THE COURT OF APPEAL Neutral Citation Number:  IECA 273
Finlay Geoghegan J.
[Appeal No: 2016/196]
John Flynn and Benray Limited
Judgment of Ms. Justice Finlay Geoghegan delivered on the 30th day of July, 2018.
1. This appeal is against an order of the High Court (Haughton J.) made on the 12th April, 2016, for the reasons set out in a written judgment delivered on the 5th February, 2016; Flynn & Ors v. Breccia & ors  IEHC 68. The appeal was heard at the same time as the closely related appeal in Joseph Sheehan v. Breccia & ors  IEHC 120. In both cases a modular hearing had been directed and heard consecutively (first Flynn and then Sheehan) in the High Court with the judgments delivered on the same day (Sheehan first) and for the most part the legal issues arising on the appeals are similar. There are certain factual differences which have a bearing on discrete issues and the evidence adduced in the High Court differed, so that accordingly separate judgments are being delivered in the two cases. This judgment is being delivered after the Sheehan judgment and it is not intended to repeat matters applicable to both. Thus a reading of the Sheehan judgment is necessary for a full understanding of this judgment.
2. Both appeals raise the issue as to what are the principles to be applied by the Court when determining whether a surcharge or default interest provision in a bank’s loan agreement is enforceable or a penalty and hence unenforceable.
3. These proceedings and the Sheehan proceedings form part of a long running dispute between the shareholders in Blackrock Hospital Limited (“BHL”), the operating company of the Blackrock Clinic. The plaintiffs in these and the Sheehan proceedings seek declarations and orders in relation, inter alia, to the redemption figure which must be paid to Breccia in order for certain loans to be redeemed. A modular hearing in the High Court on the redemption figure gave rise to the orders and judgment under appeal. Central to the redemption figure was whether Breccia is entitled to include default surcharge interests and costs of enforcement in the redemption figure.
4. There is no dispute in relation to the relevant background facts. It is agreed that they were correctly set out by the trial judge and it is only necessary to record for the purposes of the appeal the following summary.
5. Benray and Breccia are shareholders in BHL. Benray financed the purchase of its shares in BHL by way of a loan provided by Anglo Irish Bank plc (“Anglo”) pursuant to a loan agreement dated the 28th March, 2006, (the “2006 Facility”) secured by a mortgage of shares and a guarantee and indemnity from Mr. Flynn. There is a second loan facility between Benray and Anglo agreed on the 19th February, 2008 ,(the “2008 Facility”) secured in the same way. The two Benray facilities will be jointly referred to as “the loan facilities”.
6. Mr. Sheehan also entered into a loan facility with Anglo on the 28th March, 2006, on similar terms to purchase his shares in BHL. There was also a shareholders agreement and cross guarantees.
7. The Anglo loan facilities were acquired under the National Asset Management Agency Act 2009 and became vested in its wholly owned subsidiary National Asset Loan Management Limited (“NALM”).
8. On the 23rd May, 2014, Breccia purchased from NALM Benray’s indebtedness under the loan facilities and the associated security. This purchase was effected by a loan sale and deed of transfer of the same date.
9. On the 8th August, 2014, Breccia demanded a sum of €8,744,853 from Benray under the loan facilities. When this amount was not paid it appointed a receiver on the 11th August, 2014. That event led to separate proceedings brought by Mr. Flynn and Benray against Breccia and the receiver which were the subject of judgments of the High Court (Haughton J.) of the 13th August, 2015;  IEHC 547 and on appeal to this Court: Flynn & anor v. Breccia & anor  IECA 74. While those proceedings were pending the plaintiffs through their solicitors sought from Breccia through its solicitor the redemption figure in respect of the loan facilities as at 29th May, 2015, together with the daily rate of interest accruing. Matheson responded on behalf of Breccia on the 9th June giving as the redemption figure €13,074,142.78 with a daily interest of €1,730.75. This was considerably in excess of the amount demanded in August, 2014 and led to a demand for a breakdown. The explanation included a reference to clause 5 of the general terms and conditions of Anglo which it claimed entitled Breccia to add a surcharge interest at a rate of 4% from the due date which was identified as 31st December, 2010. In addition in accordance with clause 6.2 of the Anglo general terms the figure was stated to include enforcement costs from the date of acquisition of the loans to 8th June, 2015 then stated to be a sum of not less than €2,002,512.43.
