Nuray Houssein & Ors v London Credit Limited & Anor

Richard Farnhill (sitting as a Deputy High Court Judge of the Chancery Division):

1. This judgment arises out of the earlier judgment I gave on 12 June 2023 following the trial of these proceedings ( [2023] EWHC 1428 (Ch) , my First Judgment ). Aspects of my First Judgment were reversed by the Court of Appeal ( [2024] EWCA Civ 721 , the Court of Appeal Judgment ), necessitating a further hearing to determine certain issues of fact. This is the judgment arising out of that hearing.

2. I recognise that this hearing was a continuation of the trial, and that rules as to such things as trial witness statements continue to apply. It will be necessary in the course of this judgment to refer back to events as they were at the original trial. Simply for ease of reference I will therefore refer to the original trial as “the trial” and the hearing that gave rise to this judgment as “this hearing”.

3. This is a somewhat lengthy, and at times unavoidably involved, judgment, and it seems to me most convenient to summarise my findings at the outset: i) The express provisions of the Facility Letter (defined below) do not require LCL to accept an offer of repayment that seeks to impose conditions, delays the receipt of funds beyond the defined Repayment Date or in some other way departs from the obligation to repay set out in the Facility Letter. ii) Similarly, the Facility Letter does not include an implied term requiring LCL to accept offers of payment on any terms other than those set out in the Facility Letter. iii) Equity may have a somewhat broader jurisdiction to intervene but that jurisdiction would not respond on the facts of this case in any event. iv) With the exception of the repayment of £1.2 million in May 2021, the Claimants have not made an effective tender of or otherwise repaid any sums due under the terms of the Facility Letter, and in so far as they have made offers, those offers were not offers of payment but were, at most, contractual offers intended to vary the parties’ existing rights and obligations or to create new rights and obligations. In many cases they seemed to me to fall short even of that, not being intended to be capable of immediate acceptance. Accordingly, the balance of the Loan (again, defined below) of a little over £629,000 due on the Repayment Date provided in the Facility Letter remains outstanding and nothing the Claimants have done has stopped interest from accruing. v) Non-payment by the contractual repayment date is a default under the terms of the Facility Letter and, again under the terms of the Facility Letter, attracts default interest at a rate of 4% compounded monthly (the Default Rate ). The Default Rate is not a penalty and so is enforceable, by LCL, from the contractual Repayment Date. vi) In the circumstances, no claim arises for the payment of interest under section 35 A of the Senior Courts Act 1981 . Factual Background to the Dispute

4. Aspects of my First Judgment were not touched by the Court of Appeal Judgment, including much of the factual background. Those matters, obviously, are no longer in dispute, but in the interests of making this judgment easier to follow as a free-standing decision I summarise them here.

5. Over a number of years Ali Houssein ( Mr Houssein ) had built up a portfolio of residential properties. One of those properties was the family home ( 71 Hamilton Road ); the others were held as investments (the Downhills Way Properties ). While Mr Houssein had been the driving force in building and managing the portfolio, some of the Downhills Way Properties were held in the name of his wife, Nuray Houssein ( Mrs Houssein ), or in their joint names. 71 Hamilton Road was also held jointly.

6. The Downhills Way Properties, but not 71 Hamilton Road, were used as security for various loans. In June 2020 one of those loans (the Bridge Loan ) needed to be refinanced. Mr Houssein and his son, Houssein Houssein, asked a relative if they could recommend anyone to assist in the process; they were referred to Andreas Liondaris of Premier Finance Ltd ( Premier ).

7. Andreas Liondaris in turn introduced Mr and Mrs Houssein and Houssein Houssein to Chris Stylianides ( Mr Stylianides ), a Business Development Manager at the First Defendant ( LCL ). Ultimately, LCL and the Claimants entered into the following agreements: i) A facility letter (the Facility Letter ) granting a loan of £1.881 million (the Loan ), entered into between the third Claimant ( CEK ), a company owned by Mr and Mrs Houssein who were also its directors, as borrower and LCL as lender. ii) Personal guarantees from Mr and Mrs Houssein of CEK’s obligations under the Facility Letter. iii) Charges over the Downhills Way Properties and 71 Hamilton Road.

8. As an unregulated moneylender LCL was not authorised to make loans to individuals secured by way of mortgage over the property where they resided. To address this, two steps were taken: i) As I have noted, the Loan was taken out by CEK rather than by Mr and Mrs Houssein personally. ii) The Facility Letter specified that the Borrower was not to reside at any secured property, which, again as I have noted, included the family home of 71 Hamilton Road.

9. I found that Houssein Houssein had taken over the day-to-day running of the property portfolio and largely took the lead on the refinancing with LCL. I further found that at all materially relevant times he was aware of the non-residence requirement but that he did not communicate it to his parents, on whose behalf he was acting.

10. On 29 July 2020 an inspection of 71 Hamilton Road was carried out by Mr Stylianides on behalf of LCL. The purpose of the inspection was to confirm that 71 Hamilton Road was vacant prior to drawdown on the Loan. I found that the inspection was a sham, concocted to create the impression that renovation works were ongoing when in fact the Housseins still resided there. I further found that Mr Stylianides, Andreas Liondaris and Houssein Houssein (but not Mr or Mrs Houssein) were fully aware of the true position. Mr Stylianides’ knowledge was imputed to LCL such that it, too, was aware of the true position when drawdown under the Facility Letter occurred on 7 August 2020.

11. Very shortly after drawdown LCL was informed by one of its investors that the Housseins continued to reside at 71 Hamilton Road. LCL’s solicitors, Gunnercooke, wrote to the Housseins requiring them to vacate the property, relying on the non-residency provision of the Facility Letter. When the Housseins refused to do so LCL appointed the Second Defendants.

12. The default on which LCL relied in taking enforcement action was the alleged breach of the non-residency obligation. The effect of my finding as to Mr Stylianides’ knowledge was that the default on which LCL had purported to rely had in fact been waived when it permitted drawdown with the knowledge, imputed from Mr Stylianides, that at the date of drawdown the Housseins were still in residence at 71 Hamilton Road. The enforcement steps taken in respect of that alleged breach were accordingly void and of no effect.

13. At the same time, by trial sums remained outstanding under the Facility Letter. The defined Repayment Date under the Facility Letter was 12 months after drawdown. There was some debate as to when that was. The Loan ran for 12 months, so elapsed on 7 August 2021, but that was a Saturday which I believe may be why the parties had concluded that the Repayment Date was the next business day, 9 August 2021. Before me it was, I think, agreed that 7 August 2021 should be treated as the correct date.

14. Of the capital, £1.2 million had been repaid on 28 May 2021. Interest was more complex. There are two rates of interest under the Facility Letter, the standard rate of 1% per month (the Standard Rate ) and the Default Rate, which as I have noted is 4% compounded monthly. The total amount outstanding therefore depended on which rate applied and for which period.

15. I found that the Default Rate was a penalty, and so would have been unenforceable in any event. However, I further found that the Standard Rate continued to apply if the Loan was not repaid on the Repayment Date. The Court of Appeal Judgment reversed both findings. Only the first has been remitted back to me for further determination.

16. For completeness, I also made the following findings that were not the subject of the appeal: i) The use of CEK as borrower was not a sham designed to disguise the “true” nature of the transaction as a loan to Mr and Mrs Houssein. LCL was entirely transparent in its use of a loan to a corporate borrower with security from Mr and Mrs Houssein. Moreover, it had no incentive to conceal the true nature of the Loan because, had the non-residence requirement of 71 Hamilton Road been met, a direct loan to Mr and Mrs Houssein would equally not have constituted a regulated loan. ii) Mrs Houssein’s consent to the transaction was not procured through undue influence on the part of Mr Houssein and no other vitiating factor was alleged. iii) A claim under section 62 of the Consumer Rights Act 2015 was abandoned by the Claimants on the last day of trial. iv) A claim under section 140 A of the Consumer Credit Act 1974 failed because the borrower in this case was a corporate entity, CEK, not an individual. The witnesses

17. The witness evidence at the trial was central to a number of the issues in dispute. At this hearing it is fair to say that it took significantly less time and was less the focus of closings. At the same time the witnesses’ evidence did alter my view of the case, particularly on the question of penalties, and it is important to address them.

18. Jack Liondaris is a mortgage broker who has assisted the Claimants in at least some of their efforts to refinance the Loan. He was obviously familiar with the lending market for a portfolio of this nature and spoke knowledgably about both this transaction and the broader issues that tend to concern lenders. He was an honest and helpful witness. Throughout this judgment I will refer to him as Jack Liondaris to avoid any risk of confusion with Andreas Liondaris, the Claimants’ previous mortgage broker who organised the Loan and was a witness at the trial but not at this hearing.

19. Rose Huseyin is the daughter of Mr and Mrs Houssein and a colleague of Jack Liondaris. Her witness statement went to the various offers and counter-offers that were made in the exchanges between the Claimants and LCL with a view to refinancing the Loan and settling this dispute. She was not, however, the decision-maker in respect of those offers. As she explained, Mrs Houssein made the decisions and Ms Huseyin acted as, to use her term, a “go-between”. She also was an honest, helpful witness, obviously doing her best to assist the court. While she often had to accept that she did not know what drove a decision I did not consider her in the least evasive or difficult, and nor did Mr Wheeler at any time suggest that she was. She gave the evidence that she was able to, and any gaps in that evidence were down to the Claimants’ decisions as to the witnesses they put forward.

20. Mr Theophanous was the only witness for LCL. He was also the only witness to appear both at the trial and at this hearing. In my First Judgment I commented that he was an impressive witness and an astute businessman who sought to enforce LCL’s rights robustly but fairly, and that remained my impression of him at this hearing. He gave crisp, clear answers; where he was unable to assist he accepted that. I once again found his evidence, particularly his evidence touching on credit risk, to be very helpful.

21. For completeness, neither expert was recalled. I was therefore limited to their Reports, Joint Statement and cross examination at the trial. Factual developments since my First Judgment

22. Leaving aside the appeal itself, which I will address at length in the analysis of the penalty issue, two subsequent events are notable. On 12 December 2023 CEK was dissolved by compulsory strike off. It was only restored to the register on 18 December 2024. That is in part the reason for the delay between the Court of Appeal Judgment and this hearing. It is therefore a delay which is at least in part of the Claimants’ making.

23. Secondly, following the Court of Appeal Judgment the parties agreed the terms of a consent order in March this year allowing LCL permission to advance a counterclaim for the outstanding debt and a ruling on the question of post-default interest. I deal with that counterclaim below, but broadly what is sought is: i) The balance of the Loan due under the Facility Letter. ii) Interest on the unpaid balance at the Default Rate. iii) As an alternative to (ii), if the Default Rate is a penalty, interest under section 35 A of the Senior Courts Act 1981 . iv) Costs of the trial and this hearing.

24. The broad thrust of the Defence to Counterclaim is that even if the Default Rate (or statutory interest) are due, LCL is precluded from recovering that interest due to its own conduct in refusing offers made by the Claimants relating to (to use as neutral a term as I can at this stage) repayment of the Loan. If that defence were successful, the question of penalty would not arise because that is a question of the rate to be paid and if no interest were due, the rate would be academic. There was also a claim of set-off that went to both the interest sought and the repayment of capital premised on the increased cost of refinancing now faced by the Claimants. By the time of this hearing that was no longer factually sustainable and was not pursued. The Counterclaim Tenders, offers and invitations to treat

25. The standard of advocacy at this hearing was high on both sides. Both Mr Wheeler KC and Mr Cowen KC presented their respective clients’ cases clearly and succinctly. There was one exception to this, however, which was in the rather broad use of the term “offer”, which at times seemed to refer to the distinct concepts of tender, offer of payment, contractual offer and invitation to treat. In the interests of making this judgment as clear as I can, I address what I understand those terms to mean at the outset.

26. Starting with tender, both parties referred me to elements of Shearer v Spring Capital [2013] EWHC 3148 (Ch) , a decision of Daniel Alexander QC sitting as a Deputy High Court Judge, for the general position. The rules are helpfully summarised at paragraphs [123]-[ 170] and [217]-[220] of his judgment. Mr Alexander QC started with what he described as “ the fundamental idea ” that “ if you have a mortgage but you have and keep aside the money to pay all of it off and tender that sum (plus costs) to the mortgagee unconditionally but he refuses to take it, you should be able to go to court to force him to give your deeds (or other security) back in exchange for payment and have interest stop running from the time of tender. ”

27. For a tender to be valid the sum must not simply be offered, it must be set aside in some way so that it is treated as the mortgagee’s money to be had on demand ( Shearer at [124] and [139]-[154]; Çukurova Finance International Ltd v Alfa Telecom Turkey Ltd (No 4) [2013] UKPC 2 at paragraph [132]).

28. The effect of a tender, if valid, is to give the court the power to curtail a right to interest ( Shearer at [126]). Refusal of a valid tender is not normally a breach of contract ( Shearer at [125], although some doubt was cast on this by Çukurova at [42]). Even in the absence of breach it is open to the party making a valid tender to bring an action for redemption to resolve the matter, essentially seeking a court order to compel the creditor to accept the tender.

29. Mr Cowen referred me to Mr Alexander QC’s observation at paragraph [154] of Shearer : “ The upshot is that the cases have not really addressed the situation where a tender is made on the basis that a new lender is and remains willing to provide the funds to pay off the loan provided that it is substituted in the existing security immediately. ” This links to the requirement that the tender must be unconditional ( Shearer at paragraph [170]). However, where payment is to be by a new loan it does not invalidate the tender to make it conditional on the original lender releasing its security in favour of the new lender, since that simply states what the law requires in any event ( Shearer at paragraphs [217]-[220], referring to Graham v Seal [1919] Ch 31 at 35).

30. Mr Cowen submitted that the communications relied on in the Defence to Counterclaim were tenders as that term was properly understood. I will address that in the context of those communications. His primary position, however, was that the Claimants did not need to meet the formal requirements of a tender in circumstances where they had offered to repay sums due under the Loan. The cases certainly refer to an offer of payment in terms that suggest that it is distinct from a tender, most notably in Çukurova at paragraph [42]. The key is pinning down what such an offer involves.

31. On the Claimants’ case an offer of payment must differ from a tender because the two positions are advanced as alternatives. It is equally not a contractual offer, however. I say that for two reasons. First, a valid offer of payment gives rise, on Mr Cowen’s case, to an obligation on the creditor to accept it and a contractual offer can be accepted or declined by the offeree. Secondly, the two seem to me different in nature. The former is purely the exercise of a pre-existing right, the discharge of a pre-existing obligation or both; the latter is an attempt to vary the parties’ existing rights and obligations or to create new ones. If an offer of payment is made conditional upon the offeror receiving something to which it would not otherwise be entitled, that seems to me to be an attempt to vary the rights and obligations under the contract and not simply to perform them; it could be a contractual offer but not an offer of payment.

32. The requirements of a contractual offer are well understood and there was no dispute as to the principles, which are summarised in Chitty at paragraphs [4-003]-[4-007]. The key point is at [4-003]: “ An offer is an expression of willingness to contract on specified terms made with the intention that it is to become binding as soon as it is accepted by the person to whom it is addressed. ” The test of agreement is objective, such that an appearance of intention will typically suffice. None of the exceptions to the objective test apply here. Mr Wheeler submitted that where an offer comprises multiple elements the normal understanding would be that it cannot be accepted in part. He referred to paragraph 4-038 of Chitty: “partial acceptance” is not acceptance but may be a counter-offer. I accept all that in principle, although whether it applies in practice depends on the language used, to which I will turn shortly.

33. Finally, there is an invitation to treat. Again, the principles around that concept are well understood and are summarised in Chitty, this time at [4-011]-[4-014]. The general rule is set out at [4-011]: “ It is distinguishable from an offer primarily because it is not made with the intention that it is to become binding as soon as the person to whom it is addressed simply communicates their assent to its terms. ” The issue is not simply the language used. The communication may lack sufficient detail (Chitty, paragraph 4-012, referring to Gibson v Manchester City Council [1979] 1 WLR 214 , where the lack of special conditions that would ultimately be part of any conveyance was fatal to a finding of offer). It is also important to consider whether it is reasonable for the other party to expect further negotiations (Chitty, paragraph 4-013).

