to be addressed is therefore

whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. That is because the payment of

liquidated damages is the most prevalent purpose for which an additional payment on breach might be required under a

contract. However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of

inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would

therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the

consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if

the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant

purpose was not to deter the other party from breach.”

83. At p. 766 Colman J. stated:-

“While fully accepting that the English authorities can hardly be described with justification as a ‘long line of authority’

(pace the Federal Court of Australia) and that none of those authorities is notable for its clarity of analysis, such

authority as there is does suggest that at least on three occasions since 1725 the courts have been prepared to enforce

increased rates of interest or analogous payments where the increase applied as from the date of default. On the other

hand, the conventional line of authorities characterising default interest as a penalty appears to be based on cases where

the default interest provision operated retrospectively as well as prospectively from the date of default.”

Colman J. concluded (p. 767):-

“In my judgment, weak as the English authorities are, there is every reason in principle for adopting the course which they

suggest and for confining protection of the creditor by means of designation of default interest provisions as penalties to

retrospectively-operating provisions. If the increased rate of interest applies only from the date of default or thereafter

there is no justification for striking down as a penalty a term providing for a modest increase in the rate. I say nothing

about exceptionally large increases. In such cases it may be possible to deduce that the dominant function is in terrorem

the borrower. But nobody could seriously suggest that a 1 per cent. rate increase could be such. It is in my judgment

consistent only with an increase in the consideration for the loan by reason of the increased credit risk represented by a

borrower in default.”

84. Counsel then referred the court to an important decision of the UK Supreme Court, delivered on 4th November, 2015 just one day

before closing submissions in this case. The court there revisited the broad question of when a contractual provision may be struck

down as penalty and restated the law in the context of two cases: Cavendish Square Holding BV v. Talal El Makdessi; ParkingEye Ltd.

v. Beavis [2015] UKSC 67. The main judgment was delivered by Neuberger and Sumption L.JJ. (with whom Carnwath L.J. agreed), and

after a review of the law they stated:-

“31 In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of

unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of

loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin’s four tests and a tendency to

treat them as almost immutable rules of general application which exhaust the field. In Legione v Hateley (1983) 152 CLR

406, 445, Mason and Deane JJ defined a penalty as follows:

“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation;

it consists of the imposition of an additional or different liability upon breach of the contractual stipulation...”

All definition is treacherous as applied to such a protean concept. This one can fairly be said to be too wide in the sense

that it appears to be apt to cover many provisions which would not be penalties (for example most, if not all, forfeiture

clauses). However, in so far as it refers to “punishment” and “an additional or different liability” as opposed to “in

terrorem” and “genuine pre-estimate of loss”, this definition seems to us to get closer to the concept of a penalty than

any other definition we have seen. The real question when a contractual provision is challenged as a penalty is whether it

is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A

damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any

rate without more, mean that it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does

not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct

of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently

penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by

which the contracting party’s conduct is to be influenced are “unconscionable” or (which will usually amount to the same

thing) “extravagant” by reference to some norm.

32 The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-

breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some

appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend

beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests would usually be perfectly

adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent

party may have in the performance of the defaulter’s primary obligations. This was recognised in the early days of the

penalty rule, when it was still the creature of equity, and is reflected in Lord Macclesfield’s observation in Peachy (quoted

in para 5 above) about the application of the penalty rule to provisions which were “never intended by way of

compensation”, for which equity would not relieve. It was reflected in the result in Dunlop. And it is recognised in the

more recent decisions about commercial justification. And, as Lord Hodge shows, it is the principle underlying the Scottish

authorities.

33 The penalty rule is an interference with freedom of contract. It undermines the certainty which parties are entitled to

expect of the law. Diplock LJ was neither the first nor the last to observe that “The court should not be astute to descry

a ‘penalty clause’”: Robophone at p 1447. As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v

Attorney General of Hong Kong (1993) 61 BLR 41, 59, “the court has to be careful not to set too stringent a standard and

bear in mind that what the parties have agreed should normally be upheld”, not least because “[a]ny other approach will

lead to undesirable uncertainty especially in commercial contracts”.

34 Although the penalty rule originates in the concern of the courts to prevent exploitation in an age when credit was

scarce and borrowers were particularly vulnerable, the modern rule is substantive, not procedural. It does not normally

depend for its operation on a finding that advantage was taken of one party. As Lord Wright MR observed in Imperial

Tobacco Company (of Great Britain) and Ireland v Parslay [1936] 2 All ER 515, 523:

“A millionaire may enter into a contract in which he is to pay liquidated damages, or a poor man may enter into a

similar contract with a millionaire, but in each case the question is exactly the same, namely, whether the sum

stipulated as damages for the breach was exorbitant or extravagant ...”

35 But for all that, the circumstances in which the contract was made are not entirely irrelevant. In a negotiated

contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that

the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach.

In that connection, it is worth noting that in Philips Hong Kong at pp 57-59, Lord Woolf specifically referred to the

possibility of taking into account the fact that “one of the parties to the contract is able to dominate the other as to the

choice of the terms of a contract” when deciding whether a damages clause was a penalty. In doing so, he reflected the

view expressed by Mason and Wilson JJ in AMEV-UDC at p 194 that the courts were thereby able to “strike a balance

between the competing interests of freedom of contract and protection of weak contracting parties” (citing Atiyah, The

Rise and Fall of Freedom of Contract (1979), Chapter 22).”

85. Neuberger and Sumption L.JJ. went on to decide that the penalty rule in general should not be abrogated, on the basis that it

might be regarded as antiquated, anomalous or unnecessary, but also that it should not be extended by judicial, as opposed to

legislative, decision-making.

86. Lord Mance in his judgment effectively agreed with Neuberger and Sumption L.JJ. At para. 143 he stated:-

“143 It is clear from these three decisions that a concern can protect a system which it operates across its whole

business by imposing an undertaking on all its counterparties to respect the system, coupled with a provision requiring

payment of an agreed sum in the event of any breach of such undertaking. The impossibility of measuring loss from any

particular breach is a reason for upholding, not for striking down, such a provision. The qualification and safeguard is that

the agreed sum must not have been extravagant, unconscionable or incommensurate with any possible interest in the

maintenance of the system, this being for the party in breach to show.”

After quoting Colman J. in Lordsvale he stated:-

“147 In a whole series of cases across the world, courts have taken their cue from Lordsvale and held that provisions in

loan agreements for uplifting the interest rate for the future after a default should not be regarded as penalties, save

where the uplift is evidently extravagant: see eg Hong Leuong Finance Ltd v Tan Gin Huay [1999] 2 SLR 153, Beil v

Mansell (No 2) (2006) 2 Qd R 499, PSAL Ltd v Kellas-Sharpe [2012] QSC 31, Elberg v Fraval [2012] VSC 342, Place

Concorde East Ltd Partnership v Shelter Corp of Canada Ltd (2003) 43 BLR (3d) 54 and In re Mandarin Container [2004] 3

HKLRD 554.

148 The rationale of these cases is that the default bears on the credit risk (and, as Beil v Mansell identifies, may also

bear on the cost of administering the loan). The uplift is conditioned on the breach, but the breach reflects directly upon

the continuing appropriateness of the originally agreed interest terms. In substance, the uplift amounts to a variation of

the original terms. If on the other hand, it is evident from the size of the uplift that it is in its nature a punishment for or

deterrent to breach, rather than an ordinary commercial re-rating to reflect a change in risk (or administration cost), then

it will still be disallowed as a penalty – as the actual decisions in Hong Leuong, Beil v Mansell and Elberg v Fraval

illustrate.”

87. In para. 152 he stated the test as follows:-

“…What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served

and protected by the clause, and, second, whether, assuming such an interest to exist, the provision made for the

interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable.”

88. Lord Hodge also favoured this approach, wording the test as follows:-

“255 I therefore conclude that the correct test for a penalty is whether the sum or remedy stipulated as a consequence

of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the

performance of the contract.”

89. Lord Toulson endorsed Lord Hodge’s “succinct statement”, and only dissented from the majority in relation to the application of

the test to the second case which concerned a £85 charge for overstaying in ParkingEye’s car park.

90. Counsel for Breccia argued that while not binding on this court the decision in Cavendish is persuasive, and reflects common sense

and commercial reasonableness. He argued that it was consonant with the approach of the Supreme Court in Truck and Machinery

Sales, and that it reflected Lordsvale which “…was certainly looked upon favourably by Ms. Justice Finlay Geoghegan in ACC…”.

91. Counsel relied on one other aspect of the judgment of Neuberger and Sumption L.JJ. in Cavendish: when addressing the parking

charge issue, which of course was a consumer contract, they quoted from the opinion of Advocate General Kokott furnished in the

case of Aziz v. Caixa d’Estalvis de Catalunya, Tarragona I Manresa (Case C-415/11) [2013] 3 CMLR 89. Aziz is the leading case in the

Court of Justice of the European Union on Council Directive 93/13/EEC on unfair terms in consumer contracts, and was a reference

from the Spanish court seeking guidance on the criteria for determining the fairness of three provisions in a loan agreement, including

one providing for the charging of default interest. At para. 106 of their judgment Neuberger and Sumption L.JJ. stated:-

“106 In its judgment, the Court of Justice drew heavily on the opinion of Advocate General Kokott, specifically endorsing

her analysis at a number of points.”

92. They then proceeded, later in para. 106, as follows:-

“Advocate General Kokott returned to the question of legitimate interest when addressing default interest. She observed

that a provision requiring the payment upon default of a sum exceeding the damage caused, may be justified if it serves

to encourage compliance with the borrower’s obligations:

“If default interest is intended merely as flat-rate compensation for damage caused by default, a default interest

rate will be substantially excessive if it is much higher than the accepted actual damage caused by default. It is

clear, however, that a high default interest rate motivates the debtor not to default on his contractual obligations

and to rectify quickly any default which has already occurred. If default interest under national law is intended to

encourage observance of the agreement and thus the maintenance of payment behaviour, it should be regarded as

unfair only if it is much higher than is necessary to achieve that aim” (para AG87).

Finally, the Advocate General observes that the impact of a term alleged to be unfair must be examined broadly and from

both sides. Provisions favouring the lender may indirectly serve the interest of the borrower also, for example by making

loans more readily available (para AG94).”

93. In their written submissions at para.s 60-69 counsel for Breccia rely on a number of other authorities – including the UK Court of

Appeal decision in ParkingEye Ltd. (the second case considered by the UKSC in Cavendish) – and learned texts in support of their

argument. These submissions were prepared before the decision of the UKSC in Cavendish was handed down, and many of them are

reviewed in that decision which I accept is now definitive of UK law on the subject.

The ACC Case

94. As the plaintiff argues that this issue has been decided in ACC, and should not be revisited by this court, it is necessary to look at

that decision in more detail. Part of ACC’s claim depended on a clause in its General Conditions which applied to a facility letter of

November, 2007 that it was agreed was a commercial dealing. Clause 2.7.1 provided:-

“If the Borrower defaults in the payment on the due date of any sum (including but not limited to interest, costs, fees,

charges or expenses) payable under a Facility, the Borrower shall pay on demand interest thereon from and including the

date of such default to the date of actual payment calculated (as well as before judgment) at 0.5% per month above the

rate otherwise applicable to the Facility.”

95. Although this provision did not describe the default rate as “surcharge interest”, it is not possible to discern any real difference

between this provision and clause 5.1 in the instant case – other than the rate equated to 6% per annum in ACC, and 4% per annum

in the instant case.

96. Having stated that the issue was whether or not the additional rate of interest of 6% was or was not a penalty, Finlay Geoghegan

J. proceeded:-

“79. It is common case that the well-known principles according to which the courts in this jurisdiction will consider

whether a term in a contract which provides for the payment of a sum of money on a default or breach of the contract is

or is not a penalty are those set out by Dunedin L.J. in Dunlop Pneumatic Tyre Company Ltd. v. New Garage and Motor

Company Ltd. [1915] AC 79, at p. 86, see Pat O’Donnell & Co. Ltd. v. Truck & Machinery Sales Ltd. [1998] 4 I.R. 191, per

Barron J. at p. 214. In summary, they require the Court to determine whether or not the additional sum payable is a

genuine pre-estimate of the probable loss by reason of the breach. The principles apply more generally than to the

imposition of default or surcharge interest.

80. Both parties referred to the consideration by Colman J. in the High Court of England and Wales in Lordsvale Finance

plc. v. Bank of Zambia [1996] Q.B. 752, to the same principles in the context of a facility agreement between the

defendant bank and a syndicate of banks under which one of the elements of interest payable following default was an

additional 1%. The issue was whether or not such additional 1% was or was not a penalty. Colman J., having referred to

the authorities preceding Dunlop Pneumatic Tyre Company Ltd. and that authority, concluded that if on default the

additional interest was payable with retrospective effect, it would have all the indicia of a penalty.”

Finlay Geoghegan J. then quoted from the judgment of Colman J. the passages that I have reproduced earlier in this judgment, and

she proceeded as follows:-

“81. The judgment of Colman J. was considered by the Court of Appeal in Murray v. Leisureplay plc. [2005] EWCA Civ.

