Replacement Process Agents and Individual Guarantors: A Cautionary Tale for Lenders

In June 2021, Regera S.à r.l (the “Lender”) entered into a $33 million loan agreement with Andrew Valmorbida (the “Borrower”) which included guarantees from three individual guarantors (the “Guarantors”), two of whom were based in the United States. The loan agreement also provided for the appointment of a process agent to accept service of proceedings, along with a mechanism for appointing a replacement process agent. Clause 40.2.2 stated:

“If any person appointed as an agent for service of process is unable for any reason to act as agent for service of process, the Borrower must immediately (and in any event within five days of such event taking place) appoint another agent on terms acceptable to the Lender. Failing this, the Lender may appoint another agent for this purpose.”

After the original process agent ceased to exist, the Lender exercised its rights under clause 40.2.2 to appoint Law Debenture as the replacement. Following a default by the Borrower, the Lender issued proceedings against the Guarantors under the guarantees and served them via Law Debenture. The Guarantors did not file an acknowledgment of service or a defence, and default judgments were entered against them — the Guarantors claimed they were unaware of the proceedings and had not received notice of Law Debenture’s appointment.

They subsequently applied to set aside the default judgments on two grounds:

• Under CPR 13.2, on the basis that service was invalid, and therefore the judgments were wrongly entered; and
• Under CPR 13.3, on the basis that they had a real prospect of defending the claim and had acted promptly.

The High Court allowed the Guarantors’ application to set aside the default judgments under CPR 13.2, holding that service on Law Debenture was invalid. The central issue was whether service of the claim form by the contractually agreed method, service on the process agent, complied with CPR 6.11.

One of the Guarantors’ arguments was that they were not a party to the loan agreement because their signatures had not been released and there was no single authoritative version of the agreement at the time of signing. The court found that the burden of proof necessary to establish, on the balance of probabilities, that the agreement was binding on the Guarantors had not been met. These issues were deemed appropriate for trial.

The court noted there was no contractual requirement for the process agent (original or replacement), the Borrower, or the Lender to notify the Guarantors of any service of process, nor was there any obligation to notify the Guarantors of the replacement process agent’s appointment. Since the Borrower acted as the obligor’s agent under clause 3 of the loan agreement, notification to the Borrower was treated as notification to the Guarantors. The Lender successfully discharged the burden of proof on this point.

However, the court expressed concerns about the fairness of clause 40.2.2 in the context of a consumer contract. There was a significant imbalance between the Lender and the Guarantors, given that the clause allowed unilateral appointment of a replacement process agent without notice to the Guarantors. This posed a risk of default judgments being entered without the Guarantors’ knowledge, while the Lender faced no such risk. The court concluded that clause 40.2.2 was unfair and not binding on the Guarantors, and therefore could not be relied upon to validate service.

While this judgment is unlikely to affect standard drafting practices in most commercial loan agreements, it signals increased scrutiny for consumer contracts such as commercial loan agreements which incorporate or are supported by guarantees given by individuals. Lenders should exercise particular caution when drafting clauses that allow unilateral appointment of replacement process agents where individual guarantors have limited bargaining power. This means that the LMA style provisions regarding obligors’ agent and replacement process agents may need to be departed from in these circumstances, and it may be prudent to include clear contractual obligations to notify all obligors, including guarantors, of any replacement process agent appointments to avoid invalid service and risks of setting aside judgments.