34. It is important to be clear on why invitations to treat are relevant to this case. I am not suggesting that there is some sort of hierarchy, and that a communication needs to ascend through the levels until it reaches the point where it is an offer of payment (or, better still for the Claimants, a tender). Contractual offers and invitations to treat, on the one hand, are different in nature from offers of payment and tenders on the other. Both contractual offers and invitations to treat are therefore equally useless to the Claimants. There may be a temptation, however, to start by assessing whether the communication fits within the well understood concept of a contractual offer and, if it does not, conclude that the payment related elements must be an offer of payment. That temptation must be resisted; the logic that underlies it is false. In many cases I do not consider that these communications amounted to a contractual offer, but nor do I consider that they contained an offer of payment. They were part of the back and forth that is typical in inter-solicitor communications seeking to settle a dispute. They were, at most, invitations to treat. Interpretation of the express terms

35. Mr Cowen submitted that in interpreting the Facility Letter I was to apply the principles set out in Arnold v Britton [2015] UKSC 36 and confirmed by the Court of Appeal in this case. The Court of Appeal Judgment also made reference to Wood v Capita Insurance Services Ltd [2017] UKSC 24 and its own decision in EMFC Loan Syndications LLP v The Resort Group plc [2021] EWCA Civ 844 . In Arnold , Lord Neuberger summarised the approach in seven points (paragraphs [17]-[23]). I note, in particular, the following: i) “ The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. ” (Paragraph [17]) ii) “… when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve. ” (Paragraph [18]) iii) “ …commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. ” (Paragraph [19]) iv) “ The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid rewriting it in an attempt to assist an unwise party or to penalise an astute party. ” (Paragraph [20])

36. The Claimants’ position is that the Facility Letter permitted the Claimants to repay the entirety of the Loan at any time. I understood that to be accepted by LCL. The Claimants go further, however and say that LCL was obliged to accept offers of repayment. This is said to arise from clauses 5.1 and 5.3 of the Facility Letter. These provide: 5.1 Interest due on the Loan shall be paid, together with the Loan amount and all other sums due to the Lender under the Finance Documents, in full by no later than 12 noon on the Repayment Date. The Facility shall be cancelled in full on the Repayment Date . … 5.3 Subject to Clause 7.3, the Borrower shall be entitled to repay (or prepay) either the whole or part only of the Loan in tranches of £50,000.00 (Fifty Thousand Pounds Sterling) or such lesser tranches as the Lender shall agree.

37. Mr Cowen submitted that the natural and ordinary meaning of those words is that CEK can repay the Loan before the defined Repayment Date i.e. the term date of the Facility. He further submitted that part only of the Facility could be repaid in tranches of £50,000 (or tranches of a lesser sum as agreed by LCL), but those tranches could also discharge the entirety of the Loan. There was no limit on how many tranches could be repaid nor when those repayments could be made.

38. Again, I did not understand that to be controversial subject to being clear on exactly what was being submitted. Provided the tranches added up to the total sum due, that is the capital plus the accrued interest calculated up to the date of payment, those tranches could discharge the entirety of the debt before the Repayment Date. There would be a mathematical limit on the number of tranches that could be repaid, at least in the absence of further agreement from LCL, because the minimum value of any tranche was £50,000 or the whole of the outstanding debt. As a matter of mathematics, in the absence of default interest the maximum number of tranches is therefore 38. In principle, though, I accept Mr Cowen’s point. Likewise, there is an absolute time limit, in the form of the Repayment Date, an important point to which I return below, but within that there is no limit on when payment could be made.

39. There, any consensus ends. The Claimants contend that the “ logical consequence ” of their being able to repay the Loan in that manner, which I take to mean both in tranches and ahead of the Repayment Date, is that LCL must be obliged to accept offers of repayment. If that were not the case, Mr Cowen submitted, LCL could thwart any refinancing, and defeat the rights granted to CEK, simply by refusing to cooperate.

40. Mr Cowen further submitted that LCL’s position in its Reply to Defence to Counterclaim, that the Facility Letter is not concerned with offers of repayment but only tenders of actual repayments, was an impermissible construction, which flew in the face of both common sense and the matrix of fact that this was a bridging loan where the exit was to be by refinancing. Repayment of the Loan had to involve an offer first being made by CEK and accepted by LCL because the refinancing could only be completed with LCL’s agreement to release their security over the secured properties.

41. Finally, Mr Cowen submitted that even if I considered that LCL’s construction of the Facility Letter was a plain reading of the language used, for the reasons he had given it accorded less with business common sense than that of the Claimants, such that the Claimants’ construction was to be preferred.

42. Mr Wheeler submitted that the Claimants’ case was not an attempt to interpret the written agreement; it was an attempt to rewrite it. He directed me, first, to clause 9 of the Facility Letter, which deals with payments generally. This provides: All payments of principal and interest and any other amounts due from the Borrower to the Lender under this Facility Letter shall be made in Sterling and in immediately available funds to such account as the Lender specifies to the Borrower. Whenever any such payment would (but for this Clause 9) fall due on a day which is not a Business Day then the due date for payment thereof shall be postponed to the next succeeding day which is a Business Day unless such day falls in the next calendar month (in which event such payment shall be made on the immediately preceding Business Day). All such payments shall be made free and clear of any restrictions or conditions and free and clear of, and (subject as provided in the next sentence) without deduction for any taxes. If any such deduction is required by law to be made from any such payment, the Borrower shall pay in the same manner and at the same time such additional amounts as will result in receipt by the Lender of such amount as would have been received by the Lender had no such deduction been required to be made.

43. The obligation was clear – to make unconditional payment in immediately available funds. None of that was surprising; on the contrary, it was typical for a loan agreement of this nature. Mr Wheeler recognised that in practice there would be a process involved – that the borrower would approach the lender and say that it wished to make a repayment. In that sense one could say the borrower was offering to repay. But, Mr Wheeler submitted, it had to be an offer to pay in accordance with the terms of the Facility Letter, and what the Claimants had done, if anything, was to offer payment on other terms.

44. In my view Mr Wheeler is plainly right in his reading of the Facility Letter, and in particular of clauses 5.1, 5.3 and 9: i) The starting point is the plain and ordinary meaning of the language of the Facility Letter. The language used in clause 5.1 was “shall be paid”. Under clause 9, payment is to be in immediately available funds. “Shall”, obviously, is mandatory. There is no reference to an offer and the use of the past tense shows that by the whole operation of payment in immediately available funds needed to be completed by the Repayment Date. That would not be the effect of the Claimants’ preferred construction. On the contrary, the process of repayment might only just be starting on that date, since all they would have to do by then would be to make an offer, not make payment. ii) That is compounded by the proper interpretation of the provisions on interest. The Court of Appeal Judgment found that the Default Rate and the Standard Rate were strict alternatives, such that if LCL could not claim the Default Rate after the Repayment Date it equally could not claim Standard Interest. If the Claimants were right, there would be no default provided an offer of payment was made on or before the Repayment Date, so Default Interest could not be charged. I should observe that there seems to me to be a lacuna in the Claimants’ pleaded case on this point. The Defence to Counterclaim at paragraph 12.1 states that the CEK would not be in breach of its obligations to make payment under the Facility Letter if it made an offer to redeem the Loan on or before the Repayment Date and that offer was refused by LCL. It does not deal with what would happen if CEK made such an offer on or before the Repayment Date but the acceptance that LCL was apparently obliged to give was received only after the Repayment Date. The logic of the Claimants’ position must be, however, that the offer stops interest running, since it seems to be the Claimants’ case from paragraph 9.2 of the Defence to Counterclaim that acceptance is a legal obligation of LCL, and so something of a formality. Were the Claimants correct it would have, in my view at least, a surprising outcome. As the Court of Appeal Judgment specified, there would be no right to the Standard Rate. Because there would be no breach of the repayment obligation there would be no right to the Default Rate. That means the effect of the Claimants’ reading is that, at their unilateral option, they could convert the Loan into an interest free facility for the period in which it took their offer to become an actual payment. I regard the language of clauses 5 and 9 to be clear in requiring payment in immediately available funds but even were there an ambiguity I would consider the effect of the Claimant’s reading to be wholly uncommercial. iii) The position is further aggravated because with the long-stop of the Repayment Date gone there is no fixed endpoint to the interest free arrangement that would arise. If the gap between what is said to be the offer and actual payment is lengthy, the economics of the deal would move quickly against LCL. This can be seen with reference to one of the alleged offers of payment in this case, a letter from the Claimants’ solicitors, Hugh Cartwright Amin ( HCA ), of 23 March 2021. I will address the terms of that communication along with the other exchanges when I come to the analysis of the alleged offers relied on by the Claimants, but what is significant at this stage is that it is described, in the Defence to Counterclaim, as “ an open offer to pay £1.85 million ”. That “offer” was to be funded in part by a loan to be obtained by the Claimants of £650,000. In a follow-up email, Mr Amin, of HCA, emphasised that the lenders required seven days’ notice to draw down funds such that there was “ urgency … in coming to an agreement in relation to the payment of £1.85 million ”. LCL’s then solicitors, Gunnercooke, asked for a copy of the offer letter in relation to the £650,000 loan. HCA responded to say that they “ understood that this is being finalised and will be available shortly. ” However, the following day HCA sent a Term Sheet from Overture Capital and stated that: “ Our clients do not wish to incur unnecessary and abortive legal expenses in dealing with compliance with OCL’s requirements if as we suspect, your client will simply let matters drag on… ”. Before me there was some disagreement about how onerous Overture’s requirements would be to satisfy. For these purposes that is not really the point. I am asked to accept that the 23 March letter constituted an offer of payment that could stop interest running in a situation where it was unsupported by either funds or even a binding offer of funds. Assuming such an offer were made on the Repayment Date there would then be some delay in satisfying the various requirements of the Term Sheet. Mr Griffiths’ evidence was that a refinance could easily take 35-50 days to arrange, and while some of that would involve finding a lender and getting indicative terms, there would still be some time taken to get from the Term Sheet to an offer. From there one would need, the evidence suggests, 7-14 days to get to drawdown. Even a relatively short delay changes the economics of the deal significantly for a lender. From the point the “offer” is made, assume that the delay needed to agree repayment (which on the Claimants’ case is a necessary step), satisfy conditions precedent to the Term Sheet and draw down on funds was a month. Using simplified figures for ease of illustration, further assume the loan had been for £1,000 at a rate of interest of 12% p.a. and a duration of one year. Interest for the term is £120. If repayment only happens 13 months after drawdown and no interest can be charged for the 13 th month, the £120 is earned over 13 months, not 12. That equates to an annual interest rate of around 11.07%. An additional two-week delay takes the rate to 10.67%; if the total delay is two months – Mr Griffiths’ 50 days plus the average of 7-14 days for drawdown – the annual rate is below 10.3%. That is a significant loss of yield for a lender, over which it has no control. Of course, as Lord Neuberger observed in Arnold it is not the place of the law of obligations to assist parties who have made imprudent bargains. But as he also made clear, the starting point is the language used and here clause 5.1 required that the sums due “ shall be paid ” by the Repayment Date and clause 9.1 made clear that meant paid in immediately available funds. Having made both those points clear, it is hard to see that LCL had been imprudent. iv) By contrast, the uncommerciality advanced by Mr Cowen, that the borrower may be unable to exercise its right to prepay where it needs security to be released in favour of the new lender, does not arise. As Mr Wheeler accepted, I think rightly given what was said in Shearer at [217]-[220], a tender conditional on release of security would still be a valid tender because the condition “imposed” by the offeror is no more than the law imposes in any event.

45. In my view clauses 5.1 and 5.3 plainly contemplate actual payment of the sum due by no later than the Repayment Date. Particularly in light of the contractual right of CEK to prepay I would accept that a tender in accordance with those terms would stop interest from running on the Loan. I do not consider that an offer of payment at some point in the future has the same effect and less still do I accept that such an offer conditional on funding being secured comes close to doing so. Implication of terms

46. The Claimants’ alternative case is that if I consider that the express terms are not to be read in the manner they suggest, a term is to be implied to like effect. Again, the legal principles were not in dispute, such that it easiest to start there. Mr Cowen referred me to Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72 . I was not taken to specific paragraphs of Marks & Spencer , but it is again worth highlighting what I consider to be the key elements of that decision.

47. At paragraph [18], Lord Neuberger (with whom Lords Hodge and Sumption agreed) set out the observation of Lord Simon in BP Refinery (Westenport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 AJLR 20 at 26: [F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express terms of the contract.

48. Lord Neuberger then referred to two decisions of Sir Thomas Bingham, first as Bingham LJ ( The APJ Pritti [1987] 2 Lloyd’s Rep 37 at 42) and later as Bingham MR ( Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at 481-482). What Bingham MR said in that latter case at 482 is particularly significant here: The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting but wrong. …[I]t is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred…

49. At paragraph [21] Lord Neuberger described these statements as “ a clear, consistent and principled approach. ” While recognising the danger of reformulation, he went on to add six points of his own: First, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 , 459, Lord Steyn rightly observed that the implication of a term was “ not critically dependent on proof of an actual intention of the parties ” when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon’s first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 , para 27, although Lord Simon’s requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is “ vital to formulate the question to be posed by [him] with the utmost care ”, to quote from Lewison, The Interpretation of Contracts 5th ed (2011), para 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon’s second requirement is, as suggested by Lord Sumption in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

50. Finally, I note the point made by Lord Neuberger at paragraph [51] that while the result of refusing the proposed implied term might be capricious or anomalous, that would not of itself show that the contract without the proposed term was unworkable.

51. The implied term contended for is set out at paragraph 10 of the Defence to Counterclaim: It was an implied term of the Facility Letter (by reason of it being necessary for the purposes of business efficacy and/or so obvious that it went without saying) that: 10.1 [LCL] would accept [CEK] and or the Claimants’ offer(s) to redeem the loan. 10.2 [LCL] would not obstruct, prevent or otherwise interfere with [CEK] and/or the Claimants’ ability to redeem the Loan. 10.3 [LCL] would facilitate and/or not obstruct, prevent or otherwise interfere with the Claimants’ exit strategy (which was known to it) of refinancing the [Downhills Way Properties].

52. Mr Cowen submitted that in the absence of such terms, LCL could prevent the Claimants from repaying the Loan and exiting the facility, an absurd result. The Facility Letter, he submitted, only entitled LCL to those sums actually due to it; if an offer to pay those sums was made, LCL should be bound to accept it. To limit that obligation to an actual tender of moneys, rather than offers of repayment, would represent such an imbalance in the parties’ rights and obligations, and undermine the express obligations in such a way that it would offend business efficacy and common sense.

53. Finally, Mr Cowen contended that the proposed terms were not inconsistent with the express terms of the Facility Letter. Certainly, he accepted, they expanded on those terms, but that was inevitably the case with implied terms; what mattered is that they did so in a way that was complementary.

54. Mr Wheeler drew my attention to the Court of Appeal’s decision in Yoo Design Services Ltd v Iliv Realty PTE Ltd [2021] EWCA Civ 560 , where the principles were summarised at paragraph [51]. There, the Court of Appeal also approved the trial judge’s use of the test from Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 at page 227: Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’

55. Mr Wheeler submitted that the proposed implied term in no way satisfied the legal test for implication. He submitted that, on the contrary, in requiring LCL to accept offers of payment that in some way fell short of tender or actual payment it was inconsistent with the express terms of the Facility Letter. He further submitted that there was no need for the implied term because the borrower has all the protection it needs from the rules on tender and an action for redemption of the mortgaged property. The strict test of necessity was therefore not met. He also noted that the situation confronting CEK in this case is far from unusual and must have happened frequently in the past; that being the case, one would expect to find cases in which a similar term had been implied. In fact, one sees the opposite: where such a term had been proposed it was rejected. He drew my attention to St Vincent European General Partner Ltd v Robinson [2018] EWHC 1230 (Comm) and Swallowfalls Ltd v Monaco Yachting & Technologies SAM [2014] EWCA Civ 186 . Finally, he submitted, a similar provision had been proposed by CEK in negotiating the Facility Letter and it had been rejected. Far from the parties responding to the officious bystander’s proposal, “Oh, of course!”, LCL had responded, “Of course not!”

56. Again, I see considerable force in Mr Wheeler’s submissions: i) In my view, and for the reasons given above in respect of the express terms, the terms proposed would be inconsistent with the requirements of the Facility Letter concerning the need for funds to be immediately available. The Court of Appeal Judgment, rightly, emphasised the importance of repayment on the due date. I see no basis whatsoever for implying a term that would defeat that express right of LCL under the Facility Letter. ii) The proposed terms are remarkably broad in their scope. As Mr Wheeler observed, it is not a strain on the language to say that a facilitation obligation could go so far as to require LCL to assist in identifying and securing refinancing. That goes well beyond what is necessary for business efficacy or is so obvious as to go without saying; in my view, it is not even reasonable to impose such a broad obligation on a lender in the absence of an express term to that effect. iii) The terms are said to be implied as a matter of fact, but the only facts apparently relied on were that the Loan was to be refinanced and the parties were aware of this. A great many loans fit that description, including bridging finance of the type in question here, which almost by definition is a short-term expedient from one debt package to another, and many, if not most, residential mortgages. Yet as Mr Wheeler pointed out, if that were the case one would expect there to be other instances where similar issues have arisen and similar terms been implied. None were identified. iv) On the contrary, I accept Mr Wheeler’s point that earlier attempts to imply a term have failed in cases such as St Vincent and Swallowfalls . Mr Cowen is, of course, correct to submit that where, as here, implication is alleged as a matter of fact the court’s refusal to imply a term in one contract does not mean that it will not be implied in another. I do not see this as a freestanding point, however, but as buttressing the previous point: no court has implied such a term, and it is not a case that the question simply has not arisen. v) I also return to the point about what would happen if an offer of payment, unsupported by even a binding offer of funds, let alone immediately available funds, were made on the Repayment Date. As I understand the Claimants’ case, that would still be an offer for the reasons I have addressed above, but, again as I have addressed above, that means that such an offer prevents a default from occurring even though the lender does not receive funds on the Repayment Date. What I am effectively being asked to conclude is that it is necessary, to give business efficacy to a loan, that the borrower have a unilateral option to extend the time for repayment by an indefinite period, interest free. I do not regard that as being necessary. Likewise, as to obviousness, if the officious bystander had suggested some express term to that effect I very much doubt that any lender in LCL’s position would have responded, testily or otherwise, “Oh, of course!” It seems to me much more likely that the officious bystander would have been lectured, testily, on the basic economic principles of profitable lending.

