Factual and Procedural Background
This appeal concerns the proper construction of the interest provisions in a facility agreement dated 20 July 2020 (the "Facility Letter") and the costs orders made by a Deputy High Court Judge in the Business and Property Courts. The Appellants challenge the judge's order dated 19 September 2023 and sealed on 25 September 2023, particularly the declarations related to interest and costs.
London Credit Limited ("London Credit") agreed to loan £1,845,000 to the Third Appellant, Company A, under the Facility Letter. The loan was increased to £1,881,000 by a deed of variation. The facility was for 12 months with interest at 1% per month, secured by various guarantees and mortgages including a property at 71 Hamilton Road, Cockfosters, Barnet EN4 9HD.
Disputes arose over alleged breaches of covenants in the Facility Letter, particularly relating to the occupation of 71 Hamilton Road, which London Credit contended was an event of default entitling it to default interest at a higher rate. The Appellants denied breaches and argued that the default interest rate was an unenforceable penalty.
The proceedings included claims regarding waiver of the non-occupation requirement, enforceability of default interest, appointment of receivers, undue influence, and allegations that the Facility Letter was a sham or unenforceable under various statutory provisions. Interim injunctions were granted to restrain dealings with secured properties.
At trial, the judge made findings including that the non-occupation requirement had been waived by London Credit, that the default interest rate was an unenforceable penalty, and made detailed costs orders. The Appellants appeal these findings and the costs orders, while London Credit cross-appeals the penalty declaration.
Legal Issues Presented
- Whether the default interest rate under the Facility Letter is an unenforceable penalty.
- The proper construction of clause 12.5 of the Facility Letter regarding the accrual of interest after the Repayment Date.
- Whether interest under clause 6.1 continues to accrue after the Repayment Date if the default interest rate is held to be a penalty.
- The correctness of the costs orders made by the judge, including the issue-based costs order and refusal to award costs on an indemnity basis.
Arguments of the Parties
Appellants' Arguments
- The judge erred in construing the Facility Letter and clause 12.5 by holding that interest continued to accrue after the Repayment Date at 1% per month.
- The default interest rate is a penalty and unenforceable, so no interest should accrue after the Repayment Date.
- The judge should not have made an issue-based costs order and should have awarded the Appellants their costs on the indemnity basis.
- The judge gave insufficient reasons for the costs decision.
Respondent's (London Credit) Arguments
- The default interest rate is not a penalty and is enforceable.
- Contractual interest at the default rate is payable from the Repayment Date on any unpaid sums.
- The standard rate of interest under clause 6.1 is not time-limited and applies after the Repayment Date if the default rate is unenforceable.
- The judge's costs orders were appropriate given the conduct of the parties and the complexity of the case.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Cavendish Square Holdings BV v Makdessi [2015] UKSC 67 |
Leading authority on the test for penalty clauses in contracts, focusing on whether a provision imposes a detriment out of proportion to a legitimate interest. |
The court applied the Cavendish test to determine whether the default interest rate was an unenforceable penalty, emphasizing legitimate interest and proportionality. |
| Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch) |
Application of the penalty test to default interest provisions and assessment of whether rates are extravagant or unconscionable. |
Used as a comparative case to evaluate the legitimacy and proportionality of the default interest rate. |
| Cargill International Trading PTE Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm) |
Consideration of default interest as a penalty and the commercial justification for higher rates post-default. |
Referenced for Bryan J’s analysis supporting legitimate commercial interest in charging higher default interest. |
| Arnold v Britton [2015] AC 1619 |
Principles of contractual construction focusing on the objective meaning of contract language in its commercial context. |
Applied to construe the Facility Letter’s clauses concerning interest accrual and repayment. |
| Wood v Capita Insurance Services Ltd [2017] AC 1173 |
Further guidance on contractual interpretation emphasizing an objective approach considering the contract as a whole. |
Supported the court’s approach to interpreting clauses 6.1, 6.6, and 12.5 of the Facility Letter. |
| Lordsvale Finance plc v Bank of Zambia [1996] QB 752 |
Consideration of increased interest rates during default and their justification. |
Referenced in the context of commercial justification for default interest rates. |
| Murray v Leisureplay plc [2005] IRLR 946 |
Discussion of commercial justification as evidence that a clause is not intended as a penalty. |
Used to assess the purpose and effect of the default interest clause. |
| Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 |
Clarification that intention is inferred from effect in penalty analysis. |
Supported the principle that evidence of actual intention is irrelevant to penalty determination. |
| Holyoake v Candy [2017] EWHC 3397 (Ch) |
Summary of penalty principles derived from Cavendish and their application. |
Used to outline the test for penalty clauses and legitimate interest. |
| Vivienne Westwood v Conduit Street [2017] EWHC 350 (Ch) |
Explanation of the penalty test focusing on secondary obligations and legitimate interests. |
Referred to for detailed exposition of the penalty test and its application. |
| EMFC Loan Syndications LLP v The Resort Group Plc [2021] EWCA Civ 844 |
Summary of principles of contractual construction. |
Supported the court’s approach to interpreting the Facility Letter. |
