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

The question remitted to me at paragraph [57] of the Court of Appeal Judgment for determination was whether “having regard to the legitimate interest in the performance of the primary obligation, the default interest provision is extortionate, extravagant or unconscionable in amount or effect.” The legitimate interest identified in that section of the Court of Appeal Judgment was “a legitimate interest in the enforcement of the primary obligation to repay the Loan, all interest, fees and commissions on the Repayment Date”.

There was disagreement between the parties over what the Court of Appeal meant. Mr Wheeler submitted that the task before me was a limited one. The Court of Appeal had identified the relevant legitimate interest – LCL’s interest in repayment – and it was against that yardstick and that yardstick alone that I was to assess whether the Default Rate was extortionate. (Footnote: ¹) Even were that not the case, he observed, ultimately it made no difference because under clause 12.1 LCL had a right to accelerate the Loan on any event of default, such that other defaults would inevitably result in a payment default. Finally, he submitted that this reflected the evidence at trial as to market practice that Default Rates were static, rather than dynamic: there was one rate that applied to all defaults, not separate rates for different types of default.

By contrast, Mr Cowen, in oral opening, suggested that what was required was a broader re-evaluation. Applying Makdessi, it would be insufficient merely to show that the Default Rate was not extortionate by reference solely to LCL’s legitimate interest in repayment; if it was extortionate or unconscionable by reference to legitimate interest underpinning any primary obligation, the Default Rate as a whole would be unenforceable. He also referred me to the terms of the Court of Appeal’s order, which is broader than paragraph [57] in providing:

This, he submitted, put everything back in play, and the question in the Court of Appeal Judgment must be read in light of it.

I accept Mr Cowen’s broader reading of the Court of Appeal’s question.

First, it seems to me that in retaining Lord Dunedin’s four tests as part of the analysis the Supreme Court in Makdessi required a consideration of all of the primary obligations (and so the interests in seeing them enforced) that were the subject of the alleged penalty. The point was very clearly made by Mr Fancourt QC in Vivienne Westwood at paragraph [53]: it was “one of the hallmarks of penalty” where “the same substantial financial adjustment applies … without regard to the nature of the obligation broken”.

The Court of Appeal Judgment expressly endorsed those judgments without any reservation. But if it were sufficient for LCL simply to show that any one of the primary obligations set out in clause 12 of the Facility Letter merited protection at the level set by the Default Rate, those tests could not be right. There would simply be no need to consider Mr Fancourt QC’s point at paragraph [53] provided, at the time the agreement was entered into, there was a legitimate interest in the enforcement of at least one primary obligation that would merit the application of the specified secondary obligation. That is not my reading of the legal test, and I do not see that the Court of Appeal Judgment was seeking to change that test.

Secondly, I do not accept that clause 12.1 of the Facility Letter means that a non-payment breach will inevitably result in acceleration. It simply grants an option to LCL to accelerate. That contrasts with the defaults set out at clause 12.3, which do automatically accelerate the Loan and bring the facility granted under the Facility Letter to an end. The distinction is important. Given that the question is assessed objectively at the time of formation it is what LCL could do that matters, not what it would do (and less still what it now believes it thought, at the time, it would do). LCL could accelerate, but it was by no means bound to do so. On an event of default, the Default Rate was applicable regardless of whether acceleration followed or not.

Even if I am wrong on that, and LCL’s conduct is relevant, as a factual matter LCL’s immediate response to finding that the Housseins remained in residence was not to accelerate. When Gunnercooke wrote to CEK on 8 September 2020 notifying it of the breach of the non-residence provision the Claimants were given one month to move out, that is to remedy the alleged breach, but the Default Rate was applied from the previous day, which was the date of the inspection confirming that the Housseins remained in residence at 71 Hamilton Road. On the facts of this case, LCL sought to apply the Default Rate even in the absence of a payment default or acceleration.

In circumstances where the Default Rate could apply in the absence of a payment default it is not clear to me why the mere potential for a payment default, a default that might never happen, means the clause is automatically not extortionate in respect of other primary obligations which depend on different legitimate interests.

Thirdly, I do not accept that the evidence as to the static nature of default rates was as clear cut as Mr Wheeler now suggests. The point was put to both experts, but in neither case was it on the terms now being considered.

Taking first Mr Griffiths, his evidence was as follows:

The “last witness” was Mr Theophanous and I think the passages of his cross-examination to which Mr Griffiths was referring were somewhat separated in time. The first related to the setting of the Standard Rate:

There then followed an exchange around what the relevant risk factors were in this case. Mr Theophanous was taken through various aspects of risk relevant to the Housseins and his evidence, as I understood it, was that taking all those factors into account he came up with a composite figure for risk, weighting the various issues he had identified, which he applied to determine an increase to LCL’s typical standard rate.