57. I should note for completeness that I do not accept Mr Wheeler’s final point, that a similar term was considered and rejected by the parties. It seems to me that this would focus too heavily on the intentions of the actual parties to the agreement, which as Lord Neuberger made clear at paragraph [21] of Marks & Spencer , is impermissible.

58. There may have been scope for implying a more limited term. Specifically, there are certain logistical steps that need to be followed that are impossible without the involvement of LCL, most critically the provision of relevant account details and the release of security on full repayment of the Loan. This arises from clause 9 of the Facility Letter, which provides, so far as is relevant: “ All payment of principal and interest and any other amounts due from [CEK] to [LCL] under this Facility Letter shall be made in Sterling and in immediately available funds to such account as the Lender specifies to the Borrower. ” That provision renders the (in any event implausible) scenario of repayment in specie impossible. The only way to repay is into an account, the details of which are known only by LCL. If the officious bystander had put it to the parties that LCL could refuse to provide those account details and so defeat repayment I think both would have agreed that was not the case.

59. I recognise that Males J, as he then was, observed in St Vincent at paragraph [59] that the situation is addressed by the rules on tender and the ability of the debtor to pay sums into court and make an application for redemption of the mortgaged property. However, he also referred without apparent disapproval to the decision of Neuberger J, as he then was, in Equatorial Corporation plc v Shah (18 October 1996, unreported) that a debtor may be entitled to require from the creditor a redemption statement. Implication of a limited duty to provide such details would also be consistent with what is said in Swallowfalls at paragraph [33] regarding the implication of an obligation to cooperate into a loan agreement in certain circumstances.

60. Ultimately, the matter does not fall for determination on the facts of this case: a term requiring the provision of account details and release of security, even had it been contended for, does not go far enough for Mr Cowen because the only time those things were requested, in May 2021, they were arranged. Assuming such a term were to be implied, it would not have been breached. Equity

61. Mr Cowen’s submission here was tied to the relationship between LCL and CEK in their capacities as mortgagee and mortgagor. There was, he submitted, an equitable right to redeem the Facility at any time after the contractual date for redemption. He referred me to Megarry and Wade: The Law of Real Property, 10 th ed. at 23-014 - 23-018, Cousins, The Law of Mortgages, 4 th ed. at 28-01-28-02 and 29-01-29-03; Fisher and Lightwood’s Law of Mortgage at 47.1-47.2; and Kreglinger v New Patagonia Meat and Cold Storage Co [1914] AC 25 at page 48. Mr Cowen, in opening, accepted that the legal and equitable standards were the same but submitted that they arose at different points in time – the legal right existed before the Repayment Date and the equitable right arose after it. Accordingly, in order to trigger the equitable right there still had to be a tender or, on the Claimants’ case, an offer of payment.

62. There were, he further submitted, two corollaries of this equitable right: i) LCL was under an equitable obligation to accept CEK’s offers to redeem the Loan and/or must not frustrate CEK’s exercise of its rights; and ii) LCL could not impose any clogs that inhibited CEK’s right to redeem the Loan.

63. He referred to Megarry and Wade at 24-086 – 24-101 and Cousins at 29-06 and following.

64. He submitted that these duties recognise that the security held by LCL protection for the sums properly due to it but nothing more than that. It did not entitle LCL to exploit the for some collateral advantage.

65. Significantly, in my view, he referred to paragraph [42] of Çukurova : “ …equity can and should respond by a special order as to interest or costs in exceptional situations where the mortgagee has by words or conduct rejected, made impossible or delayed repayment of the mortgage debt, and that such a situation may exist where there is a tender or offer of repayment, particularly one backed by moneys actually paid into court or an account. ”

66. These were just such exceptional circumstances, he submitted, because LCL knew, through the imputed knowledge of Mr Stylianides, that it had no right to charge default interest during the term of the Loan and as Mr Theophanous had accepted at this hearing default interest was the sticking point that caused LCL to refuse the offers made.

67. I will address the knowledge point below, but simply as regards the scope of the jurisdiction I agree with Mr Wheeler that Çukurova does not mean that LCL was obliged to accept an offer of payment that was not compliant with the contractual scheme of the Facility Letter. Specifically, LCL was entitled to refuse any offer that did not involve payment of the sum due in immediately available funds. None of the communications relied on by the Claimants did involve immediate payment, such that in my view the jurisdiction contemplated by Çukurova has no factual basis here. The offers

68. On the facts of this case I do not consider that any offer of payment was made. There was one tender, made in May 2021, that resulted in part-payment of the Loan and does not give rise to any issue in dispute. Everyone now accepts that LCL has given proper credit for that payment. There was what seems to me obviously a contractual offer on 9 November, when Gunnercooke wrote to HCA with what was described as a “ formal offer ” and attached a settlement agreement signed on behalf of LCL. That offer was not accepted. Mr Wheeler conceded that the first communication on which the Claimants rely, from 16 March 2021, was a contractual offer and that the other communications from March and April 2021 were “ probably ” also contractual offers. For my part I would think many solicitors would be somewhat surprised by that; typically, the emails exchanges and discussions work out the commercial terms of the deal but it would only be finally agreed in a more formal settlement agreement. In a sense that is irrelevant, however, in that even if they were contractual offers they would be different to, and fall short of, being offers of payment.

69. With a view to avoiding repetition, so far as that is possible, a lot of these communications involved common themes, and it is worth saying what those are at the outset. i) None of the communications upon which the Claimants now rely were tenders. None involved the payment of immediately available funds and so none complied with the requirement of clause 9 to that effect. They all sought to impose conditions to payment that were not limited to the release of security. At no time were the funds set aside, and indeed in some cases there were not even funds (or binding offers of funds from another lender) in place. ii) The fact that funds were not immediately available (and in one case, the 23 March 2020 letter, were not at that stage available at all) also means this was in no sense an offer of payment under the terms of the Facility Letter. It was an attempt to make payment on other terms. That was, at most, a contractual offer. iii) This correspondence was not before me at the trial because elements of it were considered by the parties, in my view rightly, to be without prejudice. The issue with that is not the question of its admissibility but, rather, what the application of the privilege must mean about the substance of the communication. Simply as a matter of general principle, correspondence is without prejudice when it is an attempt to settle contested issues; even where it includes payment under the parties’ agreement that payment is conditional on settlement of other points which are disputed. An offer of payment is an unconditional offer to pay a sum due under an existing agreement between the parties. Those are different things. The issue is especially acute here because in principle one would typically expect that an offer of payment would amount to an acknowledgment for the purposes of section 29(5) of the Limitation Act 1980 . Such an acknowledgment would normally not be covered by the without prejudice privilege ( Bradford & Bingley plc v Rashid [2006] UKHL 37 ), yet without prejudice privilege is said to apply to certain of the communications as a whole. That suggests that whatever was said about payment was not an acknowledgment of the debt. I was not taken to that decision, or to the later decision of the House of Lords in Ofulue v Bossert [2009] UKHL 16 so it is not clear to me how the Claimants address either the general issue that an offer to pay an undisputed amount is in principle different to an offer conditional upon settlement of wider issues or to the specific point on acknowledgement. iv) Perhaps in recognition of this Mr Cowen accepted, as I think he inevitably had to, that almost all the offers made by his clients covered things other than just payment. His primary position was that the offers were severable and that LCL could have accepted only the offer of payment. As I have noted, that question depends on an objective reading of the individual communications, and in principle Mr Cowen accepted that, and so the detail needs to be addressed on a case-by-case basis. In my view it is a general issue with all of the communications proposing payment alongside other things that the language, objectively assessed, is offering a package deal, not alternatives that can be individually accepted. v) A variation on this argument was that the offers contained both an offer to pay what was contractually due and an offer to do something more, generally in respect of the default interest that had been charged since September 2020 but which I found, in my First Judgment, was not properly due from that date due to the knowledge of Mr Stylianides (and through him, LCL) that the Housseins had not moved out of 71 Hamilton Road at the time of the inspection in July 2020. Mr Cowen expressly disavowed any reliance on dishonesty, but asked, rhetorically, why should LCL be put in a better position by pursuing a claim which it (as a corporate entity) knew had no basis. In response I put a (non-rhetorical) question to Mr Cowen. Assume a company has a claim that its lawyers advise can be pleaded without breaching professional obligations but which is, in material respects, speculative, weak or thin such that it would not properly survive strike-out and would expose the client to a claim for indemnity costs. If the other side, nonetheless, settled such a claim, would the settlement fail for want of consideration? Mr Cowen did not directly address the point, but it seems to me that the settlement would not so fail because even a very weak claim has value. That being the case, the simple answer to Mr Cowen’s point is that LCL was entitled to ask for more than the debt that was due to it under the Facility Letter because it was giving up more than a simple release of that debt. Had dishonesty been asserted (which, in turn, would necessarily have involved it being pleaded) and established the matter might have been different because dishonesty gives rise to issues of public policy. Corporate knowledge, which is what is asserted here, does not. vi) Failing that, Mr Cowen submitted, the obligation was to accept the offers as a whole; to the extent that there were outstanding points for further discussion they were not so significant as to result in an agreement to agree. The problem there is that the offer of payment ceases to be an unconditional offer of payment, or an offer conditional only on release of security, and becomes something much more ambitious in its scope. The borrower is no longer seeking merely to discharge its debt, but is also seeking some additional advantage to which it was not previously entitled. It becomes a contractual offer, and it is trite law that the offeree is at liberty to reject a contractual offer. vii) Taking the Claimants’ case at its highest and assuming, for the sake of argument, that the communications contained a severable offer of payment, LCL did, on at least one occasion, agree to those aspects of the “offers” in unconditional terms, yet no money ever followed. On the contrary, HCA responded with different proposals. On such facts it is hard to see how LCL is in breach of some obligation to accept when, objectively assessed, it did so, or to understand any other reason why LCL should be deprived of any right it had to charge interest. viii) The Claimants have been frank in formulating their attacks on LCL, and LCL is entitled to its vindication in similarly clear terms. In my view these communications do not demonstrate a borrower seeking to repay a sum due who is being thwarted by an obdurate and opportunistic lender. The opposite is the case. LCL engaged with the negotiations and often responded with counter-offers, many of which were either clarifications or attempts to inject certainty into vague and highly contingent proposals. There is nothing to be criticised in any of that. By contrast, throughout this process the Claimants have cavilled, prevaricated, temporised and delayed often with a view to improving their outcome. Most obviously, since my First Judgment it has been clear that the Claimants would have to repay the outstanding balance of the Loan. Rather than doing so, they have put forward multiple lines seeking to justify why they should not have to. That aspect of my First Judgment was not appealed and so is final. They have sought to improve their position on settlement and have retained the capital due to LCL as part of that. A party is entitled to adopt such a strategy in a negotiation, but they expose themselves to the risk of interest accruing where, as here, it fails.

70. Turning to the details of what are said by the Claimants to be the offers of payment, on 16 March 2021 Mr Amin, of HCA, wrote to Ms Swainson, of Gunnercooke, offering:

1. £1.2 million by the middle of April 2021;

2. A further £650,000, again by the middle of April 2021;

3. In return, my client would expect a discharge of all the securities (including for the avoidance of doubt, 71 Hamilton Rd) in favour of LCL and a concessionary default interest rate to be agreed between the parties which my client will pay.

4. In the meantime, neither your client nor the Receivers will take any steps to dispose of any of the properties the subject of securities in favour of your client.

71. Self-evidently that is neither a tender of payment nor an offer of payment under the terms of the Facility Letter because the funds are not immediately available. Nor do I accept this was a freestanding offer of payment at some point in the future because it is conditional on settling the default interest dispute; I struggle to see how, objectively, one can read the “In return” language in point 3 in any other way.

72. This email must also be read in the context of the message to which it responds, an email from Ms Swainson to Mr Amin sent 24 minutes before. This states, in relevant part: Is it correct to say that 199, 201 and 203 Downhills Way will be refinanced (for at least £1,200,000) and a lump sum of £650,000 made available for payment to [LCL] by close of business on Wednesday 14 April 2021? I am instructed that should the refinancing proceed at a satisfactory pace, then [LCL] may be willing to consider its position with regards [sic] default interest at the point the refinancing is to complete.

73. Mr Amin was responding to that request for clarification and, like Ms Swainson, saw this as part of a package deal that would address both repayment of sums due and settle the default interest question.

74. The next communication relied on is described in the Defence to Counterclaim as an open offer made on 23 March 2021. This is the letter to which I have already made some reference. The letter to which I was referred as evidencing this offer in fact stated “ our clients’ proposal will be set out in open correspondence as follows ”. I did not see that open offer, although presumably it was in substantially identical terms. These were (emphasis added): Nevertheless, in the interests of narrowing the issues in accordance with the overriding objective, our clients’ proposal will be set out in open correspondence as follows:

1. The loan of £1.2 million will be secured over three properties (199, 201 and 203 Downhills Way). LCL will be required to release its charges over those properties in order to receive the funds.

2. A further loan of £650,000 will be made but a third-party charge over 71 Hamilton Road is required, so LCL will also be required to release its charge over that property.

3. Once the £1.85 million has been paid to LCL the only outstanding issue will be the issue of the Receivers’ costs and the default interest claimed by LCL. These are disputed sums. The complaints made by our clients have been canvassed in previous correspondence. The net effect will be that our clients would be paying the redemption amount almost 6 months early. In addition, the 2 remaining buy to let properties valued in excess of £1.1 million and in respect of which you have seen mortgage offers of £800,000 will be retained by your client upon the terms specified below.

4. Our clients’ proposal in regard to the 2 remaining buy to let properties is as follows: [There followed a suggestion for a litigation procedure to resolve the default interest issue, the details of which are not relevant.] … If LCL is not prepared to agree to the above proposal , our clients will be obliged to take pre-emptive steps to prevent LCL/Receivers from incurring further unnecessary costs and attempting to dispose of the buy to let properties.

75. A lack of clarity arises because the whole of points 1-4 and, separately, just point 4 are both described as the Claimants’ proposal, and the concluding quoted paragraph refers to LCL agreeing to “ the above proposal ” without apparently seeing the ambiguity. On balance it seems to me that it must mean the whole of points 1-4. It is seen as an alternative to the Claimants taking “pre-emptive steps” to protect all of the Downhills Way Properties and the point 4 proposal relates only to two of them. That would also seem to me the more commercially sensible reading; it makes more sense if the Claimants were trying to settle everything, not just the mechanism for resolving the default interest point.

76. Ultimately that is academic; what matters for the Claimants’ current case is whether points 1 and 2 formed a free-standing proposal. Nothing in the language supports that. On the contrary, the opening language suggests that what followed was intended to form a single proposal. Moreover, for the Claimants to be right that this was an offer of £1.85 million one has to understand that Mr Amin’s references to “ our clients’ proposal ” and “ the above proposal ” permit 1 and 2 to be severed from 3 and 4, but do not permit for 1 to be severed from 2. Otherwise this would not be a single offer of £1.85 million but, rather, separate offers (presumably capable of separate acceptance) of £1.2 million and £650,000. No words are identified that might convey that somewhat complex structuring whereby 1 and 2 are linked to one another but not to any other points.

77. The exchange that follows is also somewhat notable. The following day, Ms Swainson responded, stating: “ It is noted and understood that £1.2m will be secured over 199, 201 and 203 Downhills Way and that LCL will release its security over those properties. ” I recognise that “ understood ” is not sufficiently clear to amount to acceptance, but at the same time there was no push-back on point 1; on the contrary, Ms Swainson recognised that LCL would need to release its security on the three properties in question. In respect of point 2 she asked to see the offer letter in relation to the £650,000 bridging loan.

78. Mr Amin responded on 25 March. In respect of point 1 all that he said was, “ Noted. ” On the Claimants’ current case that is an odd response. Accepting that Ms Swainson’s reply had been ambiguous, had Mr Amin intended to make a free-standing offer one would expect some request for clarification – do we have a deal on that point or not?

79. On Ms Swainson’s second point – sight of the offer letter – HCA stated their understanding that this was being finalised and would be available shortly. Their understanding apparently changed overnight, since they wrote on 26 March enclosing a term sheet from Overture Capital and noting: “ Our clients do not wish to incur unnecessary and abortive legal expense in dealing with compliance with OCL’s requirements if as we suspect, your client will simply let matters drag on (for the purpose [sic] which we do not understand). ”

80. There was some disagreement as to how great a hurdle it was to move from the term sheet to a final loan. Mr Cowen’s submission was that all that was left were the formalities. Mr Wheeler submitted that key details remained to be decided. On balance I agree with Mr Wheeler’s submission. The security required included a personal guarantee from Houssein Houssein, who had never previously been personally liable in respect of any of the debt. All of the documents had to be translated into Turkish for the benefit of Mrs Houssein, suggesting she had not at that stage seen them in a form that she understood. She would then have to agree to the loan agreement (as a director of CEK), a personal guarantee and a charge over 71 Hamilton Road. There remained considerable uncertainty.

