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Recovery of future losses as a result of a prepayment - watch the drafting!

18 October 2012

In an early termination situation lenders sometimes look to recover lost income during the remainder of the term - this is particularly relevant to ABLs and invoice financiers. This case does not say recovery cannot be made but does make it clear that the wording of the indemnity is crucial.

The recent case of K/S Preston Street v Santander (UK) plc [2012] EWHC 1633 (Ch) considered a loan agreement which permitted prepayment but provided that the borrower would, in addition to any prepayment fee, indemnify the bank against any losses that were incurred due to the prepayment of the loan before the maturity date. This included the loss of fees and interest during the remainder of the term. The High Court held that, under the indemnity, the bank could recover the losses incurred up to the date the loan was prepaid, but could not recover anticipated future losses.

The reason given for the decision was that the agreement itself did not explicitly provide for the recovery of future estimated losses under the indemnity, therefore this could not be claimed by the bank. Given prepayment was permitted by the agreement, the bank could not recover losses calculated on the basis of a breach of contract and so its entitlement to recovery was limited by the scope of the indemnity.

The learning point is that drafting indemnities needs to be carefully considered if the expectation is recovery of future estimated losses for a permitted course of action (i.e. prepayment) under an agreement.

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