Sheehan v Breccia – Key Decision On Surcharge Interest In Loan Agreements

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

Key Points

The key takeaways from the judgments are as follows:

A clause providing for surcharge interest that effectively doubled the interest payments is a penalty and is therefore unlawful. In order for surcharge interest to be lawful, it should be a genuine pre-estimate of loss arising from a breach and not merely a generic rate. The leading decision on penalties in loan agreements remains that of Finlay Geoghegan J in ACC Bank v Friends First Managed Pensions Funds Ltd and Ors [1]. The court declined to follow the decision of the UK Supreme Court in Cavendish Square Holding BV v El Makdessi/Parking Eye Ltd v Beavis [2]. In brief, therefore, Irish law will allow a "modest uplift" in an interest rate upon debtor default but anything beyond that is a penalty. A creditor who notifies its borrower what is due and owing at a particular time, but does not include a claim for surcharge interest, cannot afterwards claim surcharge interest in respect of a breach up to the date of the notification. An unequivocal statement of the intention to charge surcharge interest is required. Generalised "reservation of rights"- type language may well not assist the creditor. In this regard a "conclusive evidence" clause...