81. Again, I do not say these are factors relevant to the interpretation of the earlier proposals; those must be assessed objectively by reference to the materials available at the time. They are, though, relevant on two levels. First, the Claimants’ case is that their “offer” was wrongfully rejected. But Ms Swainson did not reject it; she sought more details about it. Ultimately those details showed that part of the offer was not backed by any funds, let alone immediately available funds. Even so, the discussions continued.

82. Secondly, these communications that come after the 23 March offer but before subsequent offers do inform how LCL was entitled to understand, and so respond to, other offers that came later. The Claimants had offered payment when what they meant was that they would pay if they could secure financing. That would, in my view, fall some considerable way short of what could properly be termed an offer of payment. Put at its highest it could only ever be a conditional offer of payment at some time in the future, should funds become available. LCL was entitled to want more certainty than that under the terms of the Facility Letter.

83. The next communication on which the Claimants rely is an exchange on 30 March 2021, evidenced by a letter the following day from HCA to LCL’s solicitors referencing a conversation between Mr Murad and Ms Swainson in which “ we canvassed whether the £350,000 requested by LCL could be reduced to £150,000 which would be payable immediately ”.

84. As before, it is important to put things in their context. On 30 March, Gunnercooke wrote to HCA with a proposal for settling the outstanding issues. This included payment by the Claimants to LCL by 14 April 2021 of £1.85 million in exchange for a release of LCL’s security over 199, 201 and 203 Downhills Way and 71 Hamilton Road and payment of £350,000 to settle the default interest issue. There then obviously followed a telephone call in which a lower figure of £150,000 was “ canvassed ” and subsequently rejected by Gunnercooke.

85. This, it seems to me, falls well short of an offer of anything. First, the meaning of the verb “to canvas” in this context is to discuss or debate, not to offer. Secondly, it is in my experience quite common in settlement negotiations for solicitors to explore the scope of the possible even without instructions – “If my client were minded to suggest X, how do you think your client might see that?” That is consistent with canvassing (or floating or mooting); it is well understood that it is part of the process of discussions rather than an attempt to conclude them. Thirdly, all of the prior exchanges had been in writing. It would be unusual then to switch to making a formal offer orally, especially given that this was a discussion between lawyers rather than between principals. Fourthly, it is wholly inconsistent with the idea that the question of payment of the £1.85 million was severable from the other elements of the dispute. Gunnercooke proposed such a payment in their 30 March letter, so on the Claimants’ current case they could simply have accepted that. Instead, in their response on 31 March HCA stated: “ In principle we have instructions to negotiate a sensible settlement and your offer goes a long way towards meeting our clients’ requirements. ” It was seen, rightly in my view, as a composite offer, a package deal, with the objective of both parties being to resolve the whole dispute. Nothing was agreed until everything was agreed.

86. The negotiations rumbled on, and by 7 April HCA made further “ proposals ” which were “ in the interests of resolving matters without recourse to legal proceeding ”. The “ proposals ” were: 4.1 Our clients will procure completion of the 3 buy to let re-mortgages and the bridging finance. …completion is now unlikely to take place by 14 April 2021. We understand that our clients should be able to make payments of £1.85 million by 21 April 2021. 4.2 Upon receipt of the funds referred to in paragraph 4.1 above, your clients will provide executed discharges in respect of the 3 buy to let properties and 71 Hamilton Road. 4.3 Your clients will take immediate steps to discharge the receiverships in respect of all of the Properties and your clients will undertake not to enforce their security (including for the avoidance of doubt appoint [sic] any receivers) in respect of the remaining 2 buy to let properties pending either the grant of probate and completion of the refinance of those 2 properties and/or 9 August 2021 (whichever is later). 4.4 Mr Ali Houssein’s probate will be available in the near future (potentially by July 2021). On receipt of the probate, Mrs Houssein will complete the refinancing of those 2 properties as quickly as possible and pay LCL with [sic] the sum of £350,000 in return for the executed discharges, subject to the lenders of the 2 buy to let properties agreeing to extend their mortgage offers. Compliance by Mrs Houssein of this obligation is conditional upon Mrs Houssein receiving independent financial advice from an adviser who can communicate in the Turkish language, which is proving to be difficult due to the pandemic and her vulnerability.

87. Ms Swainson responded later that day: 4.1 It is agreeable for the £1.85m to be paid to LCL on 21 April 2021. 4.2 It is agreed DS1s will be provided in respect of the three Downhills Way properties to be refinanced and 71 Hamilton Road upon receipt of the £1.85m on or before 21 April 2021. 4.3 LCL is agreeable to the receivers standing down over the two remaining Downhills Way properties upon receipt of the £1.85m detailed in 4.1 but only on the basis that if another default occurs or the final sum of £350,000 is not paid by 9 August 2021 it is entitled to enforce its security and recover the full outstanding debt due to it. 4.4 Payment of the discounted outstanding debt of £350,000 must be paid on or before 9 August 2021. [LCL] is not willing to make that payment conditional upon advice being received by Mrs Houssein or mortgage offers being extended. Mrs Houssein should have little difficulty in raising £350,000 over security valued at (based on your figures) £1.1m.

88. Mr Amin replied the following day to “ float a potential solution which could save my clients are [sic] more money, without any specific instructions from my client ”.

89. This exchange, to my mind, highlights the deep flaws in the Claimants’ position.

90. First, I do not regard it as a sensible reading of HCA’s 7 April letter to treat the proposals as severable. I recognise that they are referred to in the plural, but acceptance of only part or parts of paragraph 4 without accepting the whole would not achieve the aim of “ resolving matters without recourse to legal proceedings ”.

91. Secondly, and very obviously, if one were to accept the Claimant’s current case that its proposals were severable, such that the offer of payment of £1.85 million was capable of separate acceptance and should have been accepted, that is what LCL did. While this offer, presumably meaning only 4.1 and 4.2, is referred to in the section of the Defence to Counterclaim headed “Particulars of Wrongful Refusals”, it is wholly unclear how a refusal can be constructed from the language Ms Swainson used in response to those sub-points. On the contrary, in my view the words used by Ms Swainson really could not have been much clearer in evidencing agreement; they are not qualified in any way. It is not at all apparent what more LCL could be expected to do, and the Defence to Counterclaim, in simply characterising LCL’s conduct as “wrongful”, does not assist in identifying anything. It does not even reference Ms Swainson’s email. If HCA’s offer is properly characterised as severable, on the question of payment of the £1.85 million the parties had reached agreement and, on the Claimants’ case, payment of the £1.85 million should have been made shortly thereafter. That did not happen.

92. On the contrary, while, on the Claimants’ current case, Ms Swainson’s reply should have been the end of the discussion, for Mr Amin it was merely the beginning. In his view, at least, everything remained in play. I recognise that Mr Amin made clear, in making his further proposal, that he did not have instructions. He did have instructions regarding the 7 April proposal, however, and so had it been intended that the proposal to pay £1.85 million was severable he would presumably have understood that once agreement was reached his instructions were that that aspect of the dispute was resolved.

93. Again to be clear, Mr Amin’s follow-up proposal was subsequent to, and so does not inform the proper characterisation of, the HCA letter of 7 April and the Gunnercooke response the next day. It does inform subsequent discussions, however, because it is obvious from this exchange that the payment proposals were not to be understood as freestanding or in some other way capable of independent acceptance. That could change (indeed did change) with the use of clear language, but the package proposals were precisely that – packages to be taken or left as a whole.

94. Thirdly, while it is the case that Ms Swainson made an apparent counter-proposal in respect of 4.3, in fact it was more by way of clarification than alteration. It simply was not clear from HCA’s letter what was to happen in respect of any further breaches of the Facility Letter. In any event, what she said did not in any way relate to the payment of the £1.85 million.

95. Fourthly, the only thing that plainly was rejected, albeit by way of counter-offer, was the proposal to pay £350,000 in 4.4. Nothing was immediately being offered in respect of that payment – it was to happen “as soon as possible” – and the whole payment was conditional on Mrs Houssein receiving advice from a bilingual advisor (rather, for example, than from an advisor whose advice was then translated, which would presumably have been easier to secure). Nothing was said about what would happen if Mrs Houssein was unhappy with that advice, although as Mr Wheeler submitted if the condition was to have any meaning it logically followed that this would entitle her to refuse to make the payment. The whole proposal was contingent and uncertain. What LCL sought to do was to inject some certainty around the payment and its timing, requiring payment on or before the Repayment Date which was still four months away. It was an entirely reasonable approach in my view. While it could be characterised as a refusal, in no way was it a wrongful refusal.

96. Finally, to the extent it is needed this exchange supports my understanding of what was meant by something being “canvassed” in earlier exchanges; as I have noted, to canvas and to float seem in this context to mean the same thing: ideas for further discussion. Moreover, Mr Amin, at the very least, was familiar with the practice I described above where solicitors will raise ideas in discussions even without express instructions in an attempt to understand the other side’s position.

97. The next communication on which reliance was placed is an email sent on 11 May 2021 from Mr Amin to Ms Swainson and expressed to be without prejudice save as to costs. The offer was:

1. £2 million (being the net amount available on the 5 buy to let mortgages) in full and final settlement of all claims that my client has against your client and vice versa;

2. My client will instruct her conveyancing solicitors to proceed with the remortgaging of the 3 buy to let properties and as soon as the remortgages are completed, your client will provide the appropriate discharge in respect of those 3 buy to let properties against a payment of £1.2 million;

3. The remaining £800,000 will be paid on or before 9 August 2021;

4. Tomorrow’s application to be dismissed with no order as to costs;

5. Your client will undertake to discharge the Receivers from their office immediately. If the Receivers are intended to continue in their office until £1.2 million is paid, then we will need an undertaking from the Receivers specifically not to deal with any of the Properties in any way whatsoever pending receipt of the £1.2 million, which for the avoidance of doubt will include not contacting the tenants of the buy to let properties, not attempting to sell or taking any steps to market the properties … and withdrawing from sale the Properties which are the subject of the auction on 13 May 2021.

98. Again, multiple difficulties arise with construing this as a severable offer of payment or part payment. It is, at most, a settlement offer. That is evidenced both by it being without prejudice save as to costs and by the reference to “ full and final settlement of all claims ”. The Claimants’ objective was to wrap up the dispute as a whole. That dispute included a claim in debt but nothing in this letter suggests that LCL could have accepted just that element of the proposal. Had, for example, Ms Swainson replied accepting points 2 and 3, rejecting the balance and providing account details it is inconceivable that any onlooker would think agreement had been reached and payment ought to follow.

99. Given the rather vague conditions attached to this proposal it is not clear whether it was a true contractual offer, capable of immediate acceptance, or an invitation to treat, which would involve some further step. Nor does that matter, however, because LCL rejected the proposal and made a counter-proposal; that, in turn, was rejected by the Claimants and the application before Falk J, as she then was, proceeded the following day.

100. On 12 May 2021 Mr Amin wrote to Ms Swainson noting: “ For the avoidance of doubt, my client’s offer to settle is now no longer open for acceptance. ” An offer to settle proceedings is not the same thing as a tender of payment said, in those proceedings, to be due from the borrower to the lender. This simply reflects all of the correspondence to date – the Claimants were seeking not simply to repay the Loan but also to get rid of the claims and proceedings that the Loan had spawned. The offers were offers made in the course of settlement negotiations; they were not a tender, or anything resembling a tender. The case the Claimants now advance is wholly at odds with what they thought at the time. More to the point, it is wholly at odds with what anyone, reading their proposals objectively, would have concluded the Claimants were offering.

101. Also on 12 May 2021 HCA wrote to Gunnercooke stating: We are mindful of the comments made by Mrs Justice Falk today, and what we say below is entirely without prejudice to our clients’ claims in respect of which all rights are reserved. Please note that our client’s mortgage offers in respect of the 3 buy to let properties will expire at the end of May 2021. There is no reason why your client should refuse to accept £1.2 million and release the 3 buy to let properties so that at least part of the money due to LCL can be discharged and CEK’s interest liability under the Facility Letter can be reduced. My [sic] clients have been offering payment of the £1.2 million in open correspondence since early March.

102. The last sentence mischaracterised what had gone before. What had been proposed was a package deal, including but not limited to a payment of £1.2 million. That much is obvious from Mr Amin’s reference, earlier the same day, to the “ offer to settle ” no longer being open for acceptance. This letter was critically different – it simply proposed repayment of amounts due with a corresponding discharge of security. Indeed, as Mr Amin made clear in an email to Ms Swainson on 28 May 2001: “ I would just like to remind you that the £1.2 million is being paid by Mrs Houssein, on the basis previously stated, namely against the appropriate discharges (as required by her conveyancing solicitors) and entirely without prejudice to the litigation between our respective clients. ” Payment was made to LCL shortly after that email was sent.

103. Exchanges continued over summer 2021, including some offers of settlement. There followed a mediation on, it appears, 27 September 2021. By this stage, of course, the remaining balance of the Loan was in default, the Repayment Date having been 7 August 2021. Following the mediation, on 7 October 2021 Mr Charlesworth, of Gunnercooke, wrote to the mediator to decline an offer of £700,000 payable “ now ”, which presumably meant at some point in the near future rather than on that date, and £100,000 a year later. Mr Charlesworth proposed three alternatives, with the total increasing as more time to pay was given.

104. In response, on 14 October 2021 Mr Amin wrote to the mediator, rejecting LCL’s offers and repeating the Claimant’s earlier offer in the following terms: “ My clients will pay £700,000 within 28 days of acceptance of the offer, a further £100,000 in 12 months [sic] time (secured against 71 Hamilton Rd), in full and final settlement. ” The Claimants rely on this as an offer of repayment.

105. The analysis here follows the pattern of earlier offers. For the reasons I have given it is plainly not a tender. Nor is it an offer of payment. Simply the context suggests that. Not only is this without prejudice, it is made via a mediator. One does not typically need to engage the services of a mediator to repay a debt; the value that they add is in resolving disputes, not facilitating payments of undisputed sums. Moreover, by its terms the offer seeks to roll up a number of matters – “ in full and final settlement ” – and not just repayment. It is not an offer to repay an undisputed sum; it is an attempt to settle a dispute arising out of a debt.

106. On 1 November 2021 Ms Golant, of HCA, wrote to Mr Charlesworth essentially repeating the offer of 14 October 2021. In the Defence to Counterclaim this is described as an open offer, but I note that five minutes after sending it Ms Golant sent a follow-up email stating that her email was “ without prejudice save as to costs and still under the ambit of mediation privilege ”. For the reasons I have given above, it does not seem to me to change anything even if the offer had been expressed to be open: it would still be an offer to settle a disputed claim. The analysis is therefore the same as for the 14 October offer.

107. Finally, following my First Judgment there were offers to pay £630,000 in return for a release of the charges over 205 and 207 Downhills Way, with the issue of interest to be addressed following the then pending appeal. The charge over 71 Hamilton Road would remain.

108. Again, it seems to me that these were offers of settlement, strictly partial settlement, aimed at narrowing the issues in dispute. They were not an offer of payment under the terms of the Facility Letter. That permitted LCL to hold onto all of its security until it was paid the capital and interest in full. As a consequence of the Court of Appeal Judgment and this judgment LCL in fact has had throughout had a right to charge the Default Rate, such that what was offered was not full redemption. In return for paying just the capital the Claimants were seeking something – release of the security – to which they were not entitled. In my view that was an offer to renegotiate the terms of the Facility Letter, not an offer of payment under them.

109. Accordingly, nothing that the Claimants did stopped interest running on the Loan. The Court of Appeal Judgment found, however, that interest at the Standard Rate stopped on the Repayment Date. Thereafter, the only interest that could run under the terms of the Facility Letter is therefore at the Default Rate, which in turn gives rise to the penalty issue. Is the Default Rate a penalty? The approach set out in my First Judgment

110. I addressed the penalty issue at paragraphs [195]-[209] of my First Judgment. There, I referenced the decision of the Supreme Court in Cavendish Square Holdings BV v Makdessi [2015] UKSC 67 , and specifically the observations made by Lords Neuberger and Sumption at paragraph [32] as to the innocent party’s legitimate interest in the performance of the primary obligations and Lord Hodge at paragraph [255] to their interest in the performance of the contract.

111. In seeking to apply that test I identified at paragraphs [205]-[208] of my First Judgment four factors that I considered to be relevant: i) The Housseins’ historic credit issues had, on the evidence, already been allowed for by increasing the Standard Rate from 0.7% to 1%. It was not clear why a further 3% increase was required in respect of subsequent defaults on other debts to third parties. ii) The Default Rate was not specific to the Housseins; it was set centrally and applied to all borrowers. This was a well secured loan, such that the credit risk was mitigated. iii) The same rate applied to breaches of different primary obligations, which in turn would protect different legitimate interests, of apparently varying seriousness. It seemed to me that each primary obligation to which the default rate might apply was relevant because if that rate were extortionate or exorbitant by reference to any of them, the provision as a whole could not be enforced. iv) The Default Rate was outside what was normal in the market in the case of non-payment default interest.