963. Arden L.J. and Clarke L.J. referred with approval to the approach of Colman J., the latter doing so as the “modern

approach to Lord Dunedin’s test in Dunlop Pneumatic Tyre v. New Garage and Motor Company Ltd., [1915] A.C. 67, and

stated at para. 106:

“It is perhaps no longer entirely appropriate to ask whether a payment on breach was stipulate in terrorem of the

offending party but, as Colman J. put it in the Lordsvale case at p. 762G . . .

‘whether a provision is to be treated as penalty is a matter of construction to be resolved by asking whether at the

time the contract was entered into, the predominant contractual function of the provision was to deter a party

from breaking the contract or to compensate the innocent party for breach. That the contractual function is

deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach

with the loss that might be sustained if a breach occurred’.”

82. In this jurisdiction, the High Court is bound by the applicable principles in accordance with the Dunlop Pneumatic Tyre

Company case as determined by the Supreme Court. However, I respectfully agree with Clarke L.J. in Murray v.

Leisureplay [2005] EWCA Civ. 963, that the decision of Colman J. in Lordsvale Finance v. Bank of Zambia, [1996] Q.B.

752, may not be a departure from such principles, but rather, a modern application of them to the banking sector. Andrew

Smith J. in the English High Court in Donegal International Ltd. v. Republic of Zambia and Another [2007] EWHC 197

(Comm.) at para. 509, referred to an analysis of the decision of Colman J. in Lordsvale Finance plc., by Jacob J. in the

Court of Appeal in Jeancharm v Barnet Football Club [2003] EWCA Civ. 58, at para. 16, in the following terms:

“That one can have an increased rate of interest as a valid clause in some circumstances appears from the decision

of Colman J in Lonsdale(sic) Finance plc v Bank of Zambia, [1996] QB 752. In that case, there was an uplift of 1%

for late payment of a debt. That was held to be a genuine pre-estimate on the basis that it indicated that the

borrower was a risky borrower. There is nothing in the decision which suggests anything other than what Colman J.

called a ‘modest increase’ would do.”

83. There is one further applicable principle. It is that the courts are reluctant to interfere with the terms of a contract

agreed between two parties of equal bargaining power. The willingness to do so in relation to a clause which is determined

to be a penalty is an exception to the general rule. In Canada, the Supreme Court has determined that it is unwilling do to

so, absent oppression. However, in this jurisdiction, it appears to me that the position is similar to that in England as set

out by Nelson J. in Tullett Prebon Group Ltd. v. El-Hajjali [2008] EWHC 1924 (Q.B.), at para. 31:

“The notion that the Courts might be moving away from the position set out in Dunlop and adopting a broader

discretionary approach was rejected in Jeancharm Limited, Keene L.J. at paragraph 21. The Supreme Court of Canada in

Elsey v J G Collins Insurance Agencies Limited [1978] 83 DLR 15 had said:-

‘It is now evident that the power to strike down a penalty clause is a blatant interference with the freedom of

contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the

stipulated sum. It has no place where there is no such oppression’.

Whilst the question of oppression cannot be regarded in English law as the sole test and the Dunlop approach is still

extant (Phillips at 58 [Philips Hong Kong v. Attorney General of Hong Kong [1993] 61 BLR 49]) it is nevertheless a relevant

factor to take into account as Lord Woolfe said in Phillips at 59:-

‘Likewise, the fact that two parties who should be well capable of protecting their respective commercial interests

agreed the allegedly penal provision suggests that the formula for calculating liquidated damages is unlikely to be

oppressive’.

The fact that the parties state that the clause is not a penalty clause and the fact that they are of equal bargaining

power are not decisive factors but they are certainly relevant to the consideration of the Court.”

84. The onus of establishing that the imposition of a surcharge interest at 6% pursuant to clause 2.7.1 of the General Conditions is a

penalty rests on Friends First. The parties to this agreement are both financial institutions capable of protecting their own commercial

interests. The question to be determined, in accordance with the applicable principles in this jurisdiction i.e. Dunlop Pneumatic Tyre

Company, is whether it represents a genuine pre-estimate of the bank’s likely loss upon default at the time the Facility Letter was

agreed i.e. November, 2007. Friends First contends that it cannot be so considered on the evidence adduced and that the only

reasonable construction is that it was intended as a deterrent against default in the payment of interest or principal. The onus is on

Friends First to so establish if it is to be considered a penalty.”

97. Finlay Geoghegan J. clearly did base her decision upon a review of “the significant relevant authority”, to use the phrase adopted

by Clarke J. in Worldport, and I did not understand counsel for Breccia to argue otherwise. Rather, he argued that in her judgment

and in particular in para. 84 thereof Finlay Geoghegan J. fell into error in setting out “the applicable principles” in failing to advert to

the “latitude” that Barron J. in Truck and Machinery Sales indicated should be applied to determining whether a clause is a penalty

where it is genuinely difficult to pre-estimate the damage that could arise on breach.

98. In my view this argument is not well made. Having carefully considered the significant recent UK authorities, and extensively

quoted from Lordsvale, Finlay Geoghegan J. reached a number of conclusions on the principles that she should apply, and she

emphasised that these are in “accordance with the Dunlop…case as determined by the Supreme Court”. She characterised the

approach of Colman J. as “…a modern application of [the principles] to the banking sector”. In para. 81 she approves the principle

that it is no longer appropriate to ask whether the impugned provision is in terrorem of the party in breach, but rather “whether at

the time the contract was entered into, the predominant contractual function of the provision was to deter a party from breaking the

contract or to compensate the innocent party for breach.” (Colman J. at p.762G). Furthermore, when she proceeded to consider the

facts she found not only that the 6% was not a pre-estimate of damage, but also that if one followed the approach of Colman J. the

rate of 6% for the range of defaults envisaged by clause 2.7.1 was not commercially justified. She also adverted to his judgment in

reaching her conclusion that 6% could not be regarded a “minimal increase”.

99. The relevance of the decision in ACC to the present case is highlighted when the banking evidence before Finlay Geoghegan J.

and her analysis of that evidence at para.s 84-91 of her decision are considered and compared with the very similar evidence and

circumstances of the present case. Paragraph 84 is already quoted above; Finlay Geoghegan J. then stated in the ensuing

paragraphs:-

“85. Each of the parties called a banking expert, ACC, a Mr. Bowen, and Friends First, a Mr. Fennelly. Each are chartered

accountants with significant banking experience and knowledge of the Basel Banking Accords. They were in agreement

that Basel II was in operation in 2007. It was explained, inter alia, as being designed to ensure that a bank has adequate

capital for the lending risk to which it is exposed. They agreed that a bank must attach a “probability of default” (PD)

factor to each loan at the outset. Mr. Fennelly’s evidence was that this would be one of the matters taken into account

by a bank in determining the original lending rate, and in particular, where, as in this Facility Letter, the rate was made up

of EURIBOR plus a margin (2%), it would be one of the factors which determined the applicable margin. The margin is also

intended to create a profit element for the bank.

86. Both experts were in agreement that if a facility goes into default, then it must be re-categorised as impaired and

that this has cost implications for a bank as it will need to set aside an increased level of capital for the anticipated loss.

Mr. Bowen, in his oral evidence, stated that, generally, an impaired loan in banking means if the loan is in arrears in excess

of 90 days.

87. Mr. Fennelly’s evidence was that in 2007, 6% could not be considered a genuine pre-estimate of a likely loss or

additional cost of funding to ACC if the facilities in relation to the Gaurus lands were at some stage to go into default. His

evidence, which I accept, was that under Basel II, a generic pre-estimate of the additional cost of funding or loss to the

bank would not be possible. Further, the Basel calculations are specific to each loan type and require to be determined

having regard to the probable loss at the date of default. This would include consideration of such matters as the likely

recoveries and security available to ACC and relevant recourse provisions. Mr. Bowen, in evidence, did not disagree that

the cost of acquiring additional capital where a facility goes into default will vary, having regard to the nature of the

default and, as he explained, differences in approach between banks to meeting the cost of capital and the requirement

to aggregate across loans. He expressed the view that 6% is “a minimal reflection of the incremental cost of acquiring

expensive capital, which all banks must procure in the marketplace where their balance sheets are damaged by an

aggregation of ‘Ennis-type defaulting loans’”. Notwithstanding having expressed that view, he did not disagree that the

actual cost would vary depending on the nature of the default.

88. ACC did not call any witness to explain the basis upon which 6% was included as the surcharge rate in its General

Conditions and applied to the Facility the subject matter of these proceedings.

89. I have concluded, having regard to the evidence of Mr. Fennelly and Mr. Bowen, that the 6% surcharge interest

cannot be considered as a reasonable pre-estimate in November, 2007 of the likely loss of ACC if the Facility was to go

into default such as to trigger the applicability of the 6% per annum pursuant to clause 2.7.1 of the General Conditions.

My reasons for doing so are as follows. The 6% rate is set in the General Conditions and, as a matter of contract, applies

where there is default in the payment, not only of principal but also of any sum for interest, costs or charges. It applies

from the date the default occurs. I accept the evidence of Mr. Fennelly that it is not possible to make a generic pre-

estimate of the cost of default for the purposes of Basel II at the time the Loan was entered into. I accept, as a matter

of probability, if a loan goes into default (certainly if it remains in default for a period of 90 days), there will be increased

costs to the bank. However, on the evidence, it appears that those costs will depend upon the nature of the default.

Whilst Mr. Bowen expressed an expert view that 6% is a minimal reflection of the incremental costs of the type of

defaults in relation to this Facility, it is disputed by Mr. Fennelly and Mr. Bowen did not support it by evidence. I cannot

accept this view, having regard to the variety of defaults which may trigger the application of the surcharge of 6%

pursuant to clause 2.7.1 of the General Conditions.

90. I am further influenced by the size of the increase and relationship between the agreed interest rate of EURIBOR plus

2% which in November, 2007 on the evidence, was an aggregate of 6.68% and the proposed increase of 6%. It increases

the agreed margin in the Facility Letter by a factor of three or almost doubles the applicable interest rate in November,

2007. In accordance with clause 2.7.1, if enforceable, this is permissible once even one interest payment is in arrears. It

cannot come within the category of minimal increase accepted as being enforceable by Colman J in Lordsvale Finance v.

Bank of Zambia, [1996] Q.B. 752. Further, even if it is permissible for the High Court in this jurisdiction to follow the

approach of Colman J., there is not in this case evidence which permits me to conclude that an increase of 6% in the rate

of interest agreed in 2007 for the variety of defaults envisaged in clause 2.7.1 of the General Conditions is commercially

justifiable.

91. It follows from my conclusion that this cannot be considered as a genuine pre-estimate by ACC of its loss or the

additional costs to it of providing capital in the event that there were to be a default. Hence, clause 2.7.1 of the General

Conditions incorporated in the Facility Letter should be construed as a deterrent against default and a penalty. It follows

that ACC is not entitled to recover surcharge interest herein.”

The Banking Evidence

100. In the present case the plaintiff also called Mr. Vincent Fennelly as its expert. Mr. Fennelly explained that under the Basel II

framework1 there is a standardised risk assessment which must be undertaken by banks which involves statistical analysis of the

potential for loss, and requires banks to look at the history of their loan books, and, if they are insufficient in size, the loan books of

other banks, to establish the probability in the future of default. Mr. Fennelly explained that default is not to be equated with a loss,

because there may be default in a loan, but the lender will not necessarily suffer a loss. In establishing interest rates the bank

therefore has to consider its “expected loss”, which means considering the probability of default and the likely loss on default, which

includes an analysis of the security held. So for example if the security held is more than ample then there will not necessarily be any

loss at default. The bank also calculates interest rates in order to ensure it achieves profit. Mr. Fennelly explained in his Witness

Statement (at para. 5.7):-

“Interest is charged by banks to reflect two things – risk and profit. The start point is a risk-free rate achievable on

lending considered effectively zero risk – say German Government Bonds. To that is added a premium to reflect the

specific risk in the transaction being banked. Lastly a profit margin is added resulting in the overall fee. This usually is

compounded into two elements – the prevailing Bank funding rate plus the Bank’s margin which encompasses the risk

premium and the profit margin.”

101. Mr. Fennelly’s evidence was that, at the start of the process i.e. when the lending is agreed, the bank ensures that weighting is

applied and appropriate capital put aside, and that interest rates are charged to cover the cost of borrowing, the risk assessment of

the loan, the expected loss and the bank’s requirement of profit. While Mr. Fennelly could not give evidence as to the calculation by

Anglo of the rates applied in the Facility Letters in this case, he was able to say that as a matter of his banking experience the

EURIBOR rate and marginal rate in respect of the loans in question would have been calculated in this fashion.

102. Given that the marginal rate was a calculation based on the probability of default and the likely loss in event of default, Mr.

Fennelly’s opinion outlined in his Witness Statement at para. 5.7 was that a predetermined surcharge rate of 4% could not be a valid

pre-estimate of loss:-

“In my opinion surcharge interest was intended to penalise for non-performance rather than represent a valid pre-

estimate of loss.

A generic “one size fits all” up-front charge could not possibly account for all possibilities from no repayments to full

repayments and additionally from nil recovery to full recovery under the security. At the outset of the loan the range of

possibilities for the eventual outcome depend on very many factors. Default in itself will not necessarily cause the Bank to

incur loss. Ultimately this will depend on the interplay between the amount outstanding at the time of default, the value

of the security ultimately realised, and the cost in time or effort in achieving these outcomes. Thus the loss possibilities

include everything from nil to the entire amount.

