Houssein & Others v London Credit Limited & Another [2024] EWCA Civ 721 04 July 2024
On 28 June 2024, the Court of Appeal handed down Judgment in Houssein & Ors v London Credit Limited & Anr [2024] EWCA Civ 721, an appeal concerning penalties, the interpretation of a facility letter, and costs orders following trial. Gary Cowen KC and Edward Blakeney, with Alexander Hutton KC, instructed by Hugh Cartwright & Amin, acted for the successful Appellants.
The facts
The First Respondent (“LCL”) agreed to loan £1,881,000 to the Third Appellant, CEK Investments Limited (“CEK”), for a period of 12 months. The loan was secured by a debenture over CEK’s assets, personal guarantees from CEK’s directors the First Appellant and her husband (who had subsequently died and whose estate was now represented by their son, the Second Appellant), and mortgages over 5 buy-to-let properties and their family home.
The facility letter prohibited CEK from occupying the family home as well as “Related Persons”, that definition including spouses and relatives but not directors. Before the loan moneys were drawn down, LCL inspected the family home to check it was not occupied. The Appellants maintained that an officer of LCL staged photographs to make it look as though the property was empty, even though they knew it was, and would be, occupied by the First Appellant and her family. The loan moneys were then released.
Under the terms of the facility letter, the standard rate of interest was 1% per month and the default rate was 4% per month, interest being compounded monthly in each case. A year’s worth of standard interest was rolled-up and retained out of the loan amount.
A month after the drawdown of the loan, LCL alleged that CEK was in breach of the facility letter by reason of the occupation of the family home. It subsequently demanded repayment of the full loan amount plus default interest. When that demand went unpaid, LCL appointed the Second Respondents to sell the buy-to-let properties and the family home. The Appellants obtained an interim injunction prohibiting them from doing so, and the matter then progressed to trial.
The Trial Judgments
The trial was heard over 6 days, following which the Judge determined that the photographs taken by LCL’s officer had been staged, the non-occupation provision had been waived, and the appointment of the Second Respondents was therefore unlawful. The Judge also held that the default interest rate was unenforceable as an unlawful penalty. Other claims brought by the Appellants, including claims in undue influence and claims under consumer protection legislation, were dismissed.
At the consequentials hearing, the Judge determined a number of matters that remained in dispute. He held that the standard rate of interest continued to apply after the term date of the loan, that the appropriate costs order was an issues-based costs order, and the Appellants were not entitled to their costs on the indemnity basis notwithstanding the dishonest evidence of LCL’s officer and one other witness, and also the numerous settlement offers made by the Appellants which they had beaten in light of the trial judgment.
The Appellants appealed on three grounds:
- The Judge’s interpretation of the facility letter was wrong. LCL was not entitled to contractual interest after the term date of the loan as, on the wording of the facility letter, the entitlement to standard rate interest had come to an end and the default rate of interest was unenforceable as a penalty. If LCL was to claim any interest, it would have to be on an equitable/ statutory basis.
- The Judge’s decision to make an issues-based costs order was wrong. The Appellants were the successful party, LCL’s conduct and offers made by the Appellants (which they had beaten) had not been properly considered by the Judge, and the possibility of a percentage costs order made an issues-based costs order inappropriate.
- The Judge’s decision not to award the Appellants their costs on the indemnity basis was wrong. The dishonesty of LCL’s officer, which resulted in LCL alleging a breach of the facility letter and the present proceedings, plus the repeated offers to settle proceedings took the case out of the norm.
LCL subsequently cross-appealed the Judge’s determination that the default interest rate was a penalty on the basis that the Judge had applied the wrong test and reached the wrong conclusion.
The Appeal Judgment
The Court of Appeal began with LCL’s cross-appeal as that was relevant to the other grounds of appeal.
Asplin LJ, with whom Newey and Baker LJJ agreed, held that the Judge had applied the wrong test. They endorsed the decision of Bryan J in Cargill International Trading PTE Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm) and the 3-stage test of Mr Fancourt QC (as he then was) in Vivienne Westwood v Conduit Street [2017] EWHC 350 (Ch). Applying those three stages:
- Was there a secondary obligation engaged upon breach of a primary obligation? The Judge did not address this threshold question, but it was implicit that it was crossed (i.e. the obligation to pay default interest arose upon a breach of the facility letter).