112. I was wrong in my approach and the Court of Appeal reversed my decision, remitting these matters to me for further determination. The law on penalties

113. The parties did not agree on what the Court of Appeal Judgment required me to do in making that determination. In addressing their respective positions it will be necessary to consider what the legal test is, and so it makes sense to start with that.

114. As I have noted, in my First Judgment I made reference to the Supreme Court decision in Makdessi , in particular the judgments of Lords Neuberger and Sumption. The Court of Appeal also referenced those paragraphs, but in light of the way matters have developed, and in particular in light of the significantly greater detail with which this judgment addresses the penalty issue, I feel it would be helpful to return to the question of approach de novo .

115. In my view the starting point is paragraph [9] of Makdessi , which lays down some general propositions. I do not believe these to be controversial, but since I will return repeatedly to them it merits quoting that passage at length: The distinction between a clause providing for a genuine pre-estimate of damages and a penalty clause has remained fundamental to the modern law, as it is currently understood. The question whether a damages clause is a penalty falls to be decided as a matter of construction, therefore as at the time that it is agreed: Public Works Comr v Hills [1906] AC 368 , 376; Webster v Bosanquet [1912] AC 394 ; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 , at pp 86-87 (Lord Dunedin); and Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86 , 94 (Somervell LJ). This is because it depends on the character of the provision, not on the circumstances in which it falls to be enforced. It is a species of agreement which the common law considers to be by its nature contrary to the policy of the law. One consequence of this is that relief from the effects of a penalty is, as Hoffmann LJ put it in Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 , 144, “ mechanical in effect and involves no exercise of discretion at all .” Another is that the penalty clause is wholly unenforceable: Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 , 9, 10 (Lord Halsbury LC); Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 , 698 (Lord Reid), 703 (Lord Morris of Borth-y-Gest) and 723-724 (Lord Salmon); Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The “Scaptrade”) [1983] 2 AC 694 , 702 (Lord Diplock); AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 191-193 (Mason and Wilson JJ).

116. Not all of those propositions survived Makdessi . In particular, the concept of genuine pre-estimate of loss is no longer the law. However, many did and, of particular relevance to this case, it remains the law that the assessment is to be carried out at the time the agreement is entered into and that the effect of a finding that a clause is penal is that the clause as a whole is unenforceable. I had not understood either proposition to be in issue at the trial; certainly, it did not seem to me controversial as between the parties at this hearing.

117. Lords Neuberger and Sumption then turned to the circumstances in which the penalty rule was engaged. It applies only to secondary obligations, those which arise on breach. It does not apply to the primary obligations under the contract.

118. They then turned to the various authorities. In particular, at paragraph [22] they expressed reservations about the status of “ quasi statutory code ” that had been accorded to Lord Dunedin’s four tests in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 . Of particular relevance here is the third of those tests: that there was a presumption that a sum would be penal if it was payable in a number of events of varying gravity.

119. Lords Neuberger and Sumption returned to Dunlop at paragraph [31]: In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and a genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin’s four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field.

120. The point on deterrence was especially clearly put when Lords Sumption and Neuberger came to apply the test at paragraph [99]: “ As we have pointed out, deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract. ”

121. They returned to Dunlop at paragraph [32], where they also set out the test: The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations. This was recognised in the early days of the penalty rule, when it was still the creature of equity, and is reflected in Lord Macclesfield’s observation in Peachy (quoted in para 5 above) about the application of the penalty rule to provisions which were “never intended by way of compensation”, for which equity would not relieve. It was reflected in the result in Dunlop . And it is recognised in the more recent decisions about commercial justification. And, as Lord Hodge shows, it is the principle underlying the Scottish authorities.

122. Two related points, it seems to me, are worth highlighting from that. First, a contract may contain multiple relevant primary obligations and the legitimate interests in seeing each of them performed may be different. Secondly, Lord Dunedin’s four tests, including that a clause protecting multiple different interests in the same way gives rise to a presumption (but no more) of penalty, remain valid issues to be considered.

123. Lords Sumption and Neuberger went on to reiterate at paragraph [33] that the penalty jurisdiction interferes with freedom of contract and that the courts “ should not be astute to descry a penalty clause ’”. They further observed, at paragraph [35]: “ In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach. ”

124. I will need to address Makdessi further in due course, obviously, and will there address what was said by Lord Hodge and Lord Mance. That is not necessary at this stage, however.

125. In applying Makdessi , the Court of Appeal Judgment endorsed the three-stage approach adopted by Mr Fancourt QC, as he then was, in Vivienne Westwood v Conduit Street [2017] EWHC 350 (Ch) . At paragraph [41] he said: The Cavendish case shows clearly that, in considering whether a contractual stipulation is or is not a penalty, one must address first the threshold issue - is a stipulation in substance a secondary obligation engaged upon breach of a primary contractual obligation; then identify the extent and nature of the legitimate interest of the promisee in having the primary obligation performed, and then determine whether or not, having regard to that legitimate interest, the secondary obligation is exorbitant or unconscionable in amount or in its effect.

126. The approach of Mr Fancourt QC was adopted in Cargill International Trading PTE Ltd v Uttam Galva Steels [2019] EWHC 476 (Comm) , to which I will also need to return at some length, and Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch) .

127. Finally, I note Mr Fancourt QC’s point at paragraph [53]: It follows that, under the Side Letter, the same substantial financial adjustment applies whether a breach is one-off, minor, serious or repeated, and without regard to the nature of the obligation broken or any actual or likely consequences for the lessor. Although it is far from being conclusive, that has long been recognised as one of the hallmarks of a penalty.

128. That follows from what he said at paragraph [41]: one identifies the primary obligation whose breach triggers the secondary obligation that is said to be penal, then one looks at the legitimate interest in the performance of that primary obligation. If there are multiple primary obligations that are subject to the same remedy, in this case the Default Rate, one must assess the legitimate interest in each of those primary obligations (or group of primary obligations if there is some common legitimate interest in their enforcement). The use of the same Default Rate for multiple different primary obligations was a concern I expressed in my First Judgment, and for the reasons I give above I agree with Mr Fancourt QC that it remains a proper question to ask when applying the Makdessi test.

129. The question of whether a provision is extortionate, and so a penalty, turns on the facts of each case. The question remitted by the Court of Appeal

130. The question remitted to me at paragraph [57] of the Court of Appeal Judgment for determination was whether “ having regard to the legitimate interest in the performance of the primary obligation, the default interest provision is extortionate, extravagant or unconscionable in amount or effect .” The legitimate interest identified in that section of the Court of Appeal Judgment was “ a legitimate interest in the enforcement of the primary obligation to repay the Loan, all interest, fees and commissions on the Repayment Date ”.

131. There was disagreement between the parties over what the Court of Appeal meant. Mr Wheeler submitted that the task before me was a limited one. The Court of Appeal had identified the relevant legitimate interest – LCL’s interest in repayment – and it was against that yardstick and that yardstick alone that I was to assess whether the Default Rate was extortionate. Even were that not the case, he observed, ultimately it made no difference because under clause 12.1 LCL had a right to accelerate the Loan on any event of default, such that other defaults would inevitably result in a payment default. Finally, he submitted that this reflected the evidence at trial as to market practice that Default Rates were static, rather than dynamic: there was one rate that applied to all defaults, not separate rates for different types of default. As I have just recorded, the Court of Appeal was clear that the Makdessi test is “ extortionate, extravagant or unconscionable ”. However, as Mr Wheeler noted in his skeleton argument, it is not suggested that these are different approaches; they are different ways of describing the same approach. At least on the facts of this case I did not understand the Claimants to suggest that was wrong. Using all three terms repeatedly is somewhat cumbersome and adds nothing to the analysis. On that basis Mr Wheeler took the approach of simply referring to the test in terms of extortionate. I felt that was a sensible approach, and I adopt it in this judgment.

132. By contrast, Mr Cowen, in oral opening, suggested that what was required was a broader re-evaluation. Applying Makdessi , it would be insufficient merely to show that the Default Rate was not extortionate by reference solely to LCL’s legitimate interest in repayment; if it was extortionate or unconscionable by reference to legitimate interest underpinning any primary obligation, the Default Rate as a whole would be unenforceable. He also referred me to the terms of the Court of Appeal’s order, which is broader than paragraph [57] in providing: 4) The following issues are remitted to the Judge for further consideration: a. Whether the default interest in the Facility Letter (as defined in the Appeal Judgment) is an unenforceable penalty at common law;

133. This, he submitted, put everything back in play, and the question in the Court of Appeal Judgment must be read in light of it.

134. I accept Mr Cowen’s broader reading of the Court of Appeal’s question.

135. First, it seems to me that in retaining Lord Dunedin’s four tests as part of the analysis the Supreme Court in Makdessi required a consideration of all of the primary obligations (and so the interests in seeing them enforced) that were the subject of the alleged penalty. The point was very clearly made by Mr Fancourt QC in Vivienne Westwood at paragraph [53]: it was “ one of the hallmarks of penalty ” where “ the same substantial financial adjustment applies … without regard to the nature of the obligation broken ”.

136. The Court of Appeal Judgment expressly endorsed those judgments without any reservation. But if it were sufficient for LCL simply to show that any one of the primary obligations set out in clause 12 of the Facility Letter merited protection at the level set by the Default Rate, those tests could not be right. There would simply be no need to consider Mr Fancourt QC’s point at paragraph [53] provided, at the time the agreement was entered into, there was a legitimate interest in the enforcement of at least one primary obligation that would merit the application of the specified secondary obligation. That is not my reading of the legal test, and I do not see that the Court of Appeal Judgment was seeking to change that test.

137. Secondly, I do not accept that clause 12.1 of the Facility Letter means that a non-payment breach will inevitably result in acceleration. It simply grants an option to LCL to accelerate. That contrasts with the defaults set out at clause 12.3, which do automatically accelerate the Loan and bring the facility granted under the Facility Letter to an end. The distinction is important. Given that the question is assessed objectively at the time of formation it is what LCL could do that matters, not what it would do (and less still what it now believes it thought, at the time, it would do). LCL could accelerate, but it was by no means bound to do so. On an event of default, the Default Rate was applicable regardless of whether acceleration followed or not.

138. Even if I am wrong on that, and LCL’s conduct is relevant, as a factual matter LCL’s immediate response to finding that the Housseins remained in residence was not to accelerate. When Gunnercooke wrote to CEK on 8 September 2020 notifying it of the breach of the non-residence provision the Claimants were given one month to move out, that is to remedy the alleged breach, but the Default Rate was applied from the previous day, which was the date of the inspection confirming that the Housseins remained in residence at 71 Hamilton Road. On the facts of this case, LCL sought to apply the Default Rate even in the absence of a payment default or acceleration.

139. In circumstances where the Default Rate could apply in the absence of a payment default it is not clear to me why the mere potential for a payment default, a default that might never happen, means the clause is automatically not extortionate in respect of other primary obligations which depend on different legitimate interests.

140. Thirdly, I do not accept that the evidence as to the static nature of default rates was as clear cut as Mr Wheeler now suggests. The point was put to both experts, but in neither case was it on the terms now being considered.

141. Taking first Mr Griffiths, his evidence was as follows: Q. You consider that in this case 3% would be the maximum and that the default rate could have been as low as 2%. A. Yes, Mr Kyriacou and I were looking at the market as a whole and what – market default rates and we were agreeing that 3% is – is more in line, but unless – I heard the evidence of the last witness this morning and he said that – that the contractual rate was dynamic but that the – the default rate was not. That’s not necessarily my experience. I mean, I’ve seen quite a bit, and I would expect the default rate to be dynamic as well.

142. The “last witness” was Mr Theophanous and I think the passages of his cross-examination to which Mr Griffiths was referring were somewhat separated in time. The first related to the setting of the Standard Rate: Q. In your witness statement you say that you’re responsible for fixing the rates of interest that you offer to potential borrowers. The range of rates in July 2020 was starting at 0.7%. … A. But I have to mention here that interest rates – the rates we offer are dynamic. The – what you mentioned is a starting point and – and rates change – they can change within the same month. They can change – it’s according – according to the market, according to our needs. So – Q. And to your assessment of risk? A. Yes.

143. There then followed an exchange around what the relevant risk factors were in this case. Mr Theophanous was taken through various aspects of risk relevant to the Housseins and his evidence, as I understood it, was that taking all those factors into account he came up with a composite figure for risk, weighting the various issues he had identified, which he applied to determine an increase to LCL’s typical standard rate.

144. The cross-examination turned to the Default Rate right at the end. There was quite a lot of back and forth but the conclusion is what seems to me important: Q. Now, I’m going to suggest that there are events of default of differing gravity which have differing impacts upon the lender. A. Okay. Q. Would you agree that that is the case? A. Yes. Q. Yes. And therefore if one’s going to assess how much injury – how much commercial injury a lender is going to suffer in the event of a default, it rather depends upon what sort of default it is? A. Yeah, I wouldn’t disagree with that. Q. You’d agree with that? A. Yeah. Q. So having a single default rate means that some people get off lightly and others get punished quite heavily. Would you agree with that? A. Well, the – the setting interest rates, fees, default rates and all that, it is a matter of policy. So if – if – Q. I see. A. - if a company has a policy to set fixed fees, fixed charges, it’s the policy.

145. I recognise that the cross-examination elided two distinct concepts, the risk associated with a type of default (which focusses on the likely magnitude of loss) and the risk associated with the individual borrower (which goes more to the likelihood of loss occurring). While this injected some unwelcome ambiguity, Mr Theophanous’ evidence seemed to me clear: that default rates were static both as to the types of default (that is, primary obligations, or categories of primary obligations) and as between different borrowers. I took, and take, Mr Griffiths evidence to have been that the default rate would typically be dynamic by reference to both: that is, different default rates would apply to different borrowers, but also different default rates would apply to different primary obligations.

146. Mr Kyriakou’s evidence was similarly clouded by the question he was asked: Q. Different types of default will have different impacts upon the credit risk. Some will really make credit risk much, much higher for the lender and others will scarcely cause a blip. If I can put it that way. So would you agree that having a single default rate across the board doesn’t reflect that difference? A. I agree with what you’re saying. So what you’re saying is – certain blips might be minimal impact, you have others that have a higher impact, and therefore in an ideal world we’d have a dynamic default rate which would reflect a high risk default and a low risk default. So yeah, in an ideal world that would be great. I mean, I can only comment on how all the lenders work and every facility that I’ve seen – facility letter that I’ve seen has had a static default rate. I’ve yet to see someone put a default rate of, say, 1% if you do this, 2% if you do that, 3% if you do that. I may agree that, yes, certain things are riskier than others but as far as the way the market operates, I haven’t seen that in practice.

147. Mr Kyriacou was therefore being asked about the impact specifically on credit risk. As I will address below, that is a particular type of legitimate interest that relates to some but by no means all of the primary obligations in the Facility Letter. As such, it is not the only primary obligation or the only legitimate interest that is subject to the Default Rate. It seemed to me, however, that his answer went beyond simply credit risk and was, effectively, from what he had seen one default rate is applied across the board to all primary obligations. It is that evidence on which I understand Mr Wheeler to rely.

148. Ultimately this comes down to an assessment of the witnesses. It seemed to me from seeing them that Mr Griffiths was both more experienced and more considered in his answers. As to the former, he has worked as a lender for quite a number of years and in that capacity, in his own words, “ had seen quite a bit ”. He knew how lenders went about setting rates. Mr Kyriacou was primarily a broker. He had experience of what rates were offered, but he could only comment on what he had seen, as he very fairly acknowledged. Both experts agreed that it can be difficult to get an accurate picture of default rates from material that is available in the market. That is significant here because it means that even on a best-case scenario Mr Kyriacou could only have part of the picture: he would know what the default rate was, but would not know what triggered it. By way of example, in Cargill , Ahuja and Lordsvale there was only one default – non-payment. In such cases the concern I am addressing here – multiple primary obligations being protected by the same secondary obligation – simply does not arise. It is meaningless to talk about a rate that responds (or does not respond) dynamically to different categories of risk when there is only one trigger to that rate applying.

149. I also found that Mr Griffiths took more time to consider the questions put to him. Even the straightforward question to Mr Kyriacou that I have quoted above was actually broken up into six chunks, with Mr Kyriacou regularly seeking to confirm his understanding and start his answer.

150. The other point on the witnesses that seems, to me, significant is that Mr Kyriacou’s evidence requires me to make a step of inductive logic whereas Mr Griffiths’ does not. When Mr Kyriacou stated that he had never seen a dynamic rate, I am to take from that that this is because such rates do not exist. That does not necessarily follow; it may simply be that Mr Kyriacou had not come across them. By contrast, when Mr Griffiths stated that he has seen dynamic default rates in the market then if I accept that evidence (which I did and do) there is no need for any inductive leap: the only way he could have come across them is if such rates are in fact offered.

