PT-2021-000393 - [2025] EWHC 2749 (Ch)

Turning, then, to Mr Fancourt QC’s threshold question, was the Default Rate a secondary obligation engaged on the breach of a primary contractual obligation? This was not addressed in my First Judgment because, as the Court of Appeal assumed (Court of Appeal Judgment paragraph [48]) it was not in issue. On the contrary, it was the pleaded case of both parties that I needed to treat the Default Rate as a secondary obligation. Specifically, paragraph 97 of the Particulars of Claim asserts that “the default rate under the Facility Letter imposed a detriment out of all proportion to any legitimate interest of the lender.” Paragraph 122 of the Defence denies that in general terms: “it is denied that the default rate under the Facility Letter imposed a detriment out of all proportion to any legitimate interest of [LCL], or that the default rate is an unfair penalty that is unenforceable at common law.” The second limb of that denial is, of course, broad, and is at least consistent with the idea that the Default Rate is simply not amenable to analysis as a penalty, i.e. it is a primary obligation. In the context I do not think that is what was intended, however, a conclusion reinforced by paragraph 123 of the Defence, which avers that: “Clause 12 of the Facility Letter sets out clearly prescribed Events of Default, each of which are serious in themselves and which permit [LCL] to apply the default rate.” Nothing in the course of the trial suggested any deviation from that pleaded position.

For completeness, I should note that there was some suggestion raised in the course of this hearing that the Default Rate, in at least some cases, did not respond to anything that could properly be characterised as a breach of a primary obligation. It came, perhaps surprisingly, from Mr Cowen, who observed on closing that:

I say surprisingly not because what he submitted was in any way illogical. On the contrary, as regards this and other events of default, for example the receipt of a letter of claim, it is hard to see what a borrower could do. However, as Makdessi at paragraph [14] makes clear, such an analysis would suggest that the Default Rate in those cases is being applied in the absence of any breach – CEK was not undertaking to prevent or avoid compulsory purchase, nor was it agreeing not to receive certain types of correspondence, it was simply the Facility Letter specifying what would happen if such an order were made or such a letter received. It was a price adjustment mechanism. That would make the Default Rate, in those instances, a primary obligation and so outside the scope of the rule on penalties altogether. That, obviously, is not in the Claimants’ interests.

As I have noted, that is not the pleaded case of either party and was not raised at trial. I did not take Mr Cowen to be shifting the Claimants’ position at this hearing. I therefore accept that both parties characterise the Default Rate as being payable on, and only on, the breach of a primary obligation. As such, it is a secondary obligation and falls to be assessed under the rules on penalties.