Enforcement of credit facilities: the value of process agents

In a recent decision, the English High Court has reiterated the value of appointing process agents in credit facilities in circumstances where the borrower and/or guarantors are based outside England.

Banco San Juan Internacional Inc v Petróleos De Venezuela SA [2020] EWHC 2145 (Comm) (31 July 2020), involved an action by the bank (BSJI) against PDVSA, a Venezuela state-owned oil company. The action related to two credit facilities – one granted in 2016 and the other in 2017.

The structure of the process agent clauses in both facilities was as follows:

1. PDVSA was obliged to appoint a process agent to be an authorised agent for service of proceedings in England.
2. If for any reason the process agent ceased to be such an agent, then PDVSA was required to appoint a new agent and notify that appointment within 30 days of the previous agent ceasing to be agent.
3. If PDVSA failed to comply with its obligation to appoint a new agent for the service of process, the lender could appoint an agent for service of process on PDVSA.

The above clause is similar in structure to the one in a standard-LMA facility.

In relation to the 2016 facility, the appointment by PDVSA of its process agent expired. The situation was slightly complicated in relation to the 2017 facility. No process agent had been appointed by PDVSA under the 2017 facility.

In accordance with the above clause, the bank appointed a replacement agent under both 2016 and 2017 facilities. The bank then served English court papers on the agent appointed on PDVSA’s behalf by the bank.

PDVSA sought to argue that the agent appointed by the bank was not PDVSA’s authorised agent on which English court papers could be validly served. The English court rejected this because the contract expressly permitted the bank to appoint an agent on PDVSA’s behalf.

PDVSA also sought to argue that there was an implied term that PDVSA had to be notified in advance of the identity of the agent and of the terms of appointment, and given an opportunity to make recommendations or comments, with some further obligation of uncertain scope on the part of the bank to have regard to those comments or to implement those recommendations if reasonable. The English court rejected this as well and recognised that such an implied term would introduce considerable scope for obstruction and delay into clauses whose purpose is well recognised as being to allow simplicity and speed in service of proceedings.

A further argument by PDVSA was that the clause could not survive after the lender had refused to lend any more funds. This was also rejected by the English court recognising that these clauses tend to become relevant when there is a breakdown of relationship between the parties. A contractual construction that these clauses cease to apply in those circumstances would be wholly uncommercial.

As no process agent had been appointed by PDVSA under the 2017 facility the issue was whether the subsequent triggers that entitled the bank to appoint an agent failed to occur. This is because the bank’s right to appoint a new agent could be said to apply only when PDVSA had failed to appoint a “replacement” agent rather than a failure to comply with the original obligation to appoint an agent. The English court rejected this argument and applied a purposive construction of the clause.

The argument put forward by PDVSA would allow it to frustrate the operation of the clause by not appointing an agent at the start. The court recognised that these clauses should be construed “so far as possible, in the light of their acknowledged purpose of allowing a speedy and certain means of service, and [the English courts] seek to avoid a construction which allows the party to be served to deprive the clause of its intended benefit”.

PDVSA could not succeed on a construction of the clause that would put it in a better off position by its own breach of failing to appoint an agent at the start.

Conclusion

This case highlights the need and advantages of having a process agent clause in credit facilities and also ensuring compliance with the clause. It also reinforces the position that English courts will enforce such clauses. Appointment of process agents should be monitored where the borrower and/or guarantor is based outside England, including now in EU jurisdictions. Appointment of a process agent helps avoid delay and added costs in court proceedings which would arise where attempting to serve outside of the jurisdiction.