Court of Appeal considers whether default interest clause is an unenforceable penalty

The Court of Appeal has found that a first instance judge erred in his application of the correct test to determine whether a default interest clause amounted to an unenforceable penalty: Houssein v London Credit Ltd [2024] EWCA Civ 721.

Applying the test from the leading case of Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 (considered here), the Court of Appeal held that the clause was designed to protect the lenders' "legitimate interest" in securing repayment of monies due under the lending agreement, but remitted to the trial judge the question of whether the clause was out of all proportion to that interest, ie whether it was "extortionate, exorbitant or unconscionable", and therefore penal.

For more information see this post on our Banking Litigation Notes blog.

NOTE: The High Court has found that the clause was not extortionate, exorbitant or unconscionable and therefore not an unenforceable penalty clause, following remittal from the Court of Appeal. See this post on our Banking Litigation Notes blog.