Seculink Limited v Eren Salih

A contractual default-interest provision is assessed as a penalty by construction at the time of contracting. Evidence may be relevant to the commercial background, but its absence does not prevent the court from determining the issue. A very substantial increase in the debt may be relevant to whether the detriment is out of all proportion to the innocent party’s legitimate interest.

Under the Consumer Credit Act 1974, the creditor bears the legal burden of proving that a relationship is not unfair. A borrower does not necessarily fail merely because no expert evidence is called. Where the first-instance court has not properly determined penalty and unfair-relationship issues, an appellate court should ordinarily remit them for retrial rather than decide them as a court of first instance.

Seculink Limited advanced a secured bridging loan of £355,000 to Eren Salih for a six-month term. The agreement provided for interest at 2.5 per cent per month during the term and, on default, 12 per cent per month compounded. Salih defaulted, and possession and a money judgment were sought in respect of three properties.

The County Court entered judgment for £850,000 after Seculink voluntarily capped its claim. It rejected or declined to determine Salih’s penalty defence and his claim that the relationship was unfair under the Consumer Credit Act 1974, principally because he had provided no evidence. The central issues on appeal were whether those evidential conclusions were legally correct and whether the issues should be determined afresh.

1. Appeal allowed in part as to the reasoning and remitted. The reasons for rejecting the penalty defence and the unfair-relationship claim could not be sustained. The money judgment and costs order were set aside, and those issues were remitted to the County Court for retrial before another judge.
2. Penalty. The question whether clause 7(e) was a penalty was one of construction, applying Cavendish Square Holding BV v Makdessi [2016] AC 1172. Evidence could be admissible and relevant, but the defence did not fail merely because Salih had called no evidence. The Judge had treated the absence of evidence as the basis for rejection.
3. The Flowchart could not properly be relied upon. It had been provided only shortly before trial, was not verified by a witness, and no application had been made to adduce it. The agreed facts, including the 12 per cent compounded rate and its arithmetical effect, were nevertheless evidence capable of informing the construction issue. The appellate court could not consider additional matters advanced by Seculink in support of the clause without a Respondent’s Notice.
4. Unfair relationship. Section 140B(9) placed the legal burden on Seculink to prove that the relationship was not unfair. Assuming, without deciding, that the borrower also bore an evidential burden, that burden was discharged at least to the extent that Salih challenged the default rate. A challenge to an interest rate did not necessarily require expert evidence. The absence of expert evidence might affect the result on particular facts, but did not determine the issue automatically.
5. The default-rate complaint was at the heart of the unfair-relationship case. The same issue therefore had to be reconsidered alongside the penalty issue. Findings concerning the matters pleaded at paragraph 49(a), (e) and (f) of the Amended Defence and Counterclaim were left undisturbed because they were not challenged.

• County Court: On 26 July 2021 HHJ Gerald ordered possession of three properties, entered judgment for £850,000 and awarded costs. The penalty and unfair-relationship issues were rejected or left undetermined principally on evidential grounds.
• High Court (King’s Bench Division): The appeal was allowed to the extent that the money judgment and costs order were set aside. The penalty and unfair-relationship issues were remitted to the County Court for retrial before another judge.