Nuray Houssein & Ors v London Credit Limited & Anor

A default-interest clause engaged on breach must be analysed by identifying whether it is a secondary obligation, the innocent party’s legitimate interest, and whether the detriment is extravagant, exorbitant or unconscionable in amount or effect. The assessment is objective and concerns the clause’s purpose as inferred from its effect and contractual context, not the lender’s subjective intention. Where contractual standard and default rates are mutually exclusive, the word applicable refers to the circumstances triggering each rate, not to enforceability. If the default rate is a penalty, the standard rate cannot fill the resulting gap after repayment. Costs must be assessed by identifying the overall winner, considering conduct and settlement offers, and considering proportional or time-limited orders before making an issue-based order.

The appellants challenged declarations made after trial concerning interest under a facility agreement and the consequential costs order. The first-instance judge had held that the default-interest provision was an unenforceable penalty, but that contractual interest at the standard rate continued after the repayment date. He also made an issue-based costs order and declined indemnity costs. London Credit cross-appealed the penalty finding. The appeal concerned the proper application of the penalty rule, the construction of the facility agreement, and the principles governing issue-based and indemnity costs.

The appeal was from the judgment and consequential orders of the Chancery Division, reported at [2023] EWHC 1428 (Ch).

1. Penalty issue. Asplin LJ, with Newey and Baker LJJ agreeing, held that the first-instance judge had failed to apply the correct penalty analysis. The threshold question was whether the default-interest provision was a secondary obligation engaged by breach. The judge had then to identify the nature and extent of London Credit’s legitimate interest and decide whether the detriment was extravagant, exorbitant or unconscionable. The relevant purpose was to be inferred objectively from the clause’s effect and construction; the lender’s subjective intention was not determinative. A lender has a legitimate interest in repayment and in the increased credit risk following default. The issue was remitted because the Court of Appeal could not safely substitute its own assessment on the limited extracts from the evidence.
2. Construction of clause 12.5. The standard rate in clause 6.1 and the default rate in clause 6.6 were mutually exclusive. The phrase applicable referred to the circumstances in which each rate operated. It did not mean enforceable. Clause 12.5 contained no fallback mechanism. Accordingly, if the default rate was held to be a penalty, the standard rate could not apply to sums outstanding after the repayment date. London Credit could pursue statutory or equitable interest if so advised.
3. Costs. Under the Civil Procedure Rules, the judge should first determine the overall winner, consider conduct and the Offers, and decide whether a proportional or time-limited order would sufficiently reflect the justice of the case before making an issue-based order. The costs order was set aside for reconsideration.
4. Indemnity costs. Dishonesty does not create a presumption or starting point for indemnity costs. The high threshold requiring conduct or circumstances taking the case out of the norm remained applicable. The judge was entitled to refuse indemnity costs, and that part of the appeal was dismissed.

1. Court of Appeal (Civil Division) allowed the appeal on the construction of clause 12.5 and the issue-based costs order, remitted the penalty question, and dismissed the appeal concerning indemnity costs.
2. Chancery Division, Business and Property Courts determined the underlying claims and consequential issues in [2023] EWHC 1428 (Ch). It held that the default rate was an unenforceable penalty, that standard-rate interest continued after the repayment date, and made an issue-based costs order.