The cross-examination turned to the Default Rate right at the end. There was quite a lot of back and forth but the conclusion is what seems to me important:

I recognise that the cross-examination elided two distinct concepts, the risk associated with a type of default (which focusses on the likely magnitude of loss) and the risk associated with the individual borrower (which goes more to the likelihood of loss occurring). While this injected some unwelcome ambiguity, Mr Theophanous’ evidence seemed to me clear: that default rates were static both as to the types of default (that is, primary obligations, or categories of primary obligations) and as between different borrowers. I took, and take, Mr Griffiths evidence to have been that the default rate would typically be dynamic by reference to both: that is, different default rates would apply to different borrowers, but also different default rates would apply to different primary obligations.

Mr Kyriakou’s evidence was similarly clouded by the question he was asked:

Mr Kyriacou was therefore being asked about the impact specifically on credit risk. As I will address below, that is a particular type of legitimate interest that relates to some but by no means all of the primary obligations in the Facility Letter. As such, it is not the only primary obligation or the only legitimate interest that is subject to the Default Rate. It seemed to me, however, that his answer went beyond simply credit risk and was, effectively, from what he had seen one default rate is applied across the board to all primary obligations. It is that evidence on which I understand Mr Wheeler to rely.

Ultimately this comes down to an assessment of the witnesses. It seemed to me from seeing them that Mr Griffiths was both more experienced and more considered in his answers. As to the former, he has worked as a lender for quite a number of years and in that capacity, in his own words, “had seen quite a bit”. He knew how lenders went about setting rates. Mr Kyriacou was primarily a broker. He had experience of what rates were offered, but he could only comment on what he had seen, as he very fairly acknowledged. Both experts agreed that it can be difficult to get an accurate picture of default rates from material that is available in the market. That is significant here because it means that even on a best-case scenario Mr Kyriacou could only have part of the picture: he would know what the default rate was, but would not know what triggered it. By way of example, in Cargill, Ahuja and Lordsvale there was only one default – non-payment. In such cases the concern I am addressing here – multiple primary obligations being protected by the same secondary obligation – simply does not arise. It is meaningless to talk about a rate that responds (or does not respond) dynamically to different categories of risk when there is only one trigger to that rate applying.

I also found that Mr Griffiths took more time to consider the questions put to him. Even the straightforward question to Mr Kyriacou that I have quoted above was actually broken up into six chunks, with Mr Kyriacou regularly seeking to confirm his understanding and start his answer.

The other point on the witnesses that seems, to me, significant is that Mr Kyriacou’s evidence requires me to make a step of inductive logic whereas Mr Griffiths’ does not. When Mr Kyriacou stated that he had never seen a dynamic rate, I am to take from that that this is because such rates do not exist. That does not necessarily follow; it may simply be that Mr Kyriacou had not come across them. By contrast, when Mr Griffiths stated that he has seen dynamic default rates in the market then if I accept that evidence (which I did and do) there is no need for any inductive leap: the only way he could have come across them is if such rates are in fact offered.

For these reasons, and as I noted in my First Judgment, I preferred the evidence of Mr Griffiths. As a factual matter, I accept that dynamic default rates are available in the market, although quite possibly the practice is not uniform.

Finally, on this point, even were it uniform in the market to apply the same rate to different defaults I do not accept that would, of itself, make it legitimate in all cases. As Makdessi makes clear, that the same consequence flows from a range of breaches or defaults gives rise to a presumption, but no more than that, that the secondary obligation in question is a penalty. Put another way, it is something that calls for explanation. A lender may in a great many, maybe in all cases be able to provide such an explanation. But to say that a default rate is not extortionate provided it is acceptable by reference to some primary obligations, such that the lender does not even need to address the basis for applying the same rate to other, apparently quite unimportant primary obligations that represent different interests, seems to me to go too far. As the Court of Appeal Judgment made clear, lenders will typically have a very strong interest in timely repayment, such that some default rate will typically be appropriate by reference to the repayment obligation. If that were the only relevant enquiry they would have carte blanche to charge the same rate for much more minor and inconsequential matters; that is not my understanding of how the law does or should operate.

With the benefit of Mr Cowen’s submissions I have therefore read the Court of Appeal’s question as being whether “given the existence of a legitimate interest in the performance of the primary obligation, the default interest provision is extortionate, extravagant or unconscionable in amount or effect”.