Given the number of factors that contribute to a Bank incurring a loss and the fact that at the inception of the loan these

are all future events which cannot be predicted, it is my opinion that the default interest charged in this case was not a

valid pre-estimate of loss incurred in the event of a default by the borrower.

It is my opinion that the interest margin charged on the loans in the first instance is the only valid pre-estimate of likely

loan loss in the event of default.”

103. In Mr. Fennelly’s view the point of clause 5.1 “…is to try and get conformity, that the customer would go back to repaying as

agreed. So it’s kind of a short sharp shock, you know, you need to get back in line and keep to the terms of the agreement…” (Day 2

p. 99).

104. While Mr. Fennelly accepted that the likelihood of loss of some or all of the bank’s capital might be increased once a default has

occurred, his evidence was that this was not necessarily the case, and that there might be no loss. As to whether the bank would

have to set aside the greater level of capital once a loan goes into default he opined that this could be an extremely marginal thing

and that this should be covered in the management of risk in the setting of the initial margin which should cover the generation of

sufficient profitability as well as maintaining adequate capital reserves.

105. Comparative rates charged by other banks were referred to by the defendant’s banking expert Mr. Conor O’Malley in his Witness

Statement in which he outlined default surcharge provisions incorporated into lending by other banks in 2009:-

“The 4% rate being charged by the Bank pursuant to the general terms was considerably less than the surcharge rate

charged by other banks at the relevant time; e.g. ACC: 6%, Ulster Bank: 9%, AIB: 9%, increasing to 12% in June 2008.”

These were put to Mr. Fennelly who responded “…the fact that the suggestion that they all analysed the same market more or less

and came up with a range of answers from 4% to 12% suggests to me that its not a specific calculation in advance.” (Day 2 p. 98).

106. Mr. Fennelly also made the point that the surcharge rate of 4% is substantially above the original marginal rate of 1.75% (he

calculated the 4% rate as being 228% greater than the marginal rate of 1.75%) under the 2006 Facility Letter and in respect of

Facilities A and B under the 2008 Facility Letter, (the marginal rates for loans C and D being slightly greater). He regarded this

increase in rate as “at least significant by any standards”.

107. Under cross-examination Mr. Fennelly agreed that there were variables which determine the extent of the expected loss on

default. While accepting that these were unpredictable his evidence was that nonetheless the interest margin charged initially

includes a valid pre-estimate of loss reached on the basis of the banker’s professional expertise. He accepted that no one could know

the loss that might arise until it is actually incurred. Mr. Fennelly was of the view that all percentage default charges, being pre-

determined round sum amounts, failed the test of pre-estimation of likely loss, and that there was little chance that the 4% figure

would reflect the actual loss.

108. In response to questioning from the court Mr. Fennelly agreed that even if the default charge had been 0.5% or 1% he would

still categorise it as a penalty on the basis that it was not a genuine pre-estimate of loss. He also clarified that under Basel II in

assessing credit risk and “expected loss” bankers also take into account “unexpected loss”. He said:-

“But generally unexpected loss is also provided for under Basel because you are saying well we can’t predict everything so

we are also going to build in a risk in relation to some thing’s that you can’t predict. So it is trying to be totally

comprehensive; it is trying to say here’s what you can reasonably estimate, here’s what you can’t reasonably estimate,

based on history. You have got to provide capital for all of that and you got to build it into your systems and charging

and you should do all of that on an ongoing basis.”

109. Mr. Fennelly added that although Basel II came in 2004 it was not fully implemented until 2006 in the Irish market, and he would

have been “very surprised” if it was not in place in Anglo in 2006 (Day 3 pp. 32-33).

110. Significantly, Mr. O’Malley was not in a position to give evidence as to the reasons why Breccia’s predecessor Anglo inserted a

4% surcharge provision in the loan facilities. However, he said that such clauses are a standard feature in loan documentation and

recognition by banks that when loans go into default the bank is likely to incur additional costs. First, there is the risk of loss of some

or all of the capital. Secondly, the bank will have to set aside or allocate a greater level of capital because the risk profile of the

borrower has altered because of the default. In this regard he noted as highlighted above that the surcharge rate of 4% was less

than that charged by ACC (6%), Ulster Bank (9%) and AIB (9%) in 2006. Thirdly, with a loan in default there was likely to be

additional administration costs arising typically from the need for more regular reviews, more correspondence and meetings with the

borrower, and reviews of the security. His evidence was that the likelihood of default and the level of costs that would be incurred if

there was default were not matters capable of accurate prediction at the point at which the loan agreement is entered into. However

he then stated:-

“…I think I would agree with Mr. Fennelly that the purpose of Basel 2 was to try and give an estimate of the likely loss

that might occur. I think it is a recognition of the fact that if you have a class of borrower that goes into default that this

class of borrower will, by virtue of the fact that it has gone into default -- and I’m excluding technical default -- will be

riskier and, therefore, the likelihood of loss and the likelihood of costs will be significantly higher”. (Day 3 p. 107).

111. Mr. O’Malley said that in his opinion because loans that go into default become by definition riskier and require greater capital

location, and give rise to greater administration costs, there is a “commercial justification” for default interest, and he regarded the

4% surcharge rate as “a reasonable charge”.

112. Mr. O’Malley did agree with Mr. Fennelly that the margin i.e. the 1.75% rate in the 2006 Facility Letter, was “the initial pre-

estimate of the risk” but he added:-

“…it is not the only charge the Bank is saying. The Bank is saying at the outset we reserve the right or we have the right

to charge you surcharge interest of, in this case, 4% if you go into default …” (Day 3 p. 109).

113. Mr. O’Malley disagreed with Mr. Fennelly over the cost to a bank of capital. Whereas Mr. Fennelly had referred to a figure of 1%

or less, Mr. O’Malley gave evidence that the cost of capital for Irish and European banks was in the region of 7%-10% in 2006.

114. Under cross-examination Mr. O’Malley accepted that he had not worked in a bank since 2004, during the time that Basel II had

been implemented. It was also put to him that specific General Conditions allowed the bank to separately recover additional

administration costs arising on default. These are clauses 6.2 relating to enforcement costs, and 6.3 which provides:-

“The Bank shall be entitled at any time to review its security and to engage the services of consultants or professionals

to assist it in carrying out this review. Any costs incurred by the Bank in reviewing its security, including any valuation or

audit costs or quantity surveyor’s fees, shall be for the account of the Borrower.”

Mr. O’Malley disagreed that the bank could separately recover these costs, saying that if “any bank attempted to bill a client for just

reviewing its security it wouldn’t be able to enforce that. This 6.3 related to engaging the services of consultants or professionals to

assist in carrying out the review is relating to third parties, not for the Bank doing its own review.” (Day 3 p. 123).

115. Under cross-examination Mr. O’Malley agreed that he had not seen any calculations supporting a figure of 4% to cover all

variable possible losses arising in respect of defaulting loans, and that he did not know why Anglo picked 4% as opposed to other

higher rates selected by other institutions. However his evidence was that it was a pre-estimate figure covering the category of loan

that goes into default. He said:-

“It’s certainly not a scientific figure in the same way that the margin is calculated. I fully agree with you and Mr. Fennelly

when he discussed how the margin was calculated. It may not be a very good calculation but that‘s what the Bank has

done.” (Day 3 p. 126)

He went on to agree that it was “arbitrary” but still insisted that it was “an estimate in a general sense of the overall costs that can

accrue for a particular category of loan, i.e. loans that go into default”.

116. Mr. O’Malley also agreed that 4% surcharge was “a significant increase on the margin”.

Discussion

117. The evidence given in ACC and as summarised by Finlay Geoghegan J. in her judgment bears remarkable similarity to the evidence

adduced in the present case. In both cases the general conditions sought to apply a surcharge at a flat rate to the outstanding

balance from the date of default, and not retrospectively. As in ACC the experts agreed that Basel II was generally applied at the

time and that the calculation of the margin would have had regard to the probable loss at the date of default – which would have

included considerations such as the security available, recourse provisions and the likely cost of recovery – albeit that Mr. O’Malley

characterised it as “an initial pre-estimate of loss”. Both experts agreed that loss is possible – if not probable – as soon as the loan

goes into default, although they disagreed as to the likely level or range of loss, and the cost to the bank of capital. Mr. Fennelly, as

he did in ACC, expressed the view that the surcharge rate here of 4%, being generic, could not have been a genuine pre-estimate of

loss. As in ACC no evidence was adduced to explain the actual basis for the surcharge rate in the Facility Letters. The experts

disagreed as to whether the rate of 4% is “minimal”, so as to come within the range of what was considered commercially justifiable in

Lordsvale. Mr. Fennelly’s evidence was that it was not minimal. Mr. Fennelly was a working banker on the Credit Committee of the

Bank of Ireland at the relevant time, and I prefer his evidence on this point, particularly as Mr. O’Malley agreed under cross

examination that the 4% increase was “a significant increase on the margin”.

118. It seems to me that, unless ACC can be distinguished, this court should, on the basis of Worldport, follow the decision of Finlay

Geoghegan J. and approach this aspect of the case by determining whether the surcharge is a genuine pre-estimate of loss in the

event of default. In my opinion the UK Supreme Court has now taken a divergent view in Cavendish. That decision gives even greater

primacy to freedom to contract and the bargain reached between parties; it eschews the test of whether a clause is a genuine pre-

estimate of loss in favour of a test of whether it imposes a detriment out of all proportion to the legitimate interest of the innocent

party in the enforcement of the primary obligation. On the application of such a test there is no doubt that Anglo had a legitimate

interest in ensuring performance by the plaintiff of his primary obligations under the Facility Letters. If the court accepted Mr.

O’Malley’s evidence that the expected loss could be in a range that far exceeds 4%, then under the Cavendish test it could well be

that clause 5 would properly be regarded as proportionate and therefore lawful.

119. Cavendish is a very recent decision, so could not have been considered in ACC. However there is no doubt but that Finlay

Geoghegan J. in ACC reviewed the existing significant case law on penalty clauses – including lengthy consideration of the decision of

Colman J. in Lordsvale which in itself reviewed the law up to 1996 (and from which the UK Supreme Court took its lead in Cavendish in

switching the emphasis to commercial justification). Finlay Geoghegan J. then applied the law as she found it to default interest

provisions in this jurisdiction. Her decision was handed down on 26th October, 2012 and is therefore recent in origin.

120. As to counsel’s suggestion that in failing to advert to or apply the ‘latitude’ referred to by Barron J. in Truck and Machinery Sales

the learned judge in ACC fell into error in addressing the question of pre-estimate in circumstances where the expected loss may be

difficult to predict, I cannot agree. Truck and Machinery Sales was clearly argued before the court in ACC and cited in the judgment,

and no suggestion was made before me that the argument in ACC was deficient.

121. It is also significant that the decision in ACC has been followed and applied by the High Court in AIB plc. v. Fahy, a decision

delivered as recently as 2nd May, 2014. In that case the rate of surcharge interest was 12%. There was no evidence there as to how

that rate was set, and the defendant relied on ACC. O’Malley J. summarised the decision in ACC and stated:-

“86. Having regard to the fact that the interest rate in the letter of sanction, set out in paragraph 22 above, already

made provision for an increase in a situation where the credit funds were insufficient (and thus had already made

provision for the increased possibility of impairment of the loan), and having regard to the absence of evidence in relation

to the surcharge rate, I do not consider that the level of 12% can be seen as a genuine pre-estimate of loss. It appears

to be more in the nature of a penalty and therefore unenforceable.”

122. Accordingly, for reasons of comity this court should follow the principles applied to default surcharge interest in ACC. While

arguments for applying a different test may be finely balanced, and there are attractions to the reasoning in Cavendish and

contentions put forward on Breccia’s behalf, it will be a matter for an appellate court in due course to consider whether in this

jurisdiction the approach taken by the UK Supreme Court in Cavendish should be preferred in a case of this nature.

123. Counsel for Breccia invited this court to distinguish ACC on the facts on the basis that it concerned a higher rate of surcharge at

6%. But the question of penalty is one of principle, to be determined upon consideration of whether the rate is a pre-estimate of loss,

and in my view whether the default rate is 4%, 6% or 12% is not critical. This statement requires some qualification as there may be

a point at which a default rate is so minimal that it could not be regarded as penal, as for example in Lordsvale where the additional

rate of 1% was regarded by Colman J. as consistent with “the increased credit risk represented by a borrower in default”.

124. It is appropriate in this context to compare the surcharge rate to the normal interest applied to the loan at the date of the

facility. In ACC when the facility was taken out in November, 2007 the agreed rate was EURIBOR plus 2%, making in aggregate 6.68%,

and when the default rate of 6% was added this almost doubled the rate. In the present case as we have seen the agreed rate was

EURIBOR plus 1.75% in the 2006 Facility Letter (and EURIBOR plus 1.75% varying to 2.75% for the loans in the 2008 Facility Letter).