- What was the extent and nature of the legitimate interest of LCL in having the primary obligation performed? Here the Judge had fallen into error. Although it had not been in issue between the parties, the Judge had looked for a legitimate interest of LCL in imposing default interest, and had done so by investigating the subjective intentions of the parties. His conclusion that default rate did not protect a legitimate interest of LCL was wrong - the Court of Appeal held at [52] that “it is inevitable that a legitimate interest in the enforcement of the primary obligation to repay the Loan, all interest, fees and commissions on the Repayment Date arises here.”
- Having regard to that legitimate interest, was the secondary obligation exorbitant or unconscionable in amount or in effect? The Judge had not asked this crucial question, and was instead looking to see whether LCL had a justification for the default rate. That was the wrong approach.
Although LCL had invited the Court of Appeal to remake the decision afresh and determine that the default rate of interest was not a penalty, the Court was unwilling to do so as it had not heard all of the factual and expert evidence. The matter would therefore be remitted to the trial judge to decide the question again.
On Ground 1 of the appeal, the Court of Appeal applied the well-known tests applicable to the construction of contracts per Arnold v Britton [2015] AC 1619 and as summarised in EMFC Loan Syndications LLP v The Resort Group Plc [2021] EWCA Civ 844. On the wording of the facility letter, the Court agreed with the Appellants that the Judge had misconstrued the provisions relating to interest. The entitlement to standard rate interest had come to an end once the term date had passed, and the Judge had erred in equating “applicable” with “enforceable”. The standard rate and the default rate were mutually exclusive, such that LCL could not choose to revert back to standard interest in circumstances where the default interest would have applied (but was not enforceable by reason of it being a penalty). The clause on which LCL relied did not provide a ‘fall back’ position.
The grounds of appeal dealing with costs were addressed next. On Ground 2 – whether an issues-based costs order should have been made – the Court was satisfied that the high threshold for appealing against a costs order had been crossed in this case. The Judge had not attempted to identify the “overall winner” and had instead mistakenly looked for an “outright winner”, which was entirely different. He did not properly consider the conduct of LCL or the offers that had been made by the Appellants, and had not properly considered whether a proportional costs order was more appropriate than an issues-based order. It was also unfortunate that the Judge had made an issues-based costs order without seeking submissions from either party as to whether it was appropriate. The correct costs order would, therefore, need to be remitted to the trial judge to determine following his reconsideration of the penalty question.
The Court dealt with Ground 3 briefly – there was no presumption of indemnity basis costs where a party has been dishonest, and on the facts of this case the Judge was entitled to reach the conclusions he did when refusing indemnity costs.
Comment
The Court of Appeal has reiterated the 3-stage test to take when determining whether an impugned provision is a penalty or not. Whilst it had been argued by the Appellants that the Judge had decided stages 2 and 3 together, that argument did not find favour with the Court, and it is therefore important to ensure that each stage is addressed separately and consequentially. It is yet to be seen whether the Judge will change his Judgment in this respect or not.
The construction of the facility letter was determined on the particular terms found in that particular contract. But the Court’s decision demonstrates that a standard rate of interest will not automatically be applicable simply because a default rate of interest is a penalty and is therefore unenforceable. Parties must be alive what to the actual position will be if certain terms of a contract are held to be unenforceable.
Lastly, the Judgment also provides a (rare) example of when a costs decision will be overturned on appeal. An ex-tempore judgment (as the Judge’s consequential judgment was) does not obviate the need to engage properly with the applicable rules, the facts of the case, and the offers made by the parties. Fundamentally, a Judge should identify the winner and not simply leave it to the costs judge to determine in due course.
Gary Cowen KC and Edward Blakeney acted for the successful Appellants, instructed by Salma Sacranie and Atul Amin at Hugh Cartwright & Amin. A copy of the appeal judgment can be found here.
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