10. Those explanations give rise to these proceedings and in the course of same a modular hearing before Haughton J. on the issues required to determine the correct redemption figure by Benray to Breccia to redeem the loans in question. The issues for determination at the modular trial were set out at para. 15 of the High Court judgment:
11. The High Court decided:
(i) Whether clause 5.1 of Anglo’s general conditions form part of the contract relating to the loan facilities;
(ii) If so, whether the surcharge interest provided therein was or was not unenforceable as a penalty; and
(iii) If surcharge interest applies contractually and is enforceable is Breccia estopped from claiming same; and
(iv) The entitlement of Breccia to charge enforcement costs and a number of issues relating to what might be included within the enforcement costs.
12. Following further submissions, the High Court by order of the 12th April, 2016, declared that the amount required to redeem Benray’s loans pursuant to facilities letters dated the 28th March, 2006, and 19th February, 2008, (excluding any liabilities of the plaintiff’s pursuant to guarantees given in respect of indebtedness of Mr. Sheehan) to be €9,394,974.93 as at the 18th February, 2016, together with a daily accrual rate up to the 31st March, 2016, of €416.45 per day and thereafter at a rate of 1.75% above the EURIBOR rate.
(i) Clause 5.1 of Anglo’s general conditions do form part of the contract in relation to the loan facilities.
(ii) The surcharge interest provided therein is unenforceable as a penalty.
(iii) If the surcharge interest were lawful and enforceable Breccia is estopped from claiming any surcharge interest up to the 19th June, 2015, but thereafter entitled to claim same.
(iv) Breccia is entitled to charge enforcement costs but on the facts held only limited costs could be added to the redemption figure. In part those were informed by certain decisions in the High Court proceedings in Flynn No. 1 which this Court subsequently reversed on appeal.
13. On appeal the issues identified by Breccia as appellant are:
14. There was broad agreement that these were the issues arising subject to one question sought to be raised as to the inclusion of general condition 5.1 as part of the contract relating to the 2006 facilities.
(i) Is the surcharge interest rate of 4% payable under the loan facilities an unlawful and unenforceable penalty clause?
(ii) If not, is Breccia estopped from applying surcharge interest between 31st January, 2010, the date of default, and the 19th June, 2014?
(iii) In what circumstances can “enforcement costs” incurred in defending the plaintiffs’ legal proceedings challenging Breccia’s right as mortgagee be included in the redemption figures for the plaintiffs’ mortgage?
15. The clause which is contended to be a penalty is contained in the applicable general conditions of Anglo (General Conditions Corporate Loans) at para. 5.1. This provides:
16. On appeal it can no longer be disputed that the general conditions including clause 5 apply both to the 2006 and 2008 facilities. It was so held by the High Court and was not the subject of a cross-appeal. I would add that it appears to have been a correct conclusion by the High Court on the contractual documents.
5.1 Any monies due by the Borrower to the Bank and for the time being unpaid will bear 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 demand is made, any judgment obtained hereunder or the insolvency of the Borrower.”
17. In these proceedings the applicable general conditions are as already stated those entitled “General Condition Corporate Loans”. In the Sheehan proceedings the applicable general conditions were those relating to personal loans. Clause 5.1 is identical in each set of general conditions. In addition, the other clauses relevant to the penalty issue including clause 3 and the clause relating to the indemnity from the borrower, which is clause 15 rather than clause 14 as in the general conditions relating to personal loans, are also the same. In relation to the issue of enforcement clause 6.2 is also the same in both general conditions.
18. In addition, the terms of the Benray facility letters insofar as they relate to the facility interest rate, the payment of interest and the entitlement of the bank to debit Benray’s account at the end of each calendar quarter are the same as they are in Mr. Sheehan’s facilities.
19. There was however, a difference in the expert evidence given in each set of proceedings which is referred to below.
Applicable Principles to Penalty Issue
20. The trial judge applied the same principles in determining the penalty clause issue in these proceedings as he did in the Sheehan proceedings. He considered that he was bound to apply the principles set out by the Supreme Court in Pat O’Donnell & Co. v. Truck and Machinery Sales  4 I.R. 191 by adoption of the well known principles in Dunlop Pneumatic Tyre v. New Garage  A.C. 79 and in particular the regularly cited principles from the opinion of Lord Dunedin. In addition, the trial judge considered that in accordance with the judgment of Clarke J. in the High Court in Re Worldport Ireland Ltd  IEHC 189 he should follow the approach taken by me in the High Court to the application of the Dunlop principles to a clause for surcharge interest in a bank’s general conditions in ACC Bank v. Friends First  IEHC 435.