The evidence adduced through Mr. O’Malley was that the EURIBOR rate was 2.45% when the 2006 loan was drawn down, giving total

interest of 4.20%. If that is correct 2 the addition of the default rate of 4% was almost double the interest rate, a situation analogous

to that in ACC.

125. In respect of the 2008 Facility Letter, when the EURIBOR rate stood at 3.81% at the date of drawdown, the rate was EURIBOR

plus 1.75% for loans A and B, and EURIBOR plus 2.25% for loan C, and EURIBOR plus 2.75% for loan D, giving rates of 5.56%, 6.06%

and 6.56% respectively. Thus the surcharge rate of 4% was not as pronounced an increase, but it still represents a substantial

increase by reference to the normal interest rate.

The actual effect of a 4% default charge applied to the outstanding balances in this case, admittedly over almost a five year period,

demonstrates just how dramatically such charges can mount up. If the defendant’s argument is correct the addition of a 4%

surcharge would add in excess of €3 million to a redemption figure based only on normal interest.

126. I am also influenced by the fact that there are other provisions in the General Conditions under which the bank is entitled to

recover certain administrative costs/expenses in the event of default – under clause 6.2 it is entitled to recover the costs of

enforcement and sale of secured assets; under clause 6.3 it can recover the costs of consultants/professionals hired to review

security; and under clause 14 the borrower agrees to indemnify the bank in respect of costs (including legal fees) charges and

expenses arising inter alia from default by the borrower or a guarantor.

127. Accordingly, I am of the view that it would not be appropriate to revisit the issue decided in ACC and followed and applied in AIB

plc. v. Fahy. I am satisfied that the surcharge rate of 4% was a generic rate, and not a genuine pre-estimate of loss arising from

default. The pre-estimate of probable loss in the event of default was part of the calculation of the ordinary interest (EURIBOR plus

the margin rate). Both experts agreed that the surcharge provision was intended to deter borrowers from defaulting on their loans.

This tends to be supported by the fact that in practice neither expert had come across any case in which a bank actually recovered

(as opposed to claimed) a surcharge – save in the circumstance of a settlement agreement to pay a specific sum backed by

agreement to pay a greater sum in the event of default. I accept that clause 5.1 was, as Mr. Fennelly put it, “a short sharp shock…to

get your attention, to get you to conform” (Day 2 pp.99-100), and as such a punishment for non-performance (Day 2 p. 85), and I

am satisfied that this was the dominant purpose of the provision. I find that in all the circumstance as judged at the time of the

Facility Letters clause 5.1 was a penalty charge, and hence unenforceable. Accordingly, no surcharge interest should be included in

the redemption figure proposed by the defendant.

Issue C: Has Breccia waived its right to claim all or part of the redemption figure?; and

Issue D: Is Breccia estopped from claiming all or part of the redemption figure?

128. These questions only arise if I am wrong in my determination that the surcharge interest is an unlawful penalty, and I treat them

as applying only to the surcharge claim and not to the issue of enforcement costs.

129. It is convenient to take these two questions together. Whilst waiver may arise expressly or by agreement, where either there is

consideration or the waiver is contained in a deed, that is not the sort of waiver relied upon in this case. Waiver may also arise by

virtue of equitable or promissory estoppel, and it is the defence of estoppel that is relied upon by the plaintiff. More specifically, or as

alternatives, the plaintiff relies upon estoppel by silence, or estoppel by convention. Moreover the plaintiff relies upon the same set of

facts and inferences whether his arguments are treated as waiver or estoppel.

130. Estoppel by representation is defined in Snell’s Equity, 32nd Ed., (London, 2010) at para. 12-009:-

“Where by his words or conduct one party to a transaction freely makes to the other a clear and unequivocal promise or

assurance which is intended to affect the legal relations between them (whether contractual or otherwise) or was

reasonably understood by the other party to have that effect, and, before it is withdrawn, the other party acts upon it,

altering his her position so that it would be inequitable to permit the first party to withdraw the promise, the party making

the promise or assurance will not be permitted to act inconsistently with it.”

131. In NALM Ltd. v. McMahon; NALM Ltd. v. Downes [2014] IEHC 71 Charleton J. referred to this extract with approval as a “modern

formulation” and one “which takes into account the variations in the case law which have tended to make that defence more flexible

and in accordance with an appropriate review of the fairness of the situation…” (para. 19).

132. While generally the representations that give rise to an estoppel will be express statements or unequivocal conduct, under

certain circumstances acquiescence or pure silence may give rise to a representation. The principle was stated thus by Buckley L.J. in

Spiro v. Lintern [1973] 1 WLR 1002, at p. 1010:-

“Where a man is under a duty – that is, a legal duty – to disclose some fact to another and he does not do so, the other

is entitled to assume the non-existence of the fact. In such circumstances the conduct of the first man amounts to a

representation by conduct to the second that the fact does not exist.”

133. The question when this duty may arise was considered by the House of Lords in Mooregate Mercantile v. Twitchings [1977] AC

890, albeit in the context of proprietary estoppel, where Wilberforce L.J. held:-

“What I think we are looking for here is an answer to the question whether, having regard to the situation in which the

relevant transaction occurred, as known to both parties, a reasonable man, in the position of the “acquirer” of the

property, would expect the “owner” acting honestly and responsibly if he claimed any title in the property, to take steps

to make that claim known to, and discoverable by, the “acquirer” and whether, in the face of an omission to do so, the

“acquirer” could reasonably assume that no such title was claimed.”

134. In Pacol Ltd. & Ors. v. Trade Lines Ltd and Anor. [1982] 1 Lloyd’s Rep 456 Webster J. adopted this dictum and reformulated it in

the following general terms:-

“[T]he duty necessary to raise an estoppel by silence or acquiescence arises where a reasonable man would expect the

person against whom the estoppel is raised, acting honestly and responsibly, to bring the true facts to the attention of

the other party known by him to be under a mistake as to their respective rights.”

135. In The Law of Waiver, Variation, and Estoppel, Wilken & Ghaly (Oxford University Press, 2012) at para. 9.57 the authors

comment that the Pacol test having been “approved in subsequent authorities…now appears to be a correct general statement of the

law”. I find these authorities persuasive and see no reason why these principles should not be applied in this jurisdiction.

136. In order to establish an estoppel by representation the plaintiff would therefore be required to demonstrate firstly that Breccia –

or prior to its acquisition of the loans and security, Anglo/IBRC – made a representation or promise with the intention of inducing the

plaintiff to rely on such representation or promise. Secondly, the plaintiff would have to establish that he did in fact rely on that

representation or promise and acted to his detriment. Thirdly, the plaintiff would have to establish that it would be inequitable or

unconscionable to permit the defendant to resile from that representation.

137. In that the plaintiff relies in the alternative on so-called “estoppel by convention” it is appropriate to refer to the observations of

Charleton J. in McMahon at para.s 20-21 where he stated:-

“20. Estoppel can arise pursuant to an oral or written representation, and that is the normal situation. It can also arise by

virtue of an assumption, perhaps tacit, shared by parties. In that instance, however, there must be conduct which

establishes an objective state of affairs whereby the party otherwise bound by the legal relations is placed in

circumstances whereby it is understood that a new state of affairs governs the relations between the parties. This clearly

requires some action or behaviour or representation by the party who is to be bound by the new state of affairs. People

cannot just jump to conclusions that matters must be so, with no foundation in the behaviour of the party whose rights in

law are to be estopped, and then claim what is in essence an altered state of obligation. Estoppel is not based on bare

assumption. Estoppel is based either on representations or on situations of behaviour that, reasonably construed, clearly

withdraw or alter the strictures of legal obligations in such a way that it would be unfair to later enforce these. Where the

matter is one of representation, it should be easy to identify the legal term supposedly altered and the representation

directed in this regard. Where it is a matter of both parties proceeding on the basis of a common understanding, the

mutual convention of the parties may suffice as a foundation for estoppel. If it is so, it is because of that common

understanding. In Treitel’s The Law of Contract, 13th Ed. (London, 2011) at para. 3.094 the learned editor sets out the

law thus:-

“Estoppel by convention may arise where both parties to a transaction “act on an assumed state of fact or law, the

assumption being either shared by both or made by one and acquiesced in by the other”. The parties are then

precluded from denying the truth of that assumption, if it would be unjust or “unconscionable” to allow them (or one

of them) to go back on it. Such an estoppel differs from estoppel by representation and from promissory estoppel in

that it does not depend on any “clear and unequivocal” representation or promise. It can arise where the

assumption was based on a mistake spontaneously made by the party relying on it, and acquiesced in by the other

party, though the common assumption of the parties, objectively assessed, must itself be “unambiguous and

unequivocal”.”

21. In the current state of the development of the law, that is a good statement. In terms of the shared nature of the

assumption of law or fact, the formulation is akin to, but not the same as, the defence in contract of unilateral mistake.

Further, as to whether such a situation amounts to an unambiguous and unequivocal retreat from insistence on full legal

rights is to be construed according to the perceptions of reasonable people.”

Assignment Subject to the Equities

138. In considering the issue of equitable estoppel it is part of the plaintiff’s case that IBRC/the Special Liquidators had become

estopped from recovering surcharge interest before the loans and security were sold and transferred to Breccia, and that the

assignment was “subject to the equities” i.e. that Breccia was also bound by any equitable rights affecting IBRC’s interest. This is a

principle with a long pedigree. In Mangles v. Dixon (1852) 3 HL Cas 702, St. Leonards L.J. at p. 731 stated:-

“If there is one rule more perfectly established in a court of equity than another, it is, that whoever takes an assignment

of a chose in action, which this charter-party was, for it is not assignable in law, although it is in equity, takes it subject

to all the equities of the person who made the assignment.”

And at p. 735 he stated:-

“The authorities upon this subject, as to liabilities, show that if a man does take an assignment of a chose in action he

must take his chance as to the exact position in which the party giving it stands.”

139. In the context of an assignment of debt Chitty on Contracts, Vol. 1, 31st Ed. (London: Sweet & Maxwell, 2012) states the law

thus at para. 19-070:-

“Assignments normally take effect ‘subject to the equities’. This was always so in equity…Thus, where a claim arises out

of a contract under which the debt arises, and the claim affects the value or amount of the debt which one of the parties

purported to assign for value, then if the assignee subsequently sues, the other party to the contract may set up that

claim (including the right to set the contract aside) by way of defence against the assignee as cancelling or diminishing

the amount to which the assignee asserts his rights under the assignment.” [Footnotes omitted]

And at para. 19-074 Chitty notes:-

“…[a] further aspect of the idea that an assignee takes an assignment ‘subject to the equities is the principle that an

assignee cannot recover more from the debtor than the assignor could have done had there been no assignment.”

140. In Technotrade Ltd. v. Larkstore Ltd. [2006] EWCA Civ 1079 the Court quoted the discussion in an earlier edition of Chitty and

Mummery L.J. adopted and applied these principles.

Similarly Treitel’s The Law of Contract, Peel (ed), 14th Ed. (London: Sweet & Maxwell, 2015) states at para. 15-067:-

“An assignee takes ‘subject to the equities’, i.e. subject to any defects in the assignor’s title and subject to certain

claims which the debtor has against the assignor. He takes subject to such defects and claims whether they arise at law

or in equity, and whether or not he knew of their existence when he took his assignment. And he cannot recover more

than the assignor could have recovered. The object of these rules is to ensure that the debtor is not prejudiced by the

assignment.” [Footnotes omitted]

141. That the position is the same in this jurisdiction is reflected by McDermott in Contract Law (Dublin: Tottel, 2001) where the

author states at para. 18.118:-

“An assignee takes subject to any equities that have matured at the time of notice to the debtor. The effect is that the

debtor may plead against the assignor all defences that the debtor could have pleaded at the time when he received

notice of the assignment.”

142. I did not take these legal principles to be disputed by Breccia. Accordingly, it follows that if IBRC was estopped from recovering

default surcharge interest that might otherwise have been contractually recoverable from 31st December, 2010 up to 10th December,

2014 (the date of completion of the assignment of debt) then it follows that Breccia is likewise estopped from recovering surcharge

for that period.

Discussion

143. There is no evidence that any express representation was made by Anglo/IBRC or the Special Liquidators or Breccia that

surcharge interest would not be applied to the loans, notwithstanding clause 5.1.

144. The next question is whether such a representation may be inferred from conduct or a course of dealing. Assuming the surcharge

was lawful, it could have been applied to the various loan account balances after 31st December, 2010. As is apparent from the bank

statements, no surcharge was ever mentioned in the bank statements, or added to the amounts stated to be due. The debiting of

normal interest on outstanding balances i.e. the EURIBOR rate plus the relevant marginal rate, is shown, and the statements record

any rate change in this normal interest rate. It is apparent that notwithstanding technical default all the loans/loan accounts

continued to operate after 31st December, 2010 as they had done prior to that time, and in particular monies due to the plaintiff by

way of dividend from BHL continued to be paid into the relevant loan accounts to offset, in whole or in part, the normal interest

charges. Anglo did not seek to call in the loans and I accept the plaintiff’s evidence that there was no verbal demand for surcharge

interest or any inclination that it might be charged. It was not until in the letter of 29th May, 2013 that IBRC wrote formally notifying

the plaintiff of default and reserving IBRC’s rights. That letter related only to the 2006 Facility Letter, and it made no reference to any

default interest. Thereafter the loan accounts and statements continued to operate as previously.

