Nuray Houssein & Ors v London Credit Limited & Anor

The Court of Appeal considered the construction of interest provisions in a facility letter and the correctness of costs orders made by the Deputy High Court Judge. The primary legal issues were whether the contractual default interest in clause 6.6 was an unenforceable penalty and, if so, whether the standard interest rate in clause 6.1 nonetheless continued to apply after the Repayment Date pursuant to clause 12.5. The court held that the judge below had applied the wrong approach to the penalty question and therefore remitted that issue for reconsideration; it held, as a matter of contractual construction, that clause 6.1 does not operate to fill the gap if clause 6.6 is inapplicable, so no contractual interest under the Facility Letter applies after the Repayment Date if the default rate is a penalty. The Court also found that the judge had erred in principle in making an issue-based costs order without first determining the overall winner and considering proportional or date-limited awards and remitted costs for reconsideration; the judge’s refusal to award indemnity costs was, however, upheld.

This appeal arose from litigation about a loan made by London Credit Limited to CEK Investments Limited under a facility letter dated 20 July 2020 (varied by deed of variation). The borrower failed to repay the outstanding balance by the Repayment Date (7 August 2021). The trial judge (Deputy Judge Farnhill) had held that London Credit had waived the non-occupation covenant in respect of the family home, that the default interest rate in clause 6.6 was an unenforceable penalty, but that contractual interest continued after the Repayment Date at the clause 6.1 rate and declared the accrued interest figure. The judge also made an issue-based costs order and refused indemnity costs.

Nature of the appeal: The appellants challenged (i) the construction and operation of clause 12.5 and clause 6.1 (whether contractual interest runs after the Repayment Date), and (ii) the judge’s costs orders. The first respondent cross-appealed the judge’s finding that the default rate in clause 6.6 was a penalty.

Issues framed by the Court:

• Whether the default interest rate in clause 6.6 is an unenforceable penalty (application of the Cavendish/Makdessi principles).
• If clause 6.6 is a penalty, whether clause 12.5 and clause 6.1 operate so that clause 6.1 interest continues to accrue after the Repayment Date.
• Whether the judge erred in principle in making an issue-based costs order without first deciding the overall winner and considering proportional orders or date-limited awards, and whether indemnity costs should have been awarded.

Court’s reasoning (concise): The Court of Appeal concluded (Asplin LJ, with whom Baker LJ and Newey LJ agreed) that the trial judge had not applied the Cavendish/Makdessi test correctly when deciding whether clause 6.6 was a penalty: he conflated matters of subjective intention with the objective constructional task and failed to address separately whether the clause was "extravagant, exorbitant or unconscionable" in relation to any legitimate interest protected. That penalty question was therefore remitted to the trial judge for determination applying the correct test to the full evidence. On construction, the court held that clause 12.5 simply refers to the two rates defined earlier (6.1 and 6.6) and that which rate applies depends on the factual circumstances; the clauses are mutually exclusive and clause 6.1 does not spring back to fill a gap if clause 6.6 (the default rate) is inapplicable or unenforceable. Consequently, if clause 6.6 is held to be a penalty then no contractual interest under the Facility Letter will run after the Repayment Date and the lender must look to statutory or equitable interest if it seeks post-Repayment Date compensation. On costs, the Court held that the judge should have decided who was the overall winner, considered conduct (including the staged evidence findings) and the settlement offers, and only then, if appropriate, applied a discount or resorted to an issue-based order; accordingly the issue-based costs order must be revisited. The judge’s decision not to award indemnity costs was within his discretion and was upheld.

This is an appeal allowed in part. The Court of Appeal concluded that (i) the trial judge misapplied the penalty test in relation to clause 6.6 and remitted that question to him for reconsideration applying the correct Cavendish/Makdessi approach to the whole evidence; (ii) as a matter of contractual construction clause 6.1 does not operate to supply post-Repayment Date interest if clause 6.6 is inapplicable or is a penalty, so no contractual interest under the Facility Letter will run after the Repayment Date if clause 6.6 is held to be a penalty; (iii) the judge erred in principle in making an issue-based costs order without first determining the overall winner and considering proportional/date-limited orders and the Offers, so the costs order must be revisited; and (iv) the judge did not err in refusing indemnity costs and that decision is affirmed.

Appeal from the Business and Property Courts of England and Wales (Property, Trusts and Probate List (ChD)) – Deputy Judge Richard Farnhill sitting as Deputy High Court Judge: [2023] EWHC 1428 (Ch). Appeal heard in the Court of Appeal and judgment delivered 28 June 2024: [2024] EWCA Civ 721.