21. On appeal it was submitted that he was in error in doing so as the judgment in ACC Bank failed to take into account what was termed a broader approach identified by Barron J. in Pat O’Donnell from the opinion of Lord Parmoor in particular in Dunlop.
22. For the reasons fully set out in the judgment in the Sheehan appeal which is being delivered immediately before this judgment, I do not consider that the High Court judge was in error in the principles which he identified as applicable or following the judgment in ACC Bank. In reaching that conclusion I recognise in the Sheehan judgment that there may have been some shorthand in the manner in which I set out the Dunlop principles at paras. 79 and 84 of the judgment in ACC Bank but ultimately as stated by Lord Dunedin “the question whether a sum stipulated is a 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 …”
Decision on Clause 5.1
23. It is correct to observe that the admissible evidence adduced at the modular hearing in these proceedings relevant to the penalty clause issue was limited. However, as appears from the High Court judgment, the trial judge did have evidence of the margin agreed in each of the facility letters and the Euribor rates in 2006 and 2008 as appears from para. 57 of his judgment. From that evidence he was entitled to conclude as he did that the surcharge rate of interest of 4% was almost equal to the normal rate of interest in 2006 which was 4.566% and more than double the then agreed margin of 1.75%.
24. Whilst I would respectfully not agree with his approach of taking into account evidence given by Mr. Costello, a banking expert to the effect that he had never come across a situation where surcharge interest had been applied retrospectively in the manner in which the defendant seeks to apply it, I would nevertheless agree with the trial judge’s reasoning insofar as it relates to the terms of clause 5.1.
25. The onus was on Benray to establish that clause 5.1 was not a genuine estimate of loss or damage to be suffered by Anglo for the specified potential defaults and in that sense not an agreement on liquidated damages. As stated in Sheehan in accordance with the principles set out by Lord Dunedin the construction of the disputed clause for the purpose of ascertaining its probable intent or functional effect from the words used in the contract between the parties in the context of the entire agreement and the relevant background or factual matrix must be undertaken now by the courts in accordance with the principles set out by the Supreme Court in Analog Devices BV v. Zurich Insurance Company  IESC 12,  1 I.R. 274.
26. As stated by the trial judge, clause 5.1 is a blunt provision. It forms part of the general conditions and is not specific to the facilities agreed between Benray and Anglo. In addition, as pointed out by the trial judge, the surcharge rate of interest of 4% applies irrespective of the amount of the loans or security held by the bank for the loans in question.
27. The contractual analysis set out in the judgment in the Sheehan appeal applies equally to the contractual terms agreed between the parties in this appeal. At para. 56 of that judgment I summarised the conclusion:
28. I recognise that in these proceedings there was no expert evidence similar to the evidence given by Mr. Fennelly in the Sheehan proceedings in relation to the operation of Basel II and upon which the trial judge placed reliance in those proceedings. Notwithstanding the detailed contractual reasons contained in the Sheehan judgment – which I have set out in summary above - I have concluded that the trial judge was correct in construing the provision in relation to surcharge interest in clause 5.1 applicable to Benray’s facilities as a penalty.
“In summary, a construction of clause 5 from its terms in the context of the entire of the general conditions and 2006 and 2008 facility letters leads to the conclusion that this clause was not a genuine attempt to agree upon liquidated damages payable by the borrower on default and hence should be construed as being a penalty. This is so in particular by reason of (i), the marked difference between the terms of clause 5 and the very specific provisions which apply to the payment of the interest due at the Facility Interest Rate and the entitlement of the bank to debit such interest on a quarterly basis; (ii) the absence of any express provision as to when the surcharge interest becomes payable by the borrower and (iii) the absence of any provision entitling the bank to debit the account of the borrower with surcharge interest.”
29. Accordingly, I would dismiss the appeal against so much of the trial judge’s decision as decided that clause. 5.1 of the Anglo general conditions which formed part of the loan agreements between Benray and Anglo in 2006 and 2008 is properly to be construed as of 2006 and 2008 as not being a genuine estimate of Anglo’s loss or damage upon a default by Benray in the payment of any monies on a due date and is accordingly a penalty and unenforceable.