145. It will be recalled that by letter dated 31st October, 2013 the Special Liquidators then informed the plaintiff of a decision that

they had taken to sell his loans, and also the loan of Mr. George Duffy. It will be recalled that the plaintiff wrote to the Special

Liquidators on 8th November, 2013 indicating that he wished to redeem his loan, to which the Special Liquidators replied by letter

dated the 12th November, 2013. Their reply is important and merits re-quoting:-

“We note that you say you wish to redeem your loan in full. That is always available to you and you can redeem this at

par at any time in the sales process. If you wish to pay off your loan in full please contact [X]…who will provide the

amount outstanding by you.” [Emphasis added]

146. Although the plaintiff did not seek to redeem his own loan at that time, this letter is none the less significant. The reference to

“par” was a reference to the amount due on foot of the loan accounts without reference to any surcharge interest. This I did not

take to be disputed, and is how it would be understood by a reasonable person reading that letter. The Special Liquidators’ letter of

12th November, 2013 was therefore a clear and unambiguous representation that the plaintiff could redeem his loan at par i.e. at the

level of the balances set out in the bank statements that he received from IBRC from time to time, without reference to any

surcharge interest. Can it be inferred from this that IBRC/the Special Liquidators would not be charging any surcharge interest? In my

view it can, given the history of the accounts since 31st December, 2010 and the absence of any indication of surcharge in the

intervening period. The plain meaning of this representation was obvious – it was saying to the plaintiff that you only have to pay par

in order to redeem your loans, and nothing further is required. Moreover, following on from this in the mounting of an offer of €24

million in March/April, 2014 through a special purpose vehicle company to purchase his loan and that of Mr. Duffy from IBRC, I am

satisfied from the evidence that the plaintiff actually based the amount of his bid on combined loan balances without including any

surcharge interest.

147. In the light of such a clear representation I don’t believe therefore that it is necessary for the court to make any assumptions as

to the state of knowledge of the parties as to their respective rights and obligations under the Facility Letters and in particular clause

5.1, at that time. Nor is it necessary to determine whether the Special Liquidators had a duty to mention surcharge in this letter, and

whether their silence on the issue could give rise to estoppel by silence or acquiescence.

148. Was this representation intended to be relied upon by the plaintiff? Undoubtedly it was, as the representation that the plaintiff

could redeem at par was immediately followed by the sentence “if you wish to pay off your loan in full please contact [X]…who will

provide the amount outstanding by you.” It should also be noted that this letter was in response to the plaintiff’s letter of 8th

November, 2013 indicating his wish to redeem his loans.

149. While it is true that the plaintiff did not proceed to redeem his loans in the manner contemplated by this correspondence, I am

satisfied that he did place reliance on it in assembling and mounting the bid of €24 million for the combined loans and security, and the

work and expense involved in raising alternative finance to support his bid.

150. As we have seen the Special Liquidators again attempted to sell the loans comprised in the Facility Letters in the summer of

2014, and the plaintiff as a bidder at Phase II had access to the Data Room. The information placed there by or on behalf of the

Special Liquidators invited bidders “to make your Phase II offer based on the Gross Loan Balance as at 31st July, 2014”. This was then

stated to be €16,144,572. I am satisfied from the evidence that this figure tallied with the plaintiff’s understanding at the time of

what he owed on foot of the Facility Letters, and was reflected in the bank statements which he received at different times quarterly

or two monthly. There was nothing in the sales documentation in the Data Room suggesting that any surcharge interest was included

or applied to the loans, or that any offer should take into account a surcharge interest.

151. Significantly the term “Gross Loan Balance” was defined in the information provided by the Special Liquidators for the purposes of

the sale as follows:-

“Gross Loan Balance represents all outstand (sic) principal, interest and all other amount[s] due under a specific account

in local currency”.

152. It is hard to conceive of a clearer representation. In my view this sales information was a further representation by IBRC to the

plaintiff, (and incidentally to Breccia), of what it regarded as being all the principal, interest and all other amounts due and owing

on foot of the plaintiff’s loans at that time. The invitation to make offers to purchase the loans on the basis of the figure of

€16,144,572 was clearly a representation intended to be relied upon by the plaintiff (and the other bidder, Breccia).

153. There is no doubt that the plaintiff relied on the Gross Loan Balance figure provided in the Data Room in assessing his bid offer of

€16,850,000. In evidence the plaintiff explained how he came to that offer. He regarded the figure in the Data Room as “pretty

genuine”, and under the terms of a Phase II offer a figure to cover administrative/legal costs that were going to be incurred by IBRC

had to be added. As there was uncertainty over these he explained “…we just put in for safety, safety net, because this was very

important to us to buy our loan not redeem it”. He was then asked (Day 1 p. 102):-

“Q. Well, is any part of that related to a belief that you might have been charged a surcharge of 4% over the facility

letter?

A. No, I never heard of that word before.”

154. I find in this evidence that the plaintiff relied centrally on the representation by the Special Liquidators of a Gross Loan Balance

of €16,144,572 as of 31st July, 2014, and that his bid was calculated on that basis and that he did not at that time entertain any

notion that the loan might attract surcharge interest.

155. I also note that Breccia in bidding €17 million for the loan (in addition to which they paid the administrative costs of the Special

Liquidators of €299,000 odd) paid a sum which, while it exceeded the gross loan value, was substantially less than the gross loan

value plus surcharge interest from 31st December, 2010. Thus Breccia also placed reliance on the representations of the Special

Liquidators as to gross loan value in the Data Room, and also did not factor in any surcharge interest. Mr. Sheeran in his evidence

accepted that at the time of the sale he was aware that the plaintiff was another bidder, and he agreed that because of this Breccia

made an offer of €17 million that was somewhat over the Gross Loan Balance on 31st July, 2014. He agreed that “we wanted to

ensure that we acquired the loan” (Day 3 p. 51). I am satisfied that the only reason Breccia was prepared to pay approximately

€850,000 over the par value was a strong desire to acquire the loan and more particularly the security for the loan.

156. Accordingly, IBRC/the Special Liquidators were at the date of assignment to Breccia estopped from recovering or seeking to

recover default surcharge interest. Consequently, Breccia who acquired the loans and security ‘subject to the equities’ is estopped

from seeking to recover (or add to the redemption figure) any default surcharge interest that might otherwise be contractually

claimed for any period up to 10th December, 2014.

157. The plaintiff relies further on the stated amount of the demand in Breccia’s letter of 18th December, 2014 as establishing an

estoppel. Breccia responded that it cannot amount to an estoppel as the letter ended with the following saver of rights:-

“This demand is without prejudice to and shall not be construed as a waiver of any other rights or remedies which we may

have including, without limitation, the right to make further demands in respect of sums owing to us.”

It is appropriate to make some findings in respect of this letter.

158. The letter was prepared and sent after advice had been obtained from Breccia’s solicitors. Mr. Sheeran personally signed the

letter on Breccia’s behalf. It demanded immediate payment from the plaintiff of the sum of €16,144,572 under the Facility Letters (and

a further sum on foot of the plaintiff’s guarantee). I have some difficulty with Mr. Sheeran’s evidence that the reference in the final

paragraph to “the right to make further demands in respect of sums owing to us” was intended to be a reference to a right to charge

surcharge interest, a subject to which I return below. I do accept his evidence that the quantum of the demand was “pitched

marginally below the par value of the loan” in order to ensure what he described as “the integrity of the enforcement process”, and so

that it couldn’t be “derailed” (Day 3 p. 74). The clear and admitted intention of Breccia at that time was to appoint a receiver to the

secured assets the principal of which was the plaintiff’s shareholding in BHL. I am of the view that this was their primary objective in

the issuance of the letter of demand. The timing supports this – it was very soon after completion of the acquisition of the loans, and

very close to Christmas when it might be anticipated that it would be difficult for the plaintiff to organise payment or mount effective

opposition to the appointment of a receiver.

159. I am satisfied that the real reason for demanding €16,144,572, as opposed to any greater figure, was concern over the

calculation of normal interest by reason of the decision in IBRC v. Morrissey [2014] IEHC 470 which raised issues on the historic

calculation of normal interest which applied to these loan accounts. I am satisfied that if the plaintiff had promptly discharged the

sum of €16,144,572 on receipt of the letter dated 18th December, 2014 the loans under the Facility Letters would have been

redeemed (albeit that the security might not have been discharged as it still supported the cross guarantees that the plaintiff had

given in respect of the other Anglo loans), and indeed Mr. Sheeran accepted as much in his evidence when stating that he didn’t

believe that Breccia would have had any scope to rework the redemption figure if the plaintiff had paid up on foot of the figures in the

letter.

160. I am satisfied that any reasonable person standing in the shoes of the plaintiff as borrower and having knowledge of the history

of the account as related above with Anglo/IBRC and the Special Liquidators would, with one proviso, have treated this letter as

clearly representing the redemption figure. Knowing €16,144,572 to be the Gross Loan Balance as of 31st July, 2014 they would have

wondered why additional ordinary interest since that date had not been added to the figure. Equally they would probably and

reasonably have treated the interest since 31st July 2014 as the possible subject of further demand under the reservation of rights

paragraph if the principal demand was not met. Mr. Sheeran in evidence mentioned that the normal interest in the region of €113,000

accrued from 31st July, 2014 to the date of completion of the purchase of the loan (10th December, 2014). This minor ambiguity does

not however materially affect the clarity of the representation in the letter.

161. Mr. Sheeran stated that before that letter was issued he was aware of the surcharge provision in the General Conditions and

that Breccia had entitlement to 4% surcharge from the date the loans went into default (Day 3 pp. 72-73). He said “I don’t believe

that we were under any obligation to report our intention to apply it” (Day 3 p. 73) and relied on the saver of rights in the letter and

on the terms of the Facility Letters which “ought to have been clear” to the plaintiff (Day 3 p. 77).

162. The question arises as to whether Breccia had a duty of disclosure, and whether their non-disclosure/silence can be treated as

actively misleading the plaintiff. The test in Pacol, which I respectfully adopt, is whether a reasonable man would have expected

Breccia “acting honestly and responsibly, to bring the true facts to the attention of the other party known by him to be under a

mistake as to their respective rights.” I do not accept that, as the law has evolved, that the obligation in this regard is limited to

circumstances of a strict legal duty of disclosure, as that would be to deprive equity of the flexibility that is integral to its application.

163. Given the representations already made by Breccia’s predecessor, and in particular the bank statements and the Special

Liquidator’s statement of the “Gross Loan Balance” in the Data Room, I am satisfied firstly that the plaintiff believed and understood

the Gross Loan Balance to be €16,144,572 as of 31st July, 2014. Secondly, I am satisfied that Breccia, being aware that the plaintiff

had access to the Data Room, must have been fully aware of the plaintiff’s understanding in this regard. Indeed, Mr. Sheeran

accepted that it was clear to him/Breccia when purchasing the loans that surcharge interest had not been applied up to that point

(Day 3 p. 72).

164. Accordingly, Breccia, given that it considered that surcharge interest applied, should have disclosed this in the letter of demand.

Breccia could have calculated and added a specific sum by way of surcharge, or indicated a generic charge by reference to 4% and

clause 5.1. The failure to do so was, and was bound to be, misleading. This is emphasised by the fact that surcharge interest would

have added in excess of €2.8 million to the debt at that time.

165. The silence on this issue was a false representation as to fact, namely Breccia’s understanding that surcharge interest applied to

loans, and a false representation as to Breccia’s intention to claim such interest. In these circumstances their silence on the issue of

surcharge interest raises an estoppel, and it would be unconscionable for them to be permitted to rely on the saver of rights

statement to overcome their misleading silence on the subject.

166. The finding of estoppel by silence is exacerbated by the fact that Breccia still did not seek surcharge interest in their Defence

and Counterclaim delivered herein on 26th February, 2015. Although later amended, the initial counterclaim as pleaded was silent as

to surcharge, and with reference to the plaintiff’s loans in para. 65 sought to recover €16,144,572 and, in the prayer, unspecified

“interest”. In the absence of full pleading of a claim to surcharge interest, that prayer could only be read as a claim to ordinary

interest – or perhaps Courts Act interest post judgment – on the sums pleaded in para. 65.

167. It wasn’t until the plaintiff demonstrated serious intent and desire to redeem his loans, as expressed in the letter of 18th May,

2015 from Arthur McLean to Matheson solicitors, that the defendant, after a lapse of some weeks, reverted on 9th June, 2015 with a

figure that included surcharge interest. Even at that stage Breccia through its solicitors did not explain the higher figure now

suggested as the redemption figure, or set out any calculations of a surcharge interest. That was only provided on 19th June, 2015.

This reaction to the request for a redemption figure and the attempted imposition of surcharge at that point in time was

unconscionable.

168. I have no doubt that the representations as to Gross Loan Balance/amounts due under the plaintiff’s loans made by the Special

Liquidators when selling the Tranche 5 loans in 2014, and by Breccia in the letter of 18th December 2014, were intended to induce

reliance by the plaintiff. The Special Liquidators specifically stipulated that the bid offers be based on the Gross Loan Balance, and

the letter of 18th December 2014 sought “immediate payment” of the same Gross Loan Balance.