151. For these reasons, and as I noted in my First Judgment, I preferred the evidence of Mr Griffiths. As a factual matter, I accept that dynamic default rates are available in the market, although quite possibly the practice is not uniform.

152. Finally, on this point, even were it uniform in the market to apply the same rate to different defaults I do not accept that would, of itself, make it legitimate in all cases. As Makdessi makes clear, that the same consequence flows from a range of breaches or defaults gives rise to a presumption, but no more than that, that the secondary obligation in question is a penalty. Put another way, it is something that calls for explanation. A lender may in a great many, maybe in all cases be able to provide such an explanation. But to say that a default rate is not extortionate provided it is acceptable by reference to some primary obligations, such that the lender does not even need to address the basis for applying the same rate to other, apparently quite unimportant primary obligations that represent different interests, seems to me to go too far. As the Court of Appeal Judgment made clear, lenders will typically have a very strong interest in timely repayment, such that some default rate will typically be appropriate by reference to the repayment obligation. If that were the only relevant enquiry they would have carte blanche to charge the same rate for much more minor and inconsequential matters; that is not my understanding of how the law does or should operate.

153. With the benefit of Mr Cowen’s submissions I have therefore read the Court of Appeal’s question as being whether “given the existence of a legitimate interest in the performance of the primary obligation, the default interest provision is extortionate, extravagant or unconscionable in amount or effect”. Objective approach

154. I recognise that one must adopt an objective approach to the assessment. Objectivity permeates contract law, and indeed many aspects of the other branches of private law. It would be largely meaningless to apply a subjective approach to this question because by definition the parties thought the clause was acceptable – they accepted it, in this case with the benefit of legal advice on both sides.

155. The point that I was seeking to make in my First Judgment is that LCL had not advanced any reasons, in its factual evidence, for why it had imposed the Default Rate uniformly to all instances of default, such that it was not possible for the experts to comment on or for me to assess whether those reasons, objectively assessed, meant that the rate was not extortionate. I note that the same issue was raised in Cargill (where there was such evidence) and Ahuja (where there was not). Primary or secondary obligation?

156. Turning, then, to Mr Fancourt QC’s threshold question, was the Default Rate a secondary obligation engaged on the breach of a primary contractual obligation? This was not addressed in my First Judgment because, as the Court of Appeal assumed (Court of Appeal Judgment paragraph [48]) it was not in issue. On the contrary, it was the pleaded case of both parties that I needed to treat the Default Rate as a secondary obligation. Specifically, paragraph 97 of the Particulars of Claim asserts that “ the default rate under the Facility Letter imposed a detriment out of all proportion to any legitimate interest of the lender. ” Paragraph 122 of the Defence denies that in general terms: “ it is denied that the default rate under the Facility Letter imposed a detriment out of all proportion to any legitimate interest of [LCL], or that the default rate is an unfair penalty that is unenforceable at common law. ” The second limb of that denial is, of course, broad, and is at least consistent with the idea that the Default Rate is simply not amenable to analysis as a penalty, i.e. it is a primary obligation. In the context I do not think that is what was intended, however, a conclusion reinforced by paragraph 123 of the Defence, which avers that: “ Clause 12 of the Facility Letter sets out clearly prescribed Events of Default, each of which are serious in themselves and which permit [LCL] to apply the default rate. ” Nothing in the course of the trial suggested any deviation from that pleaded position.

157. For completeness, I should note that there was some suggestion raised in the course of this hearing that the Default Rate, in at least some cases, did not respond to anything that could properly be characterised as a breach of a primary obligation. It came, perhaps surprisingly, from Mr Cowen, who observed on closing that: So you have, in the events of default, for instance, a judgment of £20,000 being awarded against the borrower. You have, for instance, the property being the subject of a compulsory purchase order. I do not know quite how the borrower is supposed to prevent that. I am not quite sure.

158. I say surprisingly not because what he submitted was in any way illogical. On the contrary, as regards this and other events of default, for example the receipt of a letter of claim, it is hard to see what a borrower could do. However, as Makdessi at paragraph [14] makes clear, such an analysis would suggest that the Default Rate in those cases is being applied in the absence of any breach – CEK was not undertaking to prevent or avoid compulsory purchase, nor was it agreeing not to receive certain types of correspondence, it was simply the Facility Letter specifying what would happen if such an order were made or such a letter received. It was a price adjustment mechanism. That would make the Default Rate, in those instances, a primary obligation and so outside the scope of the rule on penalties altogether. That, obviously, is not in the Claimants’ interests.

159. As I have noted, that is not the pleaded case of either party and was not raised at trial. I did not take Mr Cowen to be shifting the Claimants’ position at this hearing. I therefore accept that both parties characterise the Default Rate as being payable on, and only on, the breach of a primary obligation. As such, it is a secondary obligation and falls to be assessed under the rules on penalties. What were the legitimate interests?

160. The second question is deceptively straightforward on two levels. First, there was the attractive submission of Mr Wheeler that the Court of Appeal had already done the work for me in identifying the relevant (and only relevant) legitimate interest as being the interest LCL had in timely repayment of the Loan. I have addressed that submission above; despite the persuasive way in which the argument was put, my reading of the Court of Appeal’s question requires me to consider all primary obligations to which the Default Rate applies and, in turn, the legitimate interests that LCL has in enforcing them.

161. Therein lies the second complexity. Some of those interests are obvious, and the protection afforded to them by the Default Rate is obviously legitimate. There is a temptation simply to assume that they are not in play and focus only on those interests that are open to question. That, I confess, was a flaw in my approach in the First Judgment: I succumbed to that temptation, rushed at the hurdle and I stumbled. I do not propose to repeat the experience.

162. With that in mind, one must therefore turn to the events of default. These can, I think, sensibly be grouped into categories of primary obligations. In saying that I recognise that some obligations give rise to more than one interest: factors affecting security may also affect repayment, for example; repayment cannot be divorced from non-residence requirements because the consequence of a breach of the non-residence requirement could be that a loan was unenforceable; and so forth. At the same time, addressing each clause individually risks unnecessary atomisation and duplication, while lumping everything into a broad category of “risk” can mean that some legitimate interests are ignored or confused, a point I feel I need to address in some detail in the particular context of credit risk.

163. It is easiest to clear the chaff out of the way first. Certain events of default have no apparent relevance to the analysis. Clause 12.2(i) dealt with defaults under what is described as the related Facility Letter. This appears to be an error, in that there is only one facility and only one Facility Letter. Clauses 12.2(n) and (o) relate to second charges and are not relevant here.

164. Turning to those primary obligations that do involve a legitimate interest, the first category is simple: under clause 12.2(a) there is an event of default on non-payment. A lender obviously has a legitimate interest in repayment (the Repayment Interest ). As Mr Wheeler submitted, it is the sine qua non of a loan.

165. Second, there is clause 12.2(h): if the representations and warranties were or became untrue, that is an event of default. The analysis here is a little more involved. The representations and warranties given at inception were the basis of the whole Loan; as clause 4 of the Facility Letter makes clear, LCL’s obligation to advance funds was conditional on those representations and warranties being “ true, correct and fully observed in all material respects ”. Given that LCL would have had no obligation to advance funds had the representations and warranties not been true, it logically follows that it was central to the structure of the Facility Letter that they were true, and therefore also follows that LCL had a legitimate interest in them being true and correct in all material respects (the Representations Interest ). The analysis is, in my view, different in respect of the provision dealing with warranties subsequently becoming “ incorrect and incomplete in any material respect ” by reference to circumstances existing at some later point in time. As a simple matter of causation, an event in the future cannot have been the basis of a decision in the past. Belief about what will happen in the future can be a cause of a prior decision, but while the belief may change over time, the belief at the point the decision was made is a question of fact and does not change. Where there is a subsequent change in what is represented or warranted that therefore seems to me to call for somewhat different treatment and is better addressed alongside other issues of security and credit risk.

166. Third, there are the events of default that relate to the security for the loan. These are clauses 12.2(g) (the security documents become unenforceable); 12.2(j) (it becomes unlawful for the CEK to perform its obligations under a Finance Document, which includes the security agreements) and 12.2(k) (CEK repudiates a Finance Document); 12.2(l) (the secured property is damaged or destroyed and the amount or timing of receipt of any insurance proceeds mean that this will have a material adverse effect on LCL); 12.2(m) (the secured property is subject to a compulsory purchase order); and 12.2(p) (death or incapacity of the guarantors).

167. This was a secured loan, and accordingly a lender had a legitimate interest in the security being both intact and realisable to meet any unsatisfied obligations of the borrower. As I have noted, in the context of this interest Mr Cowen raised a question about how a borrower was to be expected to prevent compulsory purchase. To my mind that is not quite the point. Compulsory purchase is an instance of the state’s power of eminent domain. Typically, once exercised the owner loses both the capital asset and the income that it can generate. The risk to a lender is therefore that the income that serviced the loan has gone and the security that provided a fallback protection is no longer available. In its place is a sum of compensation that may or may not be sufficient to repay the debt. It seems to me that a secured lender must have a legitimate interest in enforcing obligations for the protection of the security (the Security Interest ).

168. Fourth, clause 12.2(q) makes it an event of default to breach the non-residence requirement or to fail to provide proof of address, which is obviously tied to that requirement. As an unregulated lender LCL was prohibited, under the Financial Services and Markets Act 2000 and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 from lending to individuals where the security is their primary residence. Here, the loan was to CEK, a corporate entity. In my First Judgment I concluded that this was sufficient to mean that no interest arose. I was wrong to do so. I had considered that the argument of sham advanced in this case was very weak such that the steps taken by LCL in structuring the loan in the way that they did addressed the issue in any event. That was the wrong lens through which to view the issue. The question, I accept, is properly whether LCL was exposed to risk. As Mr Griffiths’ evidence made clear, they were so exposed and the fact that they took other measures to mitigate that risk goes, if anything, to the question of whether the Default Rate, used in this context, was extortionate. I accept that an unregulated lender has a legitimate interest in seeing a non-residence provision observed (the Non-residence Interest ).

169. Finally, there are those primary obligations that relate to credit risk. This category covers clauses 12.2(c) (CEK defaults on other borrowing), 12.2(e) (enforcement against CEK’s property), 12.2(f) (to which I will return, but which in essence relates to unpaid judgment debts arising from obligations to third parties); and 12.2(j) and (k) (described above, Finance Document also including the Facility Letter). In principle a lender has a legitimate interest in primary obligations that go to preserve a borrower’s ability to repay the debt when due (the Credit Risk Interest ).

170. In light of the Court of Appeal Judgment it seems to me that this is, by far, the most complex of the interests I have identified. I say that because, at least in my view, when some of the cases use the term credit risk they use it to cover two quite different concepts.

171. One might be described as predictive: given what we know now, what is the likelihood of the borrower (strictly, of a borrower like this one) defaulting on its payment obligations. That is the sense in which I understood the witnesses before me to have used the term, and it is certainly the sense in which I am using it by reference to the primary obligations I identify above in respect of the Credit Risk Interest. It is also the sense in which part of Bryan J’s judgment in Cargill used the term.

172. The second sense is descriptive: given that the borrower has defaulted, we know they were not good for their debt. I am not suggesting that such a descriptive use of the term “credit risk” is illegitimate, provided that we do in fact know that the borrower was not good for their debt, but one can see immediately that it is different. It is assessed from a different point of time (post-payment default, not pre-payment default), is therefore based on different evidence (most obviously, one knows there was a payment default) and so answers a different question (what happened, rather than what might happen). In each of Lordsvale Finance plc v Bank of Zambia [1996] QB 752 , Cargill , insofar as it was referenced in the Court of Appeal Judgment, and Ahuja that is the way that the term is used: we know that a payment default has happened and that tells us about the credit risk of the borrower as regards and only as regards the defaulted obligation.

173. One can readily see the difficulty in equating the two different concepts by using the notation of probability. As Professor Perry has observed (Perry, “Risk, Harm and Responsibility” in Owen (Ed), “Philosophical Foundations of Tort Law” (Clarendon 1995) “ The idea of risk can apply to many different types of harm or bad outcome, but what we mean by risk is fundamentally determined by the understanding of probability we take the concept to presuppose. ” He is not there saying that risk and probability are synonymous; as Professor Perry makes clear, risk involves the concepts of both probability and harm. The point is that probability is integral to risk. Classically, in addressing a probability one does so by reference to another variable or variables, so the probability of occurrence x given occurrence y . That is typically abbreviated to p ( x | y ). To consider p (default on this debt | default on a third party judgment debt) deals with, to a greater or lesser extent, a future uncertainty. By contrast, as a predictive tool p (default on this debt | the same default on this debt) is circular.

174. The distinction between the two senses of credit risk is, it seems to me, critical in this case, and in particular in the application of the decisions in Cargill , Ahuja and Lordsvale to the facts before me. Specifically, the default trigger in each of those cases was limited to payment defaults. While I fully accept the logic adopted in those decisions, in my view that logic does not translate to this case well, or indeed in some ways at all. It is important to address this in some detail.

175. The Court of Appeal Judgment dealt with credit risk separately to the Repayment Interest. Paragraph [49] of the Court of Appeal Judgment criticised my First Judgment on the basis that: “[the Judge] does not appear to have taken any real account of Bryan J's conclusion in the Cargill case … that it is self-evident that there is a good commercial justification for charging a higher rate of interest on an advance of money after a default in repayment because a person who has defaulted is, inevitably, a greater credit risk .”

176. As I have indicated, the Court of Appeal was right to say that I did not rely on Cargill , or on Ahuja or Lordsvale (including the treatment of Lordsvale by Lord Hodge in Makdessi ) in relation to what I have now more fully described as the Credit Risk Interest. That was not because I did not consider the conclusions reached there; nor, as I have also indicated, do I disagree with them. On the contrary, I do agree with those decisions and their application, in this case, to the Repayment Interest. As I have also noted, however, that is a separate interest as is apparent from the Court of Appeal Judgment, which deals with it separately at paragraph [52]. It is also an obvious interest, as I have accepted above. The sine qua non of the Loan.

177. In this case there are other primary obligations the breach of which triggers the Default Rate. In a sense they have a connection with the Repayment Interest but they are obviously free-standing – they can be breached in a way that triggers the application of the Default Rate even in the absence of a payment default. Moreover, some of those interests, specifically what I have described here as the Credit Risk Interest, seemed to me to be weaker than others, and in particular weaker than the Repayment Interest. That, in turn, seemed and still seems to me significant for reasons I have addressed: the effect of paragraph [9] of Makdessi and the cases referred to there by Lords Neuberger and Sumption is that if a clause is a penalty for any reason it is unenforceable for all purposes. As a consequence, it seemed to me at the time of my First Judgment that it was unnecessary to address the stronger interests, like the Repayment Interest, if the Default Rate was a penalty by reference to some other interest.

178. The difficulty I had, and still have, is how the descriptive use of credit risk is helpful, or indeed applicable at all, to a situation involving the Credit Risk Interest. Put another way, why do the descriptive observations in, say, Cargill inform the predictive task that the Credit Risk Interest requires me, in my view, to undertake? While the same or very similar issues arise in seeking to apply each of Lordsvale , Cargill and Ahuja to this case, given the terms of the Court of Appeal Judgment I start with Cargill and, so far as it forms the basis of Bryan J’s reasoning there, with Lordsvale

179. The application before Bryan J arose out of an earlier application for summary judgment before Teare J, reported at [2018] EWHC 2977 (Comm) , to which Bryan J expressly referred for its findings of fact. Summarising those findings, Cargill sought summary judgment against Uttam for US$61.8 million plus interest under two Advance Payment and Steel Supply Agreements (the APSAs ). The APSAs allowed Uttam to call upon Cargill to make advance payments of the purchase price of steel. Cargill had an option as to whether or not it made payment, but if it did so Uttam was then obliged either to supply steel (to Cargill or to an alternative buyer designated by Cargill) to that value or to refund the price. There were two APSAs in issue and evidence to suggest that the parties had been dealing with one another on similar terms for a number of years. Uttam stated it was over a decade, and no issue seems to have been taken with that.

180. In 2015 Uttam submitted six notices of drawdown representing the full facility under the two APSAs of US$61.8 million. The repayment dates were spread over time; no repayment was made on any of them. An email from Uttam to Cargill stated that the non-payment was a result of “ huge cash flow pressure ” caused by a downturn in the steel industry and increased production capacity in China. Uttam therefore requested that Cargill “ rollover [sic] its amount due of US$61.8 million ”. Cargill did not do so.

181. A number of defences to payment were subsequently advanced by Uttam, which were dismissed by Teare J who granted summary judgment. A dispute arose as to whether the default interest provision in Cargill’s favour, clause 8.12, was a penalty. That provision stated, so far as is relevant: …if the seller fails to pay an amount payable by or under or pursuant to this agreement on its due date Default Compensation shall accrue on the overdue amount from the due date up to the date of actual payment (both before and after judgment) at the Default Compensation Rate. Any Default Compensation shall be immediately payable by the Seller on demand by the Buyer.

