Court of Appeal confirms default interest clause in loan agreement is not unenforceable penalty

The Court of Appeal has dismissed an appeal against a High Court decision that a default interest clause in a short-term loan agreement was not extortionate, exorbitant, or unconscionable (and therefore not an unenforceable penalty clause): Houssein & Ors v London Credit Ltd & Anor [2026] EWCA Civ 830. 

As a reminder, in assessing whether a clause amounts to a penalty, the three-stage test drawn from Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 is applicable. This test provides that a clause will not amount to an unenforceable penalty, unless it creates a secondary obligation triggered by a breach of contract and: (1) the clause is not in furtherance of a "legitimate interest" which the innocent party has in the performance of the primary obligation; and (2) the clause is "extortionate, exorbitant or unconscionable".

The appeal judgment represents the latest in a string of decisions between the same parties and arising out of the same facts. The original trial judge found that the default interest clause was unenforceable as a penalty, but this decision was overturned by the Court of Appeal (see our blog post), which found that the High Court had misapplied the law on penalty clauses and remitted the case back to the trial judge. On remittal, the High Court found that the clause was not an unenforceable penalty (see our blog post), but this decision was appealed to the Court of Appeal, and the present judgment represents the outcome of that appeal.

The Court of Appeal held that: (i) the default interest clause was commercially justifiable in light of the lender’s legitimate interests (in particular, in credit risk management); and (ii) no tender of payment had occurred sufficient to engage the equitable principle that interest should cease to run before repayment.

For further details, see this post on our Banking Litigation Notes blog.