| Burchell v Bullard & Ors [2005] 3 Costs LR 507 |
Standard of appellate review of costs orders. |
Applied to assess whether the judge erred in his costs discretion. |
| Kupeli & Ors v Sirketi & Anr [2019] 1 WLR 1235 |
Guidance on the court’s discretion in costs orders under CPR 44.2. |
Used to analyze the judge’s exercise of discretion in making an issue-based costs order. |
| Adamson v Halifax plc [2003] 1 WLR 60 |
Appellate principles on costs discretion. |
Referenced regarding the difficulty of overturning costs decisions. |
| Roache v News Group Newspapers Ltd [1998] EMLR 161 |
Principles on costs discretion and appellate interference. |
Supported the high threshold for overturning costs decisions. |
| English v Emery Reimbold [2002] 1 WLR 2409 |
Considerations on issue-based costs orders and proportionality. |
Referenced to caution against issue-based costs orders unless no better alternative exists. |
| Thakkar & Ors v Mican & Ors [2024] EWCA Civ 552 |
Guidance on the award of indemnity costs and the high threshold required. |
Applied to assess the judge’s refusal to award indemnity costs despite findings of dishonesty. |
| SCT Finance Ltd v Bolton [2003] 3 All ER 434 |
Principles on the wide discretion of the court in awarding costs. |
Used to explain the heavy burden on appellants challenging costs awards. |
| Three Rivers DC v The Governor of the Bank of England [2006] EWHC 816 (Comm) |
Factors relevant to awarding indemnity costs. |
Referenced regarding the conduct required to justify indemnity costs. |
| Digicel (St. Lucia) Limited v Cable and Wireless PLC [2010] EWHC 888 (Ch) |
Considerations for indemnity costs awards. |
Referenced in the context of the discretion to award indemnity costs. |
| Excalibur Ventures v Texas Keystone & Others (No 2) [2016] EWCA Civ 1144 |
Framework for awarding indemnity costs based on conduct. |
Used to illustrate the high threshold for indemnity costs. |
| Whaleys (Bradford) Ltd v Bennett [2017] EWCA Civ 2143 |
Clarification of the test for indemnity costs involving conduct out of the norm. |
Referenced to emphasize the critical requirement for indemnity costs. |
| Esure Services Ltd v Quarcoo [2009] EWCA Civ 595 |
Consideration of conduct and dishonesty in costs awards. |
Applied in the context of awarding costs after findings of dishonesty. |
| Medway Primary Care Trust & Anr v Marcus [2011] 5 Costs LR 808 |
Principles on determining the overall successful party for costs purposes. |
Referenced regarding the judge’s failure to identify an overall winner in costs. |
| Brit Inns Ltd v BDW Trading Ltd & Anr [2013] 1 Costs LR 72 |
Guidance on the approach to costs and overall success in litigation. |
Used to critique the judge’s approach to costs allocation. |
Court's Reasoning and Analysis
The court undertook a detailed analysis of the penalty issue applying the test from Cavendish and subsequent cases. It found that the judge below failed to apply the correct test properly, particularly by not clearly addressing whether the default interest clause was a secondary obligation engaged on breach, by conflating legitimate interest with the effect of the clause, and by adopting a subjective approach contrary to the objective construction required.
The court noted that the judge did not separately consider whether the default interest rate was extortionate, exorbitant, or unconscionable and instead sought a justification rather than applying the Cavendish test fully. The court concluded that the question of whether the default interest provision is a penalty must be remitted for reconsideration applying the correct legal principles.
Regarding the construction of clause 12.5 and whether interest under clause 6.1 applies after the Repayment Date, the court held that the judge was wrong to decide that the standard interest rate applies post-Repayment Date. The natural and ordinary meaning of the Facility Letter is that the standard rate applies during the term of the loan and ceases at the Repayment Date. The default rate applies if an Event of Default occurs, but these rates are mutually exclusive and there is no fallback to the standard rate if the default rate is unenforceable.
On costs, the court found that the judge erred by not determining the overall winner, failing to apply CPR 44.2(7) regarding proportionality before making an issue-based costs order, and not properly considering the conduct of the parties and the offers made. The judge's approach fettered his discretion and did not apply the correct test. The costs order must therefore be revisited on remittal.
Finally, on indemnity costs, the court confirmed that there is no presumption that indemnity costs follow findings of dishonesty and that the judge was entitled to exercise discretion to refuse indemnity costs given the conduct on both sides and the circumstances of the case.
Holding and Implications
The appeal is allowed in part and dismissed in part.
The court orders that:
- The question of whether the default interest rate under clause 6.6 of the Facility Letter is an unenforceable penalty is to be remitted to the trial judge for reconsideration applying the correct legal test and considering the full evidence.
- The appeal is allowed in relation to the construction of clause 12.5 and clause 6.1 interest, holding that no interest under clause 6.1 accrues after the Repayment Date if the default interest rate is held to be a penalty.
- The appeal against the issue-based costs order is allowed, and the costs order is to be reconsidered on remittal. The judge must determine the overall winner, consider conduct and offers, and only then decide on the appropriate costs order, including whether to apply discounts or proportionality before resorting to issue-based costs.
- The appeal against the refusal to award costs on the indemnity basis is dismissed. The judge's exercise of discretion in this regard was proper and within the wide ambit of judicial discretion.
No new precedent is created; rather, the decision clarifies the application of established principles to the facts of this case and directs a reconsideration consistent with those principles.