182. I pause to note two features about that provision which seem to me significant. First, a point I have already made, it is only triggered by non-payment of a sum due. That is very different to the Default Rate in this case, which can be triggered by a variety of things ranging from compulsory purchase orders to allegations of non-payment of sums due to third parties. Second, the default compensation was only payable on the overdue sum; it did not apply to any non-defaulted sums. Again, that is different to this case where there could be a non-payment default that would cause the Default Rate to apply to the repayment amount, even where the Loan was not yet due for repayment. Indeed, as I have noted, that was the position LCL adopted in respect of the alleged breach of the non-residence provision when Gunnercooke wrote to CEK on 8 September 2020.

183. There was insufficient time to determine the penalty question at the hearing before Teare J and it was argued at the later application before Bryan J. He found that the provision was not a penalty. It was against that backdrop that he made his observation that “ a person who has defaulted is, inevitably, a greater credit risk ” referred to at paragraph [49] of the Court of Appeal Judgment.

184. Seeking to tie Cargill to the Credit Risk Interest in this case is, in my view, problematic on a number of levels.

185. First, I do not consider the facts of Cargill to be analogous to this case. The question of when two cases are properly analogous has, of course, generated considerable academic debate. I will address, as precisely as I can, the more specific bases for distinction below because the detail seems to me important, but even if one takes this simply as a matter of impression the facts here are fundamentally different to those in Cargill .

186. That case involved the forward sale of steel between two parties with an established trading history of over a decade in sums totalling US$61.8 million over a series two contracts involving six trades. Repayment could easily have come from other sources open to Uttam, and indeed might not have involved repayment at all but, rather, the delivery of steel. By contrast, this was a one-off, short-term loan from a specialist lender in bridging finance secured on a, with all respect to the Claimants, relatively small portfolio of residential investment properties and the family home. Like some credit themed uroboros – the serpent that consumes its own tail – repayment was always going to be by way of another refinancing secured on the various properties.

187. Significantly, in Cargill the default could only ever be non-payment because repayment was the only primary obligation protected by the default rate provision. Non-payment is now the relevant default before me, but because the time for assessment is at formation of the agreement that does not matter. Even if hindsight were in some way relevant, at trial the focus was the Non-residence Interest, which was the primary obligation whose alleged breach was said to have triggered LCL’s right to charge the Default Rate.

188. The starkness of the distinction between Cargill and this case, in broad terms, can be seen from the fact that two of the claims originally before me were consumer claims. Those claims either collapsed or were unsuccessful, of course, but they were felt by the Claimants to be arguable and LCL did not apply for summary judgment or to strike them out. It is hard to see how a forward sale agreement of US$61.8 million of steel would ever reach that quite low bar: if such an agreement were pleaded as a consumer contract, it is inconceivable to me that a properly advised defendant would ever allow it to reach trial.

189. For completeness I should address one point of apparent distinction between this case and Cargill that seems to me not to be relevant. Bryan J was invited to compare the default interest rate under the APSAs and those that applied to other borrowing of Uttam. He declined to do so on the ground that it was “ not a relevant comparator ” (paragraph [64]). The latter loan was secured and backed by a personal guarantee such that: …there is no comparable increase in credit risk because, of course, if the security has been set in advance at an appropriate level the effect of being in default is simply that the security becomes available. That is very different from unsecured borrowing.

190. While that was the case on the facts before Bryan J, it was not the evidence before me. The Loan was both secured and backed by a guarantee, but for reasons I will come to deal with the realisation of that security was not straightforward. It therefore seems to me that the existence of that security is not such a ground of difference between this case and Cargill as one might in principle expect.

191. As I noted above, the detail of the distinction seems to me important, and a more reliable guide than first impressions. My second reservation is how one translates the analysis of risk in Cargill to this case. Specifically, it seems to me difficult to apply the descriptive observation of Bryan J that “ a person who has defaulted is, inevitably, a greater credit risk ” to the predictive task that is necessary in assessing the Credit Risk Interest. This, I recognise, requires some developing.

192. Risk normally deals with uncertainty. As Lady Hale observed in Sienkiewicz v Greif (UK) Ltd [2011] UKSC 10 at [170]: “ Risk is a forward looking concept – what are the chances that I will get a particular disease in the future? ” As the quote itself makes clear, Lady Hale was dealing with a different context (the risk of developing mesothelioma following exposure to asbestos dust) but her observation on the concept being forward-looking is not context specific. There is also some nuance, in that one can meaningfully talk about risk of a past event to reflect epistemic uncertainty (for example, when we talk about the risk of somebody having missed their train at some point after the train has departed – they either have or they have not, but given the lack of knowledge it is appropriate to talk about the event in terms of risk). Typically, however, the uncertainty that we are discussing when we discuss risk is future uncertainty. That was certainly the case in Sienkiewicz , and in my view it is the only relevant use of the term in the context of the Credit Risk Interest.

193. Risk is not the same as cause. The distinction is explained by Professor Turton (“Risk and the damage requirement in negligence liability” (2015) 35 Legal Stud 75): [Risk] describes a situation of uncertainty as to whether a particular outcome will occur. When a risk materialises it causes an outcome, so it is no longer a ‘risk’ but a cause. Of course, there may be uncertainty as to what caused a particular event – that is, uncertainty as to which risk(s) materialised … It would be incorrect to say that if a risk has materialised it has contributed to the risk of the outcome – this is just circular. Once the outcome occurs, then the relevant question is whether the risk materialised and made a causal contribution.

194. I have already addressed the link between probability and risk. As Professor Perry notes in his 1995 essay, the class of probability theories that seems most appropriate in private law is what are known as relative frequency theories: one identifies a reference class of sufficiently similar events in the past, identifies from that (so far as one can) the incidence of loss within that reference class and projects that forward, using inductive reasoning, to predict the likelihood of such events happening again in the future. Professor Perry was speaking in the context of tort law but nothing seems to turn on that.

195. The inductive logic on which relative frequency is premised is central to those events of default that represent the Credit Risk Interest. Put simply, LCL plainly has a very direct interest in the Loan being repaid – the Repayment Interest. But why should it care if third parties are repaid, even on judgment debts? All the more so where there is simply an allegation by a third party of default by CEK on sums that it owes – what business is that of LCL’s? The answer is that it tells LCL something about the probability of its Loan being repaid in due course: if CEK is defaulting on other debts, or otherwise breaching those primary obligations that relate to the Credit Risk Interest, it may be more likely in due course to default on the Loan. The strength of that link – between other obligations to other parties and default on the Loan – is the yardstick against which the question of whether the Default Rate is extortionate falls to be assessed in the context of the Credit Risk Interest.

196. The problem with using this aspect of Cargill in the process is that such inductive logic is not, in my view, what Bryan J was relying on when he talked about credit risk. The reasoning in Cargill on why it was legitimate to charge higher rates to a party in default referenced the decision of Colman J in Lordsvale . I will return to consider Lordsvale further, but for now what matters is the reasoning adopted by Bryan J, which is at page 763E-F of Colman J’s judgment: The additional amount payable is ex hypothesi directly proportional to the period of time during which the default in payment continues. Moreover, the borrower in default is not the same credit risk as the prospective borrower with whom the loan agreement was first negotiated. Merely for the pre-existing rate of interest to continue to accrue on the outstanding amount of debt would not reflect the fact that the borrower no longer has a clean record. Given that money is more expensive for a less good credit risk than for a good credit risk, there would in principle seem to be no reason to deduce that a small rateable increase in interest charged prospectively upon default would have the dominant purpose of deterring loss.

197. Credit risk in that context is not in any sense being used predictively. Probability is not needed to predict the prospect of default on the sum to which the higher rate applies – the default has already happened. Mr Wheeler observed that there might be said to be a higher credit risk in the sense that one did not know when the default would be cured, as to which there was uncertainty. I see that argument but I do not believe that is what Colman J had in mind, because the structure of what he proposed meant that the increased interest rate could be justified for, and only for, the period of default: “ The additional amount payable is … directly proportional to the period of time during which the default in payment continues. ” It is a response to something that has happened and is ongoing, not an attempt to predict and allow for an uncertain future.

198. Moreover, were risk being used predictively one would expect there to be some knock-on impact in respect of future instalments, because the predictive credit risk in respect of them is presumably also now higher. But that is plainly, from the language I have just quoted, not what Colman J had in mind: the enhanced rate was justified only for the defaulted sums, and only for the duration of the default.

199. When Lord Hodge (paragraph [222]) and Lord Mance (paragraph [148]) in Makdessi agreed with the reasoning in Lordsvale they treated credit risk in the same way as Colman J – descriptively, not predictively. Lord Mance referred to a “ commercial re-rating to reflect the change in risk ”; and Lord Hodge stressed that he regarded Lordsvale as correct because “ a default affected the credit risk that the lender undertook ”. As a narrative description of what happened in respect of the borrower in question, which was the issue that Lords Hodge and Mance were addressing, it is of course right to say that the loan to the borrower had come to be a bad debt.

200. That is not the same thing as saying that the risk prediction made at the time that the loan was taken out was wrong. As I have noted, when risk is being used predictively it is often addressed through use of a reference class. The class remains central throughout the process. Professor Perry makes the point in his 1995 essay, but makes it particularly clearly in a later essay (Perry, “Torts, Rights, and Risk” in Oberdiek (Ed), “Philosophical Foundations of Tort Law” (Oxford University Press 2014)): Strictly speaking, a probability, understood as a relative frequency, is a property of specified reference classes and not a property of the individuals who happen to fall into those classes. Any given individual will fall into an indefinitely large number of reference classes, where the relative frequency of harm will be, for each one, different.

201. In assessing whether the prediction of risk was accurate, one does so in respect of the class as a whole. If 2% of loans across a book of 50 loans are predicted to default one would consider it unusual for any particular loan to be the defaulted obligation. But the prediction would still be accurate if the other 49 did not default. Using risk predictively, when a loan defaults it does not show that the credit risk prediction was necessarily wrong. Nor has the that risk necessarily changed. Certainly, that may be the case. As Professor Perry notes, in his explanation of epistemic risk in his 1995 essay, whenever we talk about relative frequency probability (and, in turn, risk) we are really talking about an estimate of the relative frequency and that estimate can improve with more data. But even where the estimate is right, on a 2% risk of default one in 50 borrowers will not repay. Pointing to that one in 50 who does not to prove the risk prediction was inaccurate when made would wrongly ignore all the other loans to which that prediction equally applied.

202. One sees the same points in Cargill . There was no uncertainty at the point that default interest started to be charged as to whether default was likely or unlikely to happen in respect of the payment in question; it had happened. There remained uncertainty around default in the sense that there were multiple repayments due under the APSAs, so at the time of the initial defaults it was uncertain whether the sums due later in time would also be the subject of default. The credit risk to which Bryan J was referring in this section of his judgment did not apply to them, however: the default interest rate in Cargill , just like in Lordsvale , only applied to the overdue payments. Of course, one would expect the first payment default to affect the (predictive) credit risk of Uttam in respect of all repayments, whether in default or not. It was never suggested by Bryan J that there was any logical incoherence in treating payments in default differently from other payments, however. Had he been using risk predictively in observing that “ a person who has defaulted is, inevitably, a greater credit risk ”, that distinction could not logically have been sustained.

203. That is in contrast to the way that Bryan J treated the term “credit risk” at paragraph [55] of Cargill . There he was considering how the market factors in the Indian steel industry at the time the APSAs were entered into might affect Uttam’s probability of later default. His conclusion that “ companies like Uttam were a greater credit risk and their cost of finance increased ” was forward looking and based on inductive reasoning. His description of “ companies like Uttam ” is the description of a reference class; it was that class that represented a higher risk. Because there was a higher probability (but still not a certainty) of default, that merited a higher interest rate to reflect the increased probability / risk for all companies in that reference class, hence the use of “ their cost of financing ”, not simply Uttam’s cost of financing. As Teare J found, it was that risk which subsequently matured into the (or at least a) cause of default in the particular case of Uttam, but even had that not been the case those market conditions would still have been a risk and would still have merited a higher interest charge.

204. The difficulty I had, and confess still have, in applying the approach adopted by Bryan J and Colman J to the facts of this case is that it only seems to me to work in the context of a known payment default. Put simply, the legitimacy of using “credit risk” descriptively depends on the description being accurate. As I have noted, it is a common feature of Cargill and Lordsvale , and for that matter Ahuja , that the higher interest rates were triggered by, and only by, payment default and applied to the defaulted sum. I accept that it does necessarily follow that if the debtor has failed to repay a debt on time that does show they are not good for that debt. Indeed, I would go further and accept that there must have been a risk, that is a predictive credit risk, that they would so default at some time between the inception of the loan and the default occurring. That seems, to me, to be Professor Turton’s point. As a matter of practice it is true that lenders charge more to borrowers they consider to have a higher credit risk, as the evidence of Mr Theophanous and Mr Griffiths in this case demonstrated. Finally, I do not need hindsight to establish any of this; where the default rate only applies to payment defaults it follows that the only context in which that higher interest rate falls to be considered as a penalty will be where there was non-payment. I know that simply from the structure of the clauses in Lordsvale , Cargill and Ahuja .

205. Of course, that logic says nothing about the precise scale of the risk. Both low probability and high probability risks can result in a loss, it is simply that the latter do so more frequently than the former. That is the essence of relative frequency probability. Looking backwards, from the point of loss, can obscure that important fact. It also says nothing about which, of several credit risks, caused the default. For reasons I go on to address, that is significant in this case.

206. What is particularly important at this stage of the analysis, however, is that whereas in Lordsvale , Cargill and Ahuja default necessarily did mean that the borrower was not good for their debt, here, at least as regards the Credit Risk Interest, that is not the case. The difficulty can be illustrated by returning to an example I have touched on from the Facility Letter.

207. It is an event of default under clause 12.2(f) if an unappealable judgment against CEK for a sum of not less than £20,000 is not satisfied within three Business Days. On the fourth business day after judgment, therefore, the Default Rate would apply to the outstanding amount of the Loan pursuant to clause 6.6(i). At that point, however, there has been no payment default in respect of the Loan. And there may never be such a default – CEK might repay the Loan in full on the Repayment Date. So unlike Bryan J, I cannot point to a non-payment to show that CEK has defaulted on the Loan, nor can I do so to show that there must have been a credit risk in the first place that it would do so. Less still can I say that the rendering of the £20,000 judgment was the (or even a) risk that matured into a cause of an as yet non-existent payment default on the Loan. Doubtless there were credit risks that applied to CEK in respect of the Loan, and the rendering of such a judgment might well have been one of them, but I cannot use payment default on the Loan to prove that if no such payment default has happened. I have to ascertain the risk in the normal, inductive, forward looking way.

208. This is not simply a philosophical diversion: maintaining conceptual clarity between the different interests that I have set out above seems, at least to me, to be highly desirable when it comes to applying the legal test. As Makdessi makes clear, (i) I must carry out the analysis at the point of formation of the agreement, when it is not known which primary obligation or obligations will be breached; (ii) where the same secondary obligation protects diverse primary obligations representing different legitimate interests in the same way that remains an indicia of penalty (a point also made in Vivienne Westwood ); and (iii) if by reference to any primary obligation the provision is a penalty, it is unenforceable in its entirety.

209. To say that there would be a self-evident, inevitable link between payment default in respect of the Loan and the descriptive credit risk of CEK in respect of the Loan therefore seems, to me, to kick the intellectual can down the road in this case. As I have said, I accept the proposition, that if someone has defaulted under a loan that shows that there must have been a credit risk associated with them in respect of that obligation. I also accept that the increased likelihood of default may merit charging a higher, possibly a much higher, rate of interest. That does not answer the question of whether a much smaller judgment debt due to a third party under a different agreement which has not (at the time the Facility Letter was entered into, which is the relevant time for assessment) and may never cause a default under the Loan merits the same treatment.

210. In applying the Makdessi analysis I find it clearer to treat the Repayment Interest, which as the Court of Appeal notes is obviously a strong legitimate interest, separately to what I have described as the Credit Risk Interest, which includes what are on their face (but as I address in due course, not in substance in the context of this structure) lesser defaults on such things as obligations to third parties. The two sets of interests are essentially different in nature, and Makdessi and Vivienne Westwood require that to be addressed. For reasons I will go on to consider, while the Repayment Interest has always been quite straightforward, as it was for Bryan J in Cargill , the Credit Risk Interest is not. Bryan J was not addressing, because in this part of his judgment he did not need to address, predictive credit risk. It is the robustness or otherwise of that predictive process that makes the Credit Risk Interest complex here. What is said in Cargill (and, by extension, Lordsvale and Ahuja ) does not deal with that process and so does not assist in resolving that complexity.

211. This leads to my second reservation. If one attempts to use Bryan J’s point outside the context in which it is made, that is if one assumes there is a link between past payment default and credit risk more generally, one overlooks critical aspects of the causal inquiry linking the two.

212. As I have noted, the link between default and descriptive credit risk made by Bryan J is straightforward: a person who has defaulted on a debt is, by definition, someone who did not pay that debt when it was due and so, again by definition, has bad credit in respect of it. In that sense the link is inevitable: the different propositions essentially describe the same thing, and where one is describing the same thing in different ways there is no need for some causal inquiry to link the different iterations. The same would equally be true here: when, on the Repayment Date, CEK defaulted and failed to repay the sums due under the Facility Letter it represented a bad debt in relation to that payment obligation, and in general terms we could describe that as representing a credit risk as regards that obligation.