30. I am aware that my colleagues agree with the conclusion reached in this judgment that surcharge interest specified in clause 5 of the general conditions is unenforceable as a penalty. Accordingly, the question of estoppel does not require to be determined by the Court on this appeal. Nevertheless I would simply state that if it did arise I would dismiss the appeal against the decision of the trial judge on estoppel for the reasons set out in the judgment which will be delivered by Hogan J.
31. The contractual provisions relating to the enforcement costs issues in these proceedings are the same as those in the Sheehan proceedings. In the High Court the trial judge in his judgment in these proceedings relied upon and repeated his conclusions in the Sheehan proceedings. I have considered those decisions of the trial judge in the judgment delivered in the Sheehan proceedings. I do not propose repeating the reasoning set out in that judgment. In summary what I concluded in the Sheehan judgment on enforcement costs was:
32. In the High Court Breccia sought to add €2,003,512.43 costs and charges to the redemption figure for Benray’s direct liability. The breakdown was given in an appendix to Mr. Sheeran’s witness statement. The costs principally related to two matters the position to which changed between the High Court judgment and the appeal hearing and were the subject of submissions. I only propose considering the principles set out above as they apply to those two matters.
1. The trial judge did not decide that non-litigation enforcement costs already incurred could not be included in a redemption figure without a court order. The judgment of Laffoy J. in the High Court in Red Sail Frozen Foods Limited (in receivership)  IEHC 328,  2 I.R. 361 makes clear that where a mortgagee is entitled to recover enforcement costs which are not litigation costs there is no requirement for an order for costs by a court. However, if the amount of the costs is disputed by the mortgagor then taxation of the amount of the costs may be sought. The basis for the taxation may depend upon the terms of the contractual documents.
2. Litigation costs are always in the discretion of the Court pursuant to O.99, r.1(2) of the Rules of the Superior Courts. Where Breccia has a contractual entitlement to enforcement costs which include litigation costs such litigation costs may only be recovered if a court order has been made in favour of Breccia (subject to any possible appeal). It is a matter for a mortgagee, where it seeks to place reliance upon a contractual right to recover litigation costs to do so in the course of the relevant litigation and, if done, a court may take a contractual right to costs into account in determining the costs of the proceedings or litigation costs under O.99. The question as to how the discretion of the Court under O.99 should be exercised will depend in any given case on the terms of the contract and the facts of the case.
3. Insofar as any particular contractual clause relating to costs is properly construed as an ouster of the jurisdiction of the courts then it may be contrary to public policy. This does not arise on the terms of clause 6.2 of the general conditions or any other contractual provision at issue herein or in the Sheehan proceedings.
4. The trial judge was correct in deciding that, on a proper construction of the relevant contractual documents, the enforcement costs which may be included in a redemption figure at any point in time are only those costs incurred prior to that date.
5. However, Breccia is entitled to include enforcement costs already incurred, but which may still be regarded as contingent either as to liability or quantum. Contingency as to liability may arise for example in relation to litigation costs incurred where the proceedings have not yet reached a point where a court has been asked to decide on the relevant costs. Contingency as to amount may arise both in relation to non-litigation enforcement costs and litigation costs where an order for costs has been made but there are disputes as to the amount and taxation is not finalised. Breccia is then entitled to include in the redemption figure a reasonable estimate of such enforcement costs already incurred.
33. First, Breccia included in its costs a sum of €680,448.59 which was stated to be legal costs incurred by Mr. McAteer, the receiver appointed by Breccia under the security documents who was the second named defendant in the Flynn (No. 1) proceedings. Breccia discharged an invoice in that sum presented to it by the receiver by reason, it was stated, of an agreement by Breccia to indemnify the receiver. At the time of the High Court modular hearing in these proceedings the position was that the High Court judge in Flynn (No. 1) had made a decision on the costs between the plaintiffs and the receiver that there should be no order as to costs between those parties in the High Court.
34. The order made by the trial judge in Flynn (No. 1) in relation to costs between the plaintiffs and the receiver was appealed by the receiver to this Court. The substantive disputes between the two parties had been in part withdrawn and in part “resolved by agreement”. This Court heard the appeal in respect of costs with written and oral submissions and a written judgment was delivered by Peart J. (Finlay Geoghegan and Hogan JJ. concurring) on the 25th May, 2017, (Flynn & anor v. Breccia & anor  IECA 163). For the reasons fully set out in that judgment, this Court upheld the decision of the trial judge to make no order as to costs between the plaintiffs and the receiver in the High Court. The Court dismissed the appeal and made an order that the receiver pay the plaintiffs’ costs of the appeal to be taxed in default of agreement.
