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Should the penalty rule go to VAR?

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Jason Rix

Senior Prof Support Lawyer

London

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21 October 2021

Richard Hooley gave one of his regular talks on developments in banking and finance law. A chunk was devoted a recent run of cases applying the penalty rule. Here’s what I noted down:
  • In Heritage Travel v Windhorst a daily lump sum obligation (equivalent to 73% pa of the amount owing) had no real prospect of being a penalty since it was a conditional primary obligation and not dependent upon breach. 

Although the court did not have to decide whether the amount was unconscionable or out of all proportion, it did note that it was unattracted by the idea that a statement in a recital gave rise to a contractual estoppel on this point, since the penalty doctrine had a public policy basis that could not be by-passed in this way.

Additionally, without any real analysis (and despite long standing authority to the contrary), the court stated “...the acceleration provisions of [the relevant clause] are to an extent penal (and so, to that extent, maybe unenforceable)...”.

  • Ahuja v Victory Games which Justin Tan has covered on this blog got a brief mention. That was a case where the court rejected a claim for default interest at the rate of 12% compounded monthly on the basis that it was an unlawful penalty.
  • Perhaps more troublesome, at least in Hooley’s view, was Bedford v Sellman. This concerned a loan which had a standard interest rate of 3% pm but, if the borrower made punctual payments and was not otherwise in breach, a concessionary rate of 1.25% pm applied. There was a snap-back provision under which, if the borrower did default, the standard rate would apply retrospectively from the date of the drawdown of the first advance. The court held “the Defendant borrower has an arguable case that the application of Standard Rate interest, at least retrospectively, is both capable of amounting to a penalty clause and if so (as the Claimant concedes as an arguable case) is penal in nature”.

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