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Court of Appeal confirms cross-default provision does not fall foul of penalty rule

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​The Court confirms, in this short judgment, what most people thought, namely that a cross-default provision is not susceptible to the penalty rule: Edgeworth Capital (Luxembourg) SARL & Anor v Ramblas Investments BV [2016] EWCA Civ 412.   

Ramblas argued that a fee payable under a so-called "upside fee agreement" was unenforceable as being a penalty, because it far exceeded any loss that Edgeworth, as assignee of the original lender RBS, could suffer as a result of the breach of contract in failing to make repayment under a junior loan agreement. The Court of Appeal held that the recitals and the upside fee agreement itself made it clear that the fee was the remuneration payable to Edgeworth for providing part of the finance necessary to complete the purchase of the Ciudad Financiera, a development in Madrid. The fee became payable on a specified date when the repayment of the junior loan fell due. The event which constituted an "Event of Default" under the junior loan agreement and caused the loan to fall due for repayment was not a breach of the junior loan agreement, but a breach of a personal loan agreement, a separate further loan agreement, by the borrowers. As the judge said, the fee had nothing to do with damages for breach of contract; it was payable on the happening of a specified event. Accordingly, it did not fall foul of the rule against penalties as formulated in Cavendish v Makdessi.

This Court of Appeal judgment has the following rather brilliant line from Lord Justice Moore-Bick, "The appeal raises no point of law of general importance and no one other than the parties to the proceedings are likely to be interested in its outcome".

Further Information 

This case summary is part of the Allen& Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey, or tel +44 20 3088 3710.