169. I am also satisfied that the plaintiff believed he was entitled to rely on these representations – this is demonstrated by his

subsequent actions.

170. Breccia disputes that the plaintiff in fact relied upon the representations as to the gross balance due, or acted to his detriment.

Counsel argued that the plaintiff must establish that in reliance on the representation(s) he “changed his course of conduct or took

some action to his detriment”.

171. I find that the plaintiff did in fact alter his position and acted to his detriment in sourcing funding and making a bid offer in

October, 2014 to purchase his loans in the “Project Amber” Tranche 5 sale. First, his bid was without doubt based on the Gross Loan

Balance figure of €16,144,572. Had the Gross Loan Balance included surcharge interest it is reasonable to presume that the plaintiff

would have pitched his bid very differently, or not made a bid at all. While it is true that one reason given by the Special Liquidators

for the failure of his bid was that he “did not have committed funding” (their letter of 17th October, 2014 to the plaintiff) this does

not mean that he did not act to his detriment in seeking funding and putting together a package that was presented with the bid

offer. This was done through London based equity funders which provided a six page Term Sheet dated 30th September, 2014 which

sets out in detail their terms “regarding a possible €20.5 million loan” and is accompanied by the statement:-

“This Letter…should not be construed or deemed to be a firm commitment to lend on behalf of the Fund. The terms and

conditions set forth herein are guidelines and only upon issuance of a commitment and completion of due diligence can

exact terms be determined, though if the parties agree to work together the indicative terms will then be subject only to

completion of satisfactory due diligence.”

172. While the terms indicated by the funder were not favourable, being for only 3 years and at high interest rates, and while it is

questionable whether the plaintiff could have serviced this loan, it cannot be denied that this letter was put in place and supported

the bid. This letter was buttressed by an accompanying letter from a Guernsey based financial agency confirming that the funder had

“in excess of £100,000,000 in un-funded commitments available”. It was also supported by a second letter dated 10th October, 2014

from the funder addressed to KPMG, the Special Liquidators accountants, which put the Term Sheet in somewhat stronger terms

stating that the Fund “has agreed terms and conditions (set forth…in the “Term Sheet”) to provide Dr Joseph Sheehan or a nominated

acquisition vehicle…up to €20.5 million”, contingent upon due diligence and final authorisation, and on the basis that this letter also

should not be construed as a commitment. The plaintiff’s evidence was that he had advisors, including legal advice, in making his bid,

which is not surprising given the amounts involved. His bid at para. 7.4 set out the names of five advising firms. I have no doubt that

putting together this bid involved the plaintiff in considerable administrative and advisory expenditure, as well as input of his own time

and energy.

173. Secondly, I accept the plaintiff’s evidence that after losing out on the sale he set about trying to raise funds with a view to

redeeming his loan, and that this work was in progress (he had hoped to have funds in place to redeem on or about 5th December,

2014) but was incomplete or had been unsuccessful by the time he received Breccia’s letter of 18th December, 2014.

174. Thirdly, I accept that after its receipt by the plaintiff that letter was shown to potential funders in the course of continuing

efforts to raise funds, and that it featured in discussions up to 25th May, 2015 when his solicitors sought a redemption figure as “our

client is in the process of refinancing his loans”. I accept the plaintiff’s evidence (Day 2 p. 69) that based on that letter,

notwithstanding the saver of right statement, he continued to rely on the figure of €16,144,572 plus added interest of “1.75% over

Euribor”, which was “normal commercial” interest under the Facility Letters.

175. While there was no evidence before the court that the plaintiff has an unequivocal commitment to funding to redeem his loan at

this stage, this is not surprising given the dispute over the redemption figure that has been live since June, 2015 when surcharge was

suddenly raised, and raised in an unconscionable manner, for the first time. I am nevertheless satisfied from the plaintiff’s evidence

that his efforts have produced potential funders even if the best terms that he might obtain may be unfavourable. I am also satisfied

that both before and after 18th December, 2014 the plaintiff’s efforts were based on his justifiably held belief that the redemption

figure was in the order of €16-17 million as a result of the representations/silence that I have found give rise to an estoppel. Whether

his most recent efforts will or will not ultimately bear fruit is not of any great relevance to the issue of estoppel, or his entitlement to

know redemption figures in respect of his loans.

176. For each of these reasons I am satisfied that the plaintiff has indeed acted to his detriment, and/or that it would be unfair and

unconscionable for Breccia to recover surcharge interest for any period of time prior to 19th June, 2015 when its solicitors provided

details of such a claim. It follows that Breccia is estopped from pursuing that claim, and that even if surcharge can be contractually

claimed under clause 5.1 the redemption figure should exclude any surcharge interest on the balances outstanding for any period prior

to 19th June, 2015 when details of the surcharge claim were provided for the first time.

177. As to the position since 19th June, 2015, firstly as there was no express waiver of clause 5.1, that provision remains part of the

loan terms. Secondly, it is a principle of promissory estoppel that in general its effect is suspensory or temporary and can be

withdrawn unless the promisee cannot resume his/her previous position. The Barge Inn Limited v. Quinn Hospitality Ireland Operations

3 Limited [2013] IEHC 387 concerned a reduction in rental payment which was consensual so long as the demised property was

adversely affected by economic circumstances, and it was held that there was a promissory estoppel such that a purported

withdrawal of the concession while such circumstances still prevailed was not valid. Laffoy J. stated (at para.74):-

“…if the Court can make a finding as to the terms on which there was consensus between the promisor and promisee as

to when the concession would cease, the promisor is entitled to withdraw the condition in accordance with those terms;

otherwise, the concession may be withdrawn on giving reasonable notice, unless the promisee can demonstrate that he

cannot resume his former position. It would hardly be consonant with fairness and equity, if the promisor could ignore the

terms, express or implied, as to the duration of the concession, and terminate it at will or on notice, even on reasonable

notice.”

178. There was never any agreement between Anglo/IBRC or the Special Liquidators, or Breccia, and the plaintiff as to when the non-

application of surcharge interest would cease. The next question is what notice was then required to enable Breccia to apply

surcharge to future balances. This is not a case in which the ability or otherwise of the plaintiff as promisee to pay surcharge has any

bearing on the resumption of such an obligation (if it exists). Matheson’s letter of 19th June, 2015 makes abundantly clear Breccia’s

intention to apply surcharge to the accounts – prospectively by reference to the daily rate, as well as retrospectively. In my view

this is reasonable notice in the circumstances of this case.

Accordingly, if clause 5.1 entitles Breccia to add surcharge interest to the redemption figure it is entitled to do so but only with effect

from 19th June, 2015 being the date on which it unequivocally made clear its intention so to do.

Issue E: Can Breccia charge “enforcement” costs, charges and expenses, and if so, how much?

179. This issue asks whether Breccia can, in addition to the loan balances (whether with or without surcharge), lawfully include as

part of the redemption figure the legal costs and expenses outlined in Matheson’s letter of 19th June, 2015 (€93,362.56), and in

addition the further costs and charges since 8th June, 2015 of €313,036, as well as VAT and counsel’s fees for the modular hearing

that had yet to be billed when Mr. Sheeran gave evidence that the majority of this had been paid by Breccia.

180. These costs and expenses are said to arise out of the legal work carried out on Breccia’s behalf in defence of these proceedings.

No Bills of Costs have been presented to the court, and it is not apparent whether these costs have been drawn by professional

costs drawers. There is therefore no evidence that the costs and charges claimed have been reasonably incurred, or are reasonable

in amount. No costs orders have been made to date, other than orders reserving motion costs, and accordingly the sums claimed

have not been taxed. The court does not have the benefit of expert evidence as to the work carried out or the appropriate level of

costs and expenses, but it must be commented that the charges seem to be surprisingly high.

181. The plaintiff contends that no liability for costs arises because no costs order has been made in favour of Breccia. It contends

that costs incurred in the defence of this modular trial are not “enforcement costs” for the purposes of clause 6.2 of the General

Conditions, and that as Breccia’s counterclaim does not arise for determination in this module, any costs that might be incurred in

respect of that will fall to be determined as part of a later substantive trial. At most, it is said, Breccia has incurred costs associated

with Matheson’s 2015 letters of demand in respect of surcharge and enforcement costs.

182. Counsel for Breccia made oral and written submissions but also relied on submissions made a week previously in the modular trial

in Flynn No.2 where a similar issue arose. I have considered all those submissions in preparing this judgment. It was contended that as

a matter of general principle a mortgagor is obliged to indemnify a mortgagee in respect of all costs incurred in enforcing the

mortgagee’s rights under the relevant mortgage. This includes costs incurred in defending, as well as instituting proceedings, provided

it can be shown that the relevant costs were reasonablly incurred. Reliance was placed on Re Red Sail Frozen Foods Limited (in

Receivership) [2007] 2 IR 361. In that case Laffoy J. stated:-

“50. The legal principles governing the entitlement of a mortgagee to add to the secured debt his costs, charges and

expenses properly incurred are summarised in the judgment of the Court of Appeal (delivered by Scott L.J.) in Gomba

Holdings U.K. Ltd. v. Minories Finance Ltd. (No. 2) [1993] Ch. 171. The summary commences with the following quotation

of remarks made by Lord Selborne L.C. in Cotterell v. Stratton (1872) 8 Ch. App. 295 at p. 302, which were made in a

case in which the mortgage, so far as the report revealed, was silent about cost charges and expenses:-

“The contract between mortgagor and mortgagee, as it is understood in this court, makes the mortgage a security,

not only for principal and interest, and such ordinary charges and expenses as are usually provided for by the

instrument creating the security, but also for the costs properly incident to a suit for foreclosure or

redemption....These rights, resting substantially upon contract, can only be lost or curtailed by such inequitable

conduct on the part of a mortgagee…as may amount to a violation or culpable neglect of his duty under the

contract.”

51 On the basis of the authorities, the Court of Appeal held that the principle that a mortgagee is entitled to add to the

secured debt his costs, charges and expenses properly incurred is firmly embedded in the law and is the principle

underlying express contractual provisions of the type one usually finds in security documents. However, the court went

on to clarify some aspects of the general principle.

52 First, it pointed out that it is not all costs, charges and expenses properly incurred which a mortgagee can, without

express contractual justification, add to the security. It illustrated this point by reference to a decision of the Court of

Appeal in Parker-Tweedale v. Dunbar Bank plc. and others (No. 2) [1991] Ch. 26 and in particular the following passage

from the judgment of Nourse L.J. at p. 33:-

“A mortgagee is allowed to reimburse himself out of the mortgaged property for all costs, charges and expenses

reasonably and properly incurred in enforcing or preserving his security. Often the process of enforcement or

preservation makes it necessary for him to take or defend proceedings. In regard to such proceedings three

propositions may be stated. (1) The mortgagee's costs, reasonably and properly incurred, of proceedings between

himself and the mortgagor or his surety are allowable. The classical examples are proceedings for payment, sale,

foreclosure or redemption, but nowadays the most common are those for possession of the mortgaged property

preliminary to the exercise of the mortgagee's statutory power of sale out of court. (2) Allowable also are the

mortgagee's costs, reasonably and properly incurred, of proceedings between himself and a third party where what

is impugned is the title to the estate. In such a case the mortgagee acts for the benefit of the equity of redemption

as much as for that of the security. (3) But where a third party impugns the title to the mortgage, or the

enforcement or exercise of some right or power accruing to the mortgagee thereunder, the mortgagee's costs of

the proceedings, even though they may be reasonably and properly incurred, are not allowable.”

53 It is interesting to note that Nourse L.J. recorded at p. 35 that the third proposition, which he characterised as an

exception to the general rule, was recognised in Ireland in Re Baldwin's Estate [1900] 1 I.R. 15. However, on the basis of

what the court has been told of the nature of the proceedings, and insofar as it is relevant, I do not consider the

proceedings, notwithstanding the joinder of Mr. Younger as a plaintiff, are properly characterised as a third party

challenge, so as to come within the exception.

54 Secondly, the Court of Appeal pointed out that the court will examine the costs, charges and expenses sought to be

added to the security and disallow those that it considers have not been “properly incurred”, subject to the qualification

that express contractual provisions may alter what otherwise would have been the position.

55. Thirdly, there is authority for the proposition that the entitlement of a mortgagee to receive its costs “properly

incurred” requires the costs to be taxed on a party and party basis. However, it was recognised that the express terms of

the security document, if plain and unequivocal, could justify a departure from that rule.” [Emphasis added]

183. Counsel emphasised the phrase “…necessary…to defend…proceedings” to argue that the enforcement costs include Breccia’s

costs of defending the plaintiff’s claims in these proceedings/this module because it is core to Breccia’s entitlement to enforce its

legal rights under the Facility Letters and security documents.

184. Breccia also relies on the express contractual provision in clause 6.2 of the General Conditions which as we have seen states

that the borrower “…shall pay to the Bank forthwith upon demand…all costs incurred by the Bank in the enforcement of the

Agreement (including any costs incidental to the sale of the assets held as security by the Bank) and the security comprised in the

Security Documents”. This, it is said, includes the costs of defending the modular issue concerning the amount of the debt.