35. The second aspect of the enforcement costs included in the redemption figure and the subject of dispute in the High Court were the costs incurred by Breccia itself in defending the Flynn (No. 1) proceedings. At the time of the modular hearing in Flynn (No. 2) the High Court had made orders (inter alia in respect of costs,) in favour of the plaintiffs against Breccia in the Flynn (No. 1) proceedings. Those orders and judgment were also the subject of an appeal to this Court and in a written judgment delivered on the 8th March, 2017, Flynn & anor v. Breccia & anor  IECA 74,  1 I.L.R.M. 369 this Court allowed the appeal of Breccia. Following a further hearing in relation to the costs a short ex tempore ruling was delivered on the 5th April, 2017. For the reasons set out therein the costs order made by the Court in relation to the appeal was:
36. The Court also made an order in respect of the High Court costs as follows:
“That the plaintiffs do pay to the first named defendant the costs of the appeal to be taxed in default of agreement – the Court doth refuse any order for costs based upon a contractual entitlement to an indemnity.”
The Court made no order in relation to four “no order for costs” orders made in specified High Court orders.
“That the plaintiffs do pay to the first named defendant the costs of the proceedings in the High Court to include the reserve costs of the interim injunction application made before Mr. Justice Hogan on the 12th September 2014 to be taxed in default of agreement.”
37. It is thus clear that the Court expressly refused an order for costs based upon a contractual entitlement to an indemnity. In the course of the ruling given I stated, insofar as relevant:
38. In the course of the appeal it was submitted that this determination leaves open the entitlement to include costs on an indemnity basis pursuant to clause 15 of the general conditions and not a party and party basis as already ordered in relation to defending the Flynn (No. 1) proceedings in the High Court and on appeal. I do not consider that such was the intention of the Court in the above in the ex tempore ruling. It is clear that a claim was made for the order for costs under O.99 to be on an indemnity basis by reason of the contractual entitlement. That was clearly refused by the Court and the saver expressed was in relation to any other issues which might be arising in the redemption proceedings which we knew were already the subject of an appeal.
“. . . insofar as the defendant sought an order on an indemnity basis in respect of the costs of the appeal by reason of contractual entitlements, this court is not prepared to make any such order. Any such claim would had to have been included in the counterclaim as a contractual claim determined by the High Court or rejected and that was not done. And I just wish to make very clear that this Court, in the ruling it is giving now, is not making any determination on any issue which arises in the separate redemption proceedings and is expressly refusing any order for costs based upon a contractual entitlement to an indemnity, it is only making what I would describe as the normal order on a party and party basis for the cost of the appeal under Order 99.”
39. It follows from the orders made by this Court on the 5th April, 2017, that Breccia is entitled to include in the redemption figure the costs incurred up to the date for which the redemption figure is sought in defending the Flynn (No. 1) proceedings in the High Court and on appeal to this Court. It follows from the principles set out above that if taxation has not been finalised, they are entitled to include a reasonable estimate of the costs incurred up to the relevant date on the basis upon which costs have been awarded, (party and party).
40. In relation to the claim made by Breccia to be entitled to include the amount paid by it to the receiver pursuant to the indemnity given by it to the Receiver for defending the proceedings brought by the plaintiffs and in respect of which the courts have refused to make any order for costs, it does not appear to me that Breccia has made out a factual basis upon which this Court could determine that such amount comes within any contractual entitlement to which it is entitled under the facility agreements and the mortgage documents. Insofar as the sums paid pursuant to the indemnity may be considered to be litigation costs which are enforcement costs to which may have a contractual right, then the determination by the High Court and the Court of Appeal in proceedings where Breccia was a party but did not participate in the costs issues and where the receiver never sought to assert an entitlement to have the plaintiff discharge the costs on a contractual basis is such that Breccia is not now in accordance with the foregoing principles entitled to include the receiver’s costs of defending the proceedings in the redemption figure.
41. I would accordingly dismiss the appeal of Breccia against the determination of the High Court that clause 5 of the general conditions is a penalty clause and hence unenforceable. If it were necessary I would dismiss the appeal against the estoppel decision. I would vary the High Court order to permit the inclusion of enforcement costs incurred prior to the date of proposed redemption in accordance with this judgment. The Court will hear the parties in relation to the precise variations required in the High Court order by reason of the judgments being delivered today.