The Court found that the borrowers were not liable for these costs, as the internal swap was not classified as a “financing transaction”. This was not a “transaction”, since the definition of loss in the loan agreement and the compensation in question, which provided for a transaction between two different legal persons and different divisions of the same bank, were not considered as such. Nor can it be regarded as a “financing operation”, since it was not an operation of the Bank intended to finance the facility for borrowers. At Barnett Waddington, when the bank entered into the credit agreement with the borrowers, it also entered into an internal hedging agreement with another division within the bank. The loan agreement provided that borrowers would compensate the bank for costs “related to the management of financing operations related to the facility”. When borrowers wanted to pay the loan in advance, the bank tried to charge them about £2 million in cancellation fees, which it said was the cost of breaking the internal swap. In these cases, the need to carefully include indemnification clauses is emphasized. Note the following key points: First, the court had to decide whether this clause applies to advances. The borrower argued that the indemnification clause applied only to the “repayment” of the loan and not to “prepayment”. The loan agreement clearly distinguishes between the two and has a separate advance clause that sets out the fees to be paid in the event of a down payment.
It argued that any ambiguity against the bank as the author (contra proferentum) must be interpreted. The bank argued that this analysis was clearly flawed and did not make commercial sense under the agreement. This raised the question of what costs/losses the bank could recover. Could he recover both his previous and future interest rate loss at the contract rate, minus what he could earn by lending the money again on the interbank market? The judge stated that the Penalty Act (and valuation of future losses) was not applicable, since the right was not related to an infringement (early repayment being allowed by the loan agreement). He therefore considered that the bank had to prove its actual damage resulting from the borrower`s contractual right to advance payment. The judge found that the use of the word “increment” and not the phrase “is created or created” was significant. He also indicated that compensation should be triggered “upon request”. It therefore found that compensation was limited to the bank`s actual crystallized costs or losses.
The High Court`s decision in K/S Preston Street v Santander  EWHC 1633 and the recent decision of Wanett Waddington v RBS  EWHC 2435 underline the importance of careful preparation of indemnification clauses for advances and the need to seek early legal advice in the event of a customer challenge. Both cases concern the implementation of early compensation clauses in fixed-rate loan contracts. In any case, the borrowers wanted to pay the credit in advance. The banks claimed compensation for their costs/losses due in advance. The borrowers disputed the fact that banks have the right to recover such costs/losses. An earlier version of this article was first published in the December 2015 issue of the Butterworth` Journal of International Banking and Financial Law. The judge rejected the borrower`s argument and found no ambiguity in the wording. . . .