185. Counsel also relied on the terms of the Mortgage to argue that Breccia enjoys the right to recover the costs of enforcement

from the secured property. First, under clause 2.1 of the Mortgage the plaintiff covenanted to pay “the Secured Liabilities”, which are

defined to include:-

“…all monies now or at any time hereafter…due or owing to the Bank by the Mortgagor including…under…any Financing

Agreement, whether on the balance of any account or accounts of the Mortgagor or in any other manner including,

interest discount commitment commission and arrangement fees and banking and other charges incurred on its account

(on a full indemnity basis)…including for the avoidance of doubt, any other monies due or to become due by the

Mortgagor to the Bank under any of the provisions of this Deed and/or any other Security Documents.”

186. Secondly, under clause 7.1(b) the plaintiff undertook to pay:-

“…all existing and future taxes, duties, fees, charges, assessments, impositions and outgoings whatsoever (whether

imposed by deed or statute or otherwise and whether in the nature of capital or revenue and even though of a wholly

novel character) which now or at any time during the continuance of the security constituted by or pursuant to this

Mortgage are payable in respect of the Security Assets or any part thereof or by the owner thereof or any person in

possession thereof…”

187. Counsel argued that as the liability is contractual there is nothing to refer to taxation – the only question is whether they are

“enforcement” costs. It was argued that there is nothing to suggest that costs are limited to party and party or solicitor and own

client costs, as those are understood in taxations, although it was tentatively accepted that a term of reasonableness may be

implied. Put another way it was suggested that the costs could be claimed on an indemnity basis provided that the provisions were

not applied with mala fides.

188. However, it appeared to be accepted by counsel for Breccia that if the costs were made part of a court order then they would

normally be governed by taxation. Thus, counsel expressly did not pursue an argument that these costs and expenses can be

recovered by Breccia as part of the redemption figure in the face of an order declining to award costs to Breccia.

189. As I understand counsel’s argument (which may apply more fully to the circumstances of the Flynn No.2 case where historic

costs of other proceedings were also at issue) it was contended that the costs and expenses have been incurred in defending these

proceedings – in particular this module – and are currently a “contingent liability”, dependant on this court, or, in the event of an

appeal, the appellate court, awarding costs. The further costs of these proceedings may be a further “contingent liability”.

Accordingly, it is said that the court should deal with this issue on a principled basis in determining the redemption figure, on the basis

that the loans cannot be redeemed until the debt plus the contingent costs are paid.

190. With regard to “contingent costs” Breccia’s submission also relied on Australia and New Zealand Banking Group Limited v. Mishra

and Another [2012] NSWSC 13333. In that case mortgagors sought to redeem the mortgage debt and sought a redemption figure

from the plaintiff bank. The mortgagors indicated that they did not intend to abandon a foreshadowed action against the plaintiff bank

and the plaintiff bank refused to agree a discharge figure that did not include a provision for the cost of defending the foreshadowed

claim ($50,000 as security for costs). The court held that the plaintiff had acted reasonably in that regard in the circumstances

where the costs of defending such an action would be payable by the mortgagors under the terms of the mortgage as “enforcement

costs”.

Discussion

191. I accept as correct the principles cited with approval by Laffoy J. in Red Sail, and in particular I agree with the observation of

Nourse L.J. in Parker-Tweedale that “[o]ften the process of enforcement or preservation makes it necessary for [a mortgagee] to

take or defend proceedings.” From this it follows that in general the costs incurred by a mortgagee in defending before a court the

validity or quantum of its core claim, are costs that it is entitled to add to the debt or redemption figure. It does not logically make

any difference that this ‘defending’ arises in a claim, defence or counterclaim.

192. In construing clause 6.2 I do not see any justification for the narrow interpretation of “enforcement” advocated by the plaintiff,

that would limit this in the context of court proceedings to the costs of the bank/Breccia in claiming or counterclaiming the debt due

under the Facility Letters. I do not consider this argument to be supported by the two cases cited by his counsel. Trimast Holding

Sarl v. Tele Columbus Gmbh [2010] EWHC 1944 (Ch) is distinguishable because it related to an agreement which itself contained a

definition of “enforcement” that the court construed in a limited way by reference to the wording in the definition. Satinland Finance

Sarl and Trimast Holding Sarl v BNP Paribas Trust Corporation UK Ltd. and Irish Nationwide Building Society [2010] EWHC 3062 (Ch)

was concerned with an attempt by the claimants, as the subordinated holders of Notes issued by INBS, to compel BNP, the trustee of

the Notes, to present a winding up petition in respect of INBS to the Irish courts because of what were claimed to be breaches of the

Notes. Under the Notes the trustee could institute proceedings to “enforce” any obligation or provision in the Notes binding on the

issuer. Mann J. at para. 42 referred to the Shorter Oxford English Dictionary and Concise Oxford Dictionary definitions of “enforce” –

“to compel observance of” or to “compel obedience to”, and counsel for the plaintiff in this case urged that on this basis the term

“enforcement” should be limited to proceedings by Breccia to compel observance or obedience. However, Mann J. went on in para. 42

to state:-

“That makes sense if the trustees commence proceedings requiring the Issuer to do something, stop doing something or

seeking compensation for an infringement of an obligation under the documentation. But it is not easy to see how a

winding up petition is an enforcement for these purposes. The only remedy sought is a winding up petition. That does not

enforce anything in any meaningful sense. It does not make INBS do anything which it is wrongfully not doing, or produce

any compensation for some wrongful act….”

It is clear from this passage that Mann J.’s references to enforcement were in the very limited context of the status of a winding up

petition, and not supportive of the plaintiff’s argument.

193. Enforcement proceedings may raise a variety of issues, and will frequently involve assessing the validity of or construing an

agreement and applying that to the facts. The defence of this module involves the construction of the Facility Letters and related

security documentation; it is core to the quantum issue, and in particular whether Breccia is contractually entitled to include 4%

surcharge interest in the redemption figure. The claim to surcharge interest is also now part of Breccia’s counterclaim to recover the

debt due under the Facility Letters. At the level of principle it is my view that defending this module must be considered as part and

parcel of Breccia’s “enforcement” proceedings. It is one of the issues that must be decided before Breccia can proceed with its claim

“to compel observance” or “obedience”. In Australia and New Zealand Banking Group Ltd. v. Mishra Davies J. at para. 34 approved a

dictum of Palmer J. in Liberty Funding Pty v. Steele-Smith [2004] NSWSC 1100 where the matter was put succinctly:-

“…In my opinion, enforcement of a mortgagees’ rights…is not confined to the taking of steps to exercise a power of sale

or other right conferred by the mortgage: it encompasses whatever is necessary to protect and preserve the mortgagee’s

rights when their validity is challenged or their exercise is sought to be prevented or impeded.”

Adopting this passage I conclude that defending this module should be viewed as necessary to protect/preserve what Breccia claims

to be its rights under the Facility Letters and security documentation, and therefore part of enforcement proceedings.

194. I am also satisfied that enforcement costs, insofar as they are contractually recoverable under clause 6.2 of the General

Conditions, can be enforced against the property secured by mortgage pursuant to the Facility Letters. This is because the definition

of “Secured Liabilities” includes monies due under “the Security Documents” which in turn includes each “Financing Agreement”, which

includes “each loan agreement”. The Facility Letters (and applicable General Conditions) are captured by this wording.

195. Where a court has made an order directing that costs be paid by a bank, or has specified that there should be no order in

relation to such costs, as a matter of public policy a contractual provision entitling a bank to add “enforcement costs” cannot in my

view be construed as entitling the bank to recover those costs, or enforce against security, in defiance as it were of the court order.

Were the position otherwise the administration of justice by the courts and the enforcement of its judgments would be seriously

undermined, and it would open the door to a multiplicity of different contractual provisions effectively ousting the jurisdiction of the

courts or fatally undermining the effectiveness of court orders.

196. In British Eagle v. Air France [1975] 1 WLR 758 (HL) the court held that contractual arrangements having the affect of altering

the order of payment provided by statute on company insolvency were “contrary to public policy” (see Cross L.J. p. 780). Similar

principles of public policy apply in the UK to prohibit contracting out of pari passu distribution under the insolvency rules – see

Belmont Park Investments v. BNY Corporate Trustee Services Ltd. [2011] 3 WLR 521. In an ex tempore judgment that I delivered in

Prime Fitness Limited, in Examinership (unreported, 14th August, 2015) I relied on these authorities to find contrary to public policy a

provision in a guarantee of a lease entered into by the company that purported to exclude the guarantee of the rental obligation from

the effect of any examinership. I stated:-

“I find the authorities cited to be persuasive. It seems to me that if such a clause was valid it would become

commonplace and would be used in every possible form of contract to prevent liquidators or examiners from accessing

assets, repudiating contracts, or pursuing realistic proposals for companies in examinership”.

197. This principle can be applied by analogy to clause 6.2, and the provisions of the security documentation relied on by Breccia, not

to render them void but rather to construe them so as to limit their scope and thereby avoid any effect that would be contrary to

public policy. In my judgment these provisions cannot apply to enforcement costs and expenses which are the subject of a court

order determining who is to pay those costs, or directing that parties are to bear their own costs, or making no order as to costs, or

directing the level of costs recoverable. A contractual provision cannot override such order in any respect. As a consequence of this

the bank – now Breccia – is bound by that taxation (or any appeal therefrom) and cannot seek to use the contractual or security

provisions to seek to recover any balance of outlays or charges made or paid out which do not “tax”. So for example if costs were

awarded on a party and party basis Breccia would not be entitled to separately seek to recover the balance paid out, or seek to

enforce for such balance against the secured property.

198. This conclusion is lent further support by the decision in Red Sail. The background was that certain companies and an individual

concerned had challenged the appointment of a receiver by the bank, and those proceedings had settled. One term of settlement was

that the bank, without admission of liability, agreed to contribute €100,000 towards the plaintiffs’ costs of the proceedings. An issue

that arose before Laffoy J. was whether the bank was entitled to be paid by the receiver out of the assets of the companies (1) the

legal costs of appointing the receiver and (2) the costs of the proceedings. With regard to (2) Laffoy J. accepted the “irrefutable

logic” that there were two possible outcomes to the original proceedings – either the plaintiffs would have won and probably been

awarded their costs against the bank and the receiver; or they would have failed in which case the bank and receiver would probably

have been awarded costs. Laffoy J. then proceeded: -

“An entitlement by the bank to add its costs to the debt would only have arisen if the latter outcome, the companies

lost, had come to pass.”

This reinforces my view that Breccia in this instance can only add the costs of defending this module to the plaintiff’s

debt/redemption figure to the extent that it is awarded costs in this module, and only in the amount at which such costs might be

agreed or taxed in default of agreement.

199. The basis for taxation could however be the subject of debate, and as Laffoy J. in Red Sail indicated in her third observation “…

the express terms of the security document, if plain and unequivocal, could justify a departure from th[e] rule” that costs be taxed on

a party and party basis. At p. 18 of her judgement Laffoy J. stated:-

“…In my view, the Court of Appeal [in Gomba], at p.186 of its judgment, clearly recognised that the express terms of a

particular security document may eliminate the risk of taxation being ordered on a party and party basis, for example,

where it is expressly provided that the mortgagee is entitled to costs on a “full indemnity basis”. However, such a term

does not countenance costs which are either unreasonably incurred or unreasonable in amount being allowed. In this

case, the guarantees cover the liability of Frozen Foods and Kilmore for legal and other expenses on a full indemnity basis

and the three debentures secure, inter alia, the liability of each of the companies giving the debentures as guarantor by

way of floating charge on the respective assets of each of the companies. That, in my view, is sufficient to entitle the

bank to the costs it has claimed in relation to the appointment of the receiver on an indemnity basis, subject, however,

to not being unreasonable in amount. As regards the quantum of this aspect of the claim by the bank, adopting an

approach consistent with the approach I have adopted in relation to the receiver’s legal costs, I do not propose to

approve of the amount claimed. If the companies dispute the amount, they can request the taxation of the costs.”

200. In the present case General Condition 6.2 refers to “all costs”, but not indemnity costs. However, General Condition 14 provides:

-

“14. Indemnity.

The Borrower indemnifies and agrees to keep indemnified the Bank against all claims, demands, liabilities, losses, costs

(including legal fees on a full indemnity basis), actions, proceedings, charges and expenses whatsoever and howsoever

arising which the Bank may incur or suffer by reason of:-

…

(b) any default by the Borrower or any guarantor in the performance of any of the obligations expressed to be assumed

by it in the Agreement or any of the Security Documents…”.

As we have seen, “Secured Liabilities” is defined in the Mortgage to include “other charges incurred on its account (on a full indemnity

basis)”, and clause 7.1(b) also refers to a duty on the borrower to pay “and indemnify” the bank. Accordingly, there is a contractual

basis in the Facility Letters and in the Mortgages for the court, if awarding any costs to Breccia, to do so on an indemnity basis. I

emphasise however that that is a matter for the court, which retains its usual discretion in relation to costs.

201. As to Breccia’s claim that it is entitled to enforcement costs that might possibly be awarded to it as a “contingent liability”, I do

not consider that the terms of the Facility Letters or mortgages can be construed as extending that far. Clause 6.2 applies only to “all

costs incurred in the enforcement” – indeed “incurred”, past tense, is used twice in the clause. A plain reading of clause 6.2 does not

show any intention to apply it to unascertained costs that might arise in futuro. As that clause contains the basic financial obligation

in relation to enforcement costs it seems to me that the mortgage provisions should be read and construed consistently with it.

“Secured Liabilities” so far as it is defined in the mortgage to mean monies “due and owing”, and “charges incurred on its account”

would clearly not extend to costs that might be awarded at some future date. The definition does go on to include “…for the

avoidance of doubt, any other monies due or to become due…under…the provisions of this Deed and/or any other Security

Documents”. However that is not sufficient to encompass a possible future incidence of costs that is contingent on a court order. It

only extends to monies actually due at the point of recovery. Thus, it would capture further interest accruing between the initiation

of proceedings and the sale of mortgaged assets.

202. Clause 7.1(b) does include an undertaking on the borrower/mortgagor’s part to:-

“promptly and duly pay, and indemnify the Bank…against all existing and future …charges…which now or at any time

during the continuance of the security constituted by or pursuant to this Mortgage are payable in respect of the Security

Assets or any part thereof or by the owner thereof or any person in possession thereof”. [Emphasis added]

It must be doubted that this clause can be construed to include enforcement costs because the main covenant to pay the Secured

Liabilities is in clause 2.1. More significantly, the words highlighted show that this subclause again only relates to charges that are

actually payable, and does not encompass unascertained possible future charges.

203. Nor do I consider that Australian and New Zealand Banking Group Ltd. v. Mishra [2012] NSWSC 13333 supports such a wide

proposition. The facts were quite particular to that case and concerned security for costs: the plaintiff bank initiated possession

proceedings to enforce security, which were met by a defence that the plaintiff had wrongly withheld monies under one facility which

prevented the defendants repaying the facilities, default of which was the basis of the bank’s claim. No counterclaim was made;

instead the defendants threatened a claim in separate proceedings. They then sought a redemption figure, but the bank was not

prepared to release the security unless the defendants (a) paid the indebtedness and (b) released the threatened claim or paid a sum

of $50,000 by way of security for the costs for such threatened claim. Davies J. stated:-

“41. Where the defendants embarked upon the course of threatening a claim against the bank and maintaining the threat

throughout the negotiations for a discharge of the mortgage they cannot be heard to say that the bank acted

unreasonably in refusing to agree to a payout figure which did not include a provision for the costs of defending such a

claim. A necessary concomitant of the defendants’ approach is the incurring of additional legal costs by the bank.”

In coming to this conclusion Davies J. relied on a decision of the New South Wales Court of Appeal in Overton Investments Pty Ltd. v.

Cuzeno RVM Pty Ltd. [2003] NSWCA 27, in which Hodgson JA., (with whom Handly and Stein JJA. agreed), said:-

“[63]…Where a dispute has arisen or is reasonably anticipated, a mortgagee is entitled to require not merely payment of

the amount secured by the mortgage but also payment or security for the probable costs of any contest…If the

mortgagee does not specify a payout figure which bears some reasonable relationship to the amount truly owing and

anticipated costs, then this may amount to unreasonable conduct or misconduct which disentitles the mortgagee to costs

subsequently incurred in determining the rights of the parties…Furthermore, where the mortgagee does not require

payment or security for the probable costs of any contest, and a question later arises as to whether the mortgagor’s

tender was sufficient to entitle the mortgagor to redemption, the mortgagee cannot then claim that the tender was

insufficient because it did not include provision for those costs: I know of no direct authority for that proposition, but in

my opinion it follows from the principles I have discussed.”

204. An overview of these two cases indicates that in Australia where a redemption figure is sought when enforcement proceedings

are being contested, or a contest is threatened, and there is a contractual provision entitling the lender to “enforcement costs”, then

it is reasonable for the lender/mortgagee to seek, in addition to the redemption figure simpliciter a figure representing what would be

appropriate as security for anticipated costs if the contest proceeds.

205. This approach in the Australian courts seeks to balance the lender’s right to costs with the right of a borrower wishing to redeem

or to obtain a certain redemption figure. It has the added advantage that if the loan is redeemed and the contest does not proceed

all or part of the ‘security for costs’ may be refunded. In principle it could be applied in this jurisdiction by leaving the mortgagee to

suggest a reasonable figure for security for costs, which might be agreed, and/or to apply to the court for such security for costs in

the normal way. The difficulty with this is that under Order 29 of the Rules of the Superior Courts security for costs can generally only

be ordered against personal litigants who are ordinarily resident outside the jurisdiction, although the same constraint does not apply

to corporate litigants. Accordingly it could not be availed of by a bank against most personal litigants. I am not persuaded that this

approach should be adopted here unless and until the lender obtains an order for security for costs or a sum for security is agreed.

Only then can it be added to the redemption figure.

206. The most important right that a mortgagor has is the right to redeem the mortgage. The courts attitude to this is expressed by

J.C.W. Wylie in Irish Land Law (Bloomsbury, 5th Ed.) at para. 13.35:-

“As one would expect, the courts have been vigilant over the years to ensure that mortgagors are protected in respect of

the right [of redemption] which is of such crucial importance to them, indeed one which is central to the very nature of a

mortgage transaction.”

It is well established that there should be no clog or fetter on the mortgagor’s equity of redemption. Again the learned author says at

para. 3.40:-

“While the mortgagor cannot redeem before the legal date for redemption, he can generally redeem in equity at any time

thereafter and the courts have been wary about clauses purporting to postpone the date for redemption for a period

much longer than the six months period usually specified in a mortgage deed. It is difficult to be dogmatic on this point,

for each case must be considered in the light of the particular circumstances surrounding it. Generally, what the courts in

both Ireland and England have said is that it would be unreasonable for it to be enforced, eg. because it render the

equitable right to redeem illusory. Thus a long postponement may be unreasonable because the property mortgaged is a

wasting asset, eg. a lease with a limited number of years to run, so that, if redemption is unduly delayed, the mortgagor

will get back a ‘fag end’ which is worthless.”[Footnotes excluded].

I respectfully adopt these passages as correctly representing the courts approach to the equity of redemption.

207. In the present case the right to redeem the mortgage is not coterminous with the right to redeem the loans, because even if the

loans are repaid in full the Mortgage of Shares also supports the cross guarantee, which is a continuing security in respect of Benray

Ltd.’s loans. Despite this in my view the plaintiff’s equitable right to redeem is inextricable from his right to redeem the Facility Letters,

because he cannot exercise his right of redemption without first redeeming his own loans. His right to know a redemption figure is

therefore just as great as it would be if there were no cross guarantee. A further incident of the same principles is that Benray Ltd.

(and by extension Dr. Sheehan as a cross guarantor) is also entitled to know the redemption figure in respect of its loan facilities.

208. The contractual provisions relied upon by Breccia for its right to include possible future enforcement costs as “contingent

liabilities” must be considered in the light of these principles. If Breccia is correct the availability of a definitive redemption figure could

be significantly delayed. It could be delayed while the balance of the substantive proceedings are heard; it could be further delayed in

the event of appeals from this decision in the modular trial, and/or from the decision in the balance of the case; it could even be

delayed by a further appeal to the Supreme Court. These are in addition to any delays occasioned by taxation, or taxation appeals.

This would be inconsistent with the equitable right to redemption – it would be a “clog” or “fetter” on redemption in real terms - and it

is easy to foresee potentially serious consequences for the plaintiff who claims, currently, to have funding in place to redeem his

loans. As an incident of his equity of redemption the plaintiff is entitled to know (or be in a position to calculate on a daily basis)

without undue delay what he must pay to redeem the Facility Letter. Whatever residual doubt may exist over the true meaning and

import of clause 7.1(b) of the Mortgage must, on this reasoning be resolved in the borrower’s favour.

209. Accordingly, I conclude that Breccia is not entitled to factor in or include in the redemption figure the costs and expenses

notified in correspondence since June, 2015. Following this judgment and any submissions that the parties may make I will deal with

the costs of the modular issue. If, but only if, any such costs are awarded to Breccia, then such costs (to be agreed or in default

taxed) will fall to be added to the redemption figure. Other than this, reserved costs or possible future or “contingent costs” of these

proceedings or any appeal do not fall to be included in the redemption figure that must be provided at this point in time.

Issue F: What is the correct redemption figure on 9th June, 2015 and as of today’s date?

210. In the course of hearing I encouraged the parties to agree the figures that would apply either way depending on whether

surcharge interest was applicable. At the close of hearing I was furnished with a sheet prepared by Mr. Sheeran with recalculated

figures on the basis that no default interest was applicable, and was informed that these were agreed figures should I decide that

surcharge did not apply. These show that as at 29th October, 2015 the principal stood at €16,500,696.44 with interest accrued to

that date of €485,232.27, making in total €16,985,929.21 as of 29th October, 2015. They further show interest accruing from 30th

October, 2015 to 31st December, 2015 at the daily rate of €770.64. Further, interest will be accruing at a similar daily rate from 1st

January, 2016, but I am conscious that this may have altered marginally assuming the three monthly EURIBOR rate has changed.

Subject to hearing the parties further on the detail of the figures, and with a view to providing a precise redemption figure (exclusive

of any costs that may arise), and a daily rate of accrual of interest based on the current EURIBOR rate, in my order, I will adopt the

above figures.

Issue G: What relief, if any, is the plaintiff entitled to in respect of the redemption issues?

211. First, I will make an order in terms of principal and interest, as just indicated. I will of course proceed to determine the costs

when I have heard the parties.

The plaintiff then seeks further orders (a draft of which was handed into court at closing) which I do not believe are appropriate, at

any rate at this point in time. Even if the plaintiff discharges the redemption figure established by my order, thus repaying his own

loan indebtedness, he is not thereby entitled to a release of the security provided under the Facility Letters. This is because, as has

been noted, that also serves as security for the cross guarantee that he signed, guaranteeing the performance by the other

borrowers of their financial obligations to Anglo under the facilities entered into by them. In particular, this guarantee and security

appears to be ongoing security for the repayment by Benray Ltd. of its Anglo loan taken out on 28th March, 2006. In their letter of

18th December, 2014 Breccia in fact looked to the plaintiff as guarantor to discharge this indebtedness under the guarantee in the

sum of €6,734,852. While there is a desire by Benray Ltd. to discharge its indebtedness, in reality it cannot do so at least until the

decision of this court on the redemption figure is handed down in Flynn No.2.

212. However, in all the circumstances, and given that undertakings remain in place, and that the balance of the substantive

proceedings remains to be heard, I will not refuse the additional reliefs sought at this point, and I propose to grant all parties liberty

to apply.

Summary of answers to the redemption issues

A. Can Breccia contractually claim the redemption figures sought?

Yes, in so far as default surcharge interest may be contractually claimed under clause 5.1 of the applicable General

Conditions, and further, in respect of the 2008 Facility Letter, under clause 9 of that Facility.

B. Is all or part of the redemption figure an “unlawful penalty”?

Yes – that part of it that purports to include default surcharge interest under General Condition 5.1.

C. Has Breccia waived its right to claim all or part of the redemption figure?; and

D. Is Breccia estopped from claiming all or part of the redemption figure?

These questions only arise if the default surcharge interest of 4% is lawful. In such circumstance the answer is that

Breccia is estopped from claiming any surcharge interest arising up to 19th June, 2015, but is thereafter entitled to claim

it on account balances.

E. Can Breccia charge “enforcement” costs, charges and expenses, and if so, how much?

Yes, but not the sums notified in correspondence. Only such costs of the modular hearing as may be awarded to Breccia,

the same to be taxed in default of agreement, may be charged and added to the redemption figure. Reserved costs, and

other possible future or “contingent” costs, may not be charged or factored into the redemption figure.

F. What is the correct redemption figure on 9th June, 2015 and as of today’s date?

As of today’s date - €16,985,929.21 being rolled up ordinary interest and principal on 29th October, 2015, together with

daily interest from 30th October, 2015 to 31st December, 2015 at the rate of €770.64 per day, plus daily interest

thereafter to be agreed/determined to reflect any change in the EURIBOR rate. In addition, in so far as any costs of the

modular trial may be awarded to Breccia, such costs, to be taxed in default of agreement.

G. What relief, if any, is the plaintiff entitled to in respect of the redemption issues?

(1) An order stating the present day redemption figure in respect of the plaintiff’s loans, together with the rate of daily

accrual of ordinary interest based on the current EURIBOR rate.

(2) Such addition to the redemption figure in (1) as may arise when the court determines costs.

(3) No other order at present, apart from liberty to apply.

___________________________________________

1. Basel II was adopted by the Basel Com m ittee in June 2004. That is the Com m ittee on Bank ing Supervision and Regulatory Practices established by Central

Bank governors of G10 countries in 1974, and it is a com m ittee of the Bank for International Settlem ents which has a sum of six ty m em bers including Ireland.

The adoption of the Basel II guidelines in 2004 was followed at European Union level by recasting of ex isting bank ing directives by way of Directive 2006/48/EC

and 2006/49/EC.

2. The evidence of Mr. Sheeran in Flynn No. 2 indicated the EURIBO R rate in March, 2006 plus 1.75% was 4.566%. This sm all variation is not m aterial and does

not alter the argum ent.