213. Some, but not all, aspects of the Credit Risk Interest would also involve a payment default, albeit on other debts. Most obviously, the example I have referred to of clause 12.2(f) involves an event of default on the Loan if CEK had not paid an unappealable judgment within three business days. The difficulty in translating across Bryan J’s comment to these examples of payment default is that I do not accept the factual proposition that the link between payment default on other debts and future payment default on the Loan, which is fundamental to using credit risk in its predictive sense, is “ inevitable ” in this context, at least to the extent that term is taken to mean that the association will arise in all cases. Neither did Bryan J. As I have noted, he did not use his finding on the earlier defaulted payments to justify the higher interest rate on later payments, even though both obligations arose under the same or linked agreements. Nor, as I have addressed, did Colman J in Lordsvale. On the contrary, he only saw the increased rate as being appropriate on the defaulted sum while it was in default.

214. Indeed, far from the link being inevitable, it seems to me that were I to try to apply what Bryan J said outside of its specific, descriptive context I would risk falling prey to two, somewhat linked, errors of reasoning.

215. The first is the concept of a confounding factor. I accept that confounding is itself a vexed topic, on which experts often disagree, but the general principle is, I think, uncontroversial and indeed obvious. It is neatly summarised by Pearl, Glymour and Jewell (“Causal Inference in Statistics: A Primer” (Wiley, 2016)): As you have undoubtedly heard many times in statistics classes, “correlation is not causation”. A mere association between two variables does not necessarily or even usually mean that one of those variables causes the other. (The famous example of this property is that an increase in ice cream sales is correlated with an increase in violent crime – not because ice cream causes crime, but because ice cream sales and violent crime are more common in hot weather.)

216. On the facts found by Teare J and Bryan J there appears to have been a similar confounding factor in Cargill . I have already addressed Bryan J’s observations at paragraph [55] of his judgment: in 2015, when the APSAs were entered into, it was known that “ the Indian steel industry generally was experiencing difficulties ” because “ the market was in decline at the relevant time ” such that “ companies like Uttam were a greater credit risk and their cost of finance increased. ”. As I have observed, in that part of his judgment Bryan J was using credit risk predictively and I respectfully agree with his approach of identifying relevant confounding factors that might impinge on the causal analysis.

217. The second pitfall in reasoning is the availability heuristic: because we can readily call to mind examples where past default is caused by something that will equally cause future default, we assume that this is always the case. But it is equally possible to think of cases where past default will tell us nothing about future default: the payer considered in good faith that they had a valid reason not to pay, the failure to pay was down to a cyber-attack at the payer’s bank, or the payer was suddenly incapacitated or distracted by an unexpected and traumatic event, such as a death in the family.

218. What is critical, then, is to identify the causal factor and ask what the probability is of it applying going forward. Typically when one is using risk to predict future default, as is the case with the Credit Risk Interest, it is not the past default that causes the future default. To the extent that the two are linked at all, it is more likely to be by reference to the factors that led to the past default. The distinction is significant, as can be illustrated with an example. Assume that debtors A and B owe two separate debts to creditor C, with a repayment instalment of £10,000 due on each of the debts on the same day. On the repayment date debtor A pays £9,000 and debtor B pays nothing. If we limit our analysis to saying that past default indicates future default, the debtor B non-payment might seem more significant, given that the magnitude of the default is greater. To stop there, however, would have parity of reasoning with governments banning the sale of ice cream in order to reduce violent crime, to return to the example of Pearl et al. We need to know what caused the non-payment in each case. If the non-payment by B is due to a dispute over whether any sums were due in respect of that repayment instalment or when while the shortfall from A is simply down to the debtor running out of money the complexion changes significantly. Now, the non-payment by B may tell us little or nothing about future credit risk, whereas the non-payment by A tells us a great deal despite its smaller magnitude: it is the sound of the falling stone that goes on to start the avalanche. The proper causal analysis is critical.

219. Such issues arose here even in the context of the Repayment Obligation. I ultimately found that CEK did default on the Loan, but what did that default tell me about the credit risk of CEK? At the time of the trial it was alleged that the Facility Letter and the supporting security were consumer contracts that were, by statute, unenforceable against the Claimants and that Mrs Houssein had, in any event, been induced to enter into the suite of finance agreements by undue influence exercised over her by Mr Houssein. I rejected those claims, but there is no suggestion that they were advanced in bad faith; the Claimants genuinely believed they were not obliged to pay anything. In such circumstances, past non-payment is not necessarily a good predictor of future non-payment. Likewise, disruption was caused by the death of Mr Houssein during the term of the Loan and the delays in obtaining probate over his estate. That, too, could result in a default that would say nothing about future creditworthiness. By contrast, Bryan J in Cargill was dealing with a debtor who had confessed cashflow issues that had been predictable from the inception of the APSAs. As Bryan J recognised when he was using credit risk in its predictive sense, such issues would compromise Uttam’s ability to pay any of its obligations.

220. Of course, the Credit Risk Interest looks well beyond the Loan itself: to return to my example, it can be triggered by any unpaid judgment debt in excess of £20,000. Showing what a default on those debts means for the Loan requires a fact specific analysis. It would include all of the factors that I have listed above. There may be other reasons that were specific to the particular contracts or obligations in issue. Certainly, I do not see how credit risk in respect of the Loan, used predictively, can be said to be “inevitably” increased by non-payment on a different obligation.

221. That approach of focussing on causal factors in assessing predictive risk is, it seems to me supported by the expert evidence in this case. Specifically, Mr Griffiths addressed how a lender would react to this being a third bridging loan for the Claimants, which I understood would typically be considered a risk factor: Q. Well, it’s right, isn’t it, that if a borrower is coming to a bridging lender for the third time, that borrower clearly is in difficulties in either exiting the original bridging loans or obtaining mainstream finance? A. Certainly something had happened. Whether that borrower through force – maybe there were adverse circumstances, maybe they had been ill-advised, or maybe there was no will to refinance. That’s common enough. So I think it is for the underwriters of the bridging lender to ask the questions why and to satisfy themselves that they’re dealing with decent people with a good story and a credible exit route.

222. Mr Griffiths was talking about a risk factor different to payment default, but nothing in his answer suggested to me that there would be an inevitable link between default on other obligations and likely default on the loan being considered. It seemed to me that he was speaking more generally.

223. I recognise that Mr Kyriacou was more cautious about how relevant such factors would be: …listen, from a broker’s perspective there is always an explanation as to why someone needs a rebridge. I could have someone come to me with the third and fourth bridge. As rare as it is, there will always be a reason for it. There’s always a reason. So from the lender’s perspective and even from a broker’s perspective it’s kind of – you’ve got to sometimes read between the lines here and try and ascertain exactly what’s going on and what is the likelihood of this deal concluding and whether – who is likely to do this deal. But there is always a reason regardless of who you speak to.

224. I took that to mean he was wary, even sceptical about the causal narratives advanced in some cases. I did not take him to be saying that a causal analysis was irrelevant.

225. Again, Makdessi makes it critical to carry out the causal analysis at the right point in time, which is the point when the agreement was entered into, not the time of breach and certainly not the time of trial. At the date the Facility Letter was agreed there were always potential reasons why payment default even on the Loan itself would not be a good or even any predictor of further default: i) The Housseins could have a good faith belief that they were dealing as consumers and, in turn, that they were entitled to the protections afforded to consumers. Had they been correct they would have had no obligation to repay, such that there would have been no default at all. Their default could therefore be a consequence of such a mistaken belief. All that was reasonably foreseeable at the time of contracting. ii) Likewise, there is an obvious risk in cases where one spouse operates a business and seeks a charge over the family home to support that business that the charge might be secured by undue influence, rendering the agreement unenforceable against the other spouse. A whole body of jurisprudence has developed on the point. LCL was sufficiently alive to it at the time the Facility Letter was negotiated that it required Mrs Houssein to obtain independent legal advice and there is nothing to suggest that their doing so was unique to this case. On the contrary, the caselaw shows that it is standard practice across the lending industry. At the point the finance agreements were entered into, all parties could have foreseen (and to the extent it is considered relevant, did foresee) that there could be a good faith defence to the claim based on undue influence that would break the link between past default and further default. iii) It was well understood that Mr Houssein was in declining health. He was particularly vulnerable in the context of the Covid-19 pandemic. Those risks to his health, and the disruption that would unavoidably arise should he succumb to them, were obvious to everyone involved at the time.

226. And again, the position becomes even more acute when one looks at other debts of the borrower for the reasons I addressed above.

227. In my view, at the point when the Facility Letter was executed any third-party onlooker considering this case objectively would see that there could be instances of non-payment, including non-payment under the Loan, that would tell you little or nothing about the risk of further default. There were, of course, other potential causes of non-payment that would. It is important to sift the wheat from the chaff.

228. This lengthy exegesis of causation may seem obvious, and I confess that I had assumed that it was when I prepared my First Judgment. As the Court of Appeal Judgment highlighted, that led to a lack of clarity, an error I would not want to repeat. In my view this case differs from Cargill in that Bryan J was using credit risk, in that part of his judgment, descriptively and not predictively, such that no causal analysis needed to be carried out to make the “inevitable” link that he did. If one is to use credit risk predictively, one must carry out such an analysis. While I accept that past default will correlate to future default, because causal factors like cashflow will apply to both, I do not consider that the correlation will be “inevitable”, and nor do I consider that the very different way in which “credit risk” was being used in Cargill drives me to that conclusion.

229. My third reservation about applying Cargill is a more straightforward one and goes to the magnitude of risk. I have already noted the link between risk and probability. Most, if not all, theories of probability measure it between 0 and 1, with 0 meaning impossibility and 1 meaning certainty. As I have indicated, if one is using credit risk predictively, which must be the case for the Credit Risk Interest, that involves an inductive approach: what do those other breaches tell us about likely payment default on the Loan? Where, between 0 and 1, do we think we land?

230. Answering that question involves revisiting the point made above from Professor Perry’s 2014 essay: probability and risk, in a relative frequency sense, are properties of the reference class, rather than the individual who happens to fall into it; and individuals will fall within multiple reference classes and so have multiple different probabilities associated with them.

231. One sees the issue here. Assume parties A, B and C all have loans with LCL on terms identical to the Facility Letter save that repayment is in instalments. Party A has defaulted on an instalment. Party B has not but is the subject of an unappealable judgment for over £20,000 in respect of other (non-LCL) borrowing. Party C has also made all payments to date but has received a letter of claim in the same amount. If the reference class is “defaulters” then the relative frequency probability for A, B and C would be the same – one looks generically at how often past default of any kind is followed by a subsequent payment default and that is the relative frequency. If the reference classes are “payment defaulters” and “non-payment defaulters” A now falls into a separate reference class to B and C and it seems likely that the probabilities will be different for the two classes. The question is ultimately a statistical one and no such statistics were before me, but as Professor Perry notes in his 1995 essay that is often the case, and does not preclude an inductive approach. Intuitively, one would expect past payment default (used as a proxy for the causal factors that underpinned it) to be the better predictor of future payment default. One would further expect that someone who fails to pay other debts would be more likely to default on payment of this one than someone who is simply alleged not to have paid their other debts, so in fact we would expect B and C to be in three reference classes: defaulters (which they share with A), non-payment defaulters (for B and C), judgment debtors on third party debts (for B alone) and alleged but unproven defaulters on third party debts (for C). And we would expect the relative frequency probabilities of future default to be different for each of those different classes.

232. There is an important gloss to the reference class that is addressed by Professor Oberdiek (“Imposing Risk: A Normative Framework” (Oxford University Press 2017)). It might be assumed from what I have just said that the narrower reference class will always be the more informative. That is not always the case because, as Professor Oberdiek observes: “ wider reference classes are sometimes preferable to narrower ones because wider reference classes can capture causally relevant factors that are excluded from narrower classes. ” I will return to this when I come to address the interest cover ratio and the prospects of refinancing in this case.

233. Again, the existence of different reference classes distinguishes this case from Cargill or Lordsvale , even had those cases been seeking to use risk predictively. One can accept that a party that defaults on one instalment under a loan is more likely to default in respect of a subsequent instalment of the same loan. As I say, the question is really a statistical one but even in the absence of statistical evidence it makes sense intuitively, and if a statistical association were shown to exist we would not struggle to develop a causal narrative that supported it. The party may have defaulted because they have no money or because they regarded the loan as invalid or because they felt they had a valid defence, for example a condition precedent to repayment that was unsatisfied. All of those causal factors would apply equally to all instalments.

234. One might be more cautious about saying the same thing about the Party B scenario I describe above. If the default on the other facility were due to credit issues then that likely would apply equally to the loan we are considering, but if it were down to an alleged invalidity of the other loan there would be no reason to assume the same would be asserted in this case. We would want to know more about the causal narrative at the very least but we would expect the probability to be lower, that is we would expect a weaker correlation. The Party C scenario is even further removed. What does the receipt of a letter of claim tell us about the borrower’s ability to pay?

235. That was the question I found myself unable satisfactorily to answer in my First Judgment. The structure of the Facility Letter, under which the Default Rate is triggered by very different primary obligations, means that CEK can fall into something resembling the A, B and C reference classes simultaneously. Breach of some of the obligations might say much more about the likelihood of further default than would the breach of others. In particular, it seemed to me that factors relating to third party liabilities – what I have identified here as the Credit Risk Interest – told me relatively little about the risk of future default on the repayment obligation under the Loan. The evidence suggested that such defaults merited an increase in the monthly interest rate of around 0.3% applied to the Standard Rate by Mr Theophanous to cover the Claimants’ increased risk, not the 3% of the Default Rate. Mr Griffiths thought that even that was too much. Accordingly, at the very least, the proposition that third party default represented such a significant credit risk that a 3% increase was not extortionate lacked face validity based on the evidence I had at the time. Cargill , which related only to payment default, did not help to resolve that issue.

236. As I go on to address, my view on that point has changed as a result of the new evidence at this hearing and what that says about the evidence before me at trial. I also benefitted greatly from the insight and pellucid clarity of Mr Wheeler’s submissions. In saying that I take nothing away from Mr Cowen, who is a rigorous and thoughtful advocate, or Mr Blakeney, who I recognise marshalled the factual and legal points admirably. As will already be apparent, on a number of points I have accepted the case they advanced. I also mean no criticism of Mr Whitfield, who acted for LCL at the first hearing. It is simply that Mr Wheeler’s crystalline submissions distilled the evidence from both hearings and tied it, rigorously and remorselessly, to the legal tests. Combined with the new evidence, they changed my view of the penalty aspects of this case for reasons I shall go on to address. The analysis is a factual one, however; it does not depend on an application of Cargill .

237. My final reservation about trying to apply Cargill touches on a point I have just made: Bryan J had the benefit of evidence that was not before me. At paragraph [52] he explained: The evidence before me [from Mr Snelling] is that the compensation rate was fixed to reflect Cargill’s genuine assessment of Uttam’s creditworthiness especially in the event of default. Clearly in the event of default there is an increased risk that Uttam would be unwilling or unable to repay sums in future.

238. That, of course, was not this case at trial at all. As I have already addressed, Mr Theophanous’ evidence was that the Default Rate was set centrally, without reference to the creditworthiness of the particular risk or the individual borrower. The Default Rate applied to a range of defaults, not just payment default.

239. Bryan J continued at paragraph [72]: Most importantly of all, in the present case I have had the benefit of the evidence of Mr Snelling setting out the basis and rationale for the terms of Clause 8.12, which I am satisfied justifies the rate set, and his evidence of market rates which are comparable. The same is true having regard to the rates at which Uttam borrowed prior to default when comparing with a post-default situation.

240. Bryan J emphasised the importance of such evidence at paragraph [70], when considering the distinction between the earlier decisions of Davenham Trust Plc v Homegold [2009] 4 WLUK 368 and White v Davenham Trust Ltd [2010] EWHC 2748 (Ch) .

241. As I noted in my First Judgment, that explanation is precisely what I did not have. I knew that the Standard Rate was increased to reflect the Houssein’s prior defaults; I knew that the Default Rate was set centrally and applied to all borrowers; I did not have, to use the words of Bryan J, “ the basis and rationale ” for that decision. On one level I accept that I still do not have it now. What I do have is the evidence of Mr Griffiths around how lenders treat credit risk and, critically, more information about the portfolio of properties used to secure the Loan and the issues around refinancing them. That is still not the evidence that Bryan J had in Cargill , but for reasons I go on to address in my view it allows me to understand how a reasonable lender in LCL’s position would have considered the Credit Risk Interest.

242. In summary, I accept the proposition that past payment default is likely to correlate with future payment default on the same or related loans and so be some evidence of credit risk in its predictive sense. That was not the point being made in Cargill , at least in that the default rate there applied only to those repayment instalments in default, not to all outstanding sums. It is irrelevant here because the repayment was structured as a single bullet repayment, so by definition there could not be default on an instalment.

243. I also accept the proposition in Cargill that default on a payment obligation proves that the debtor’s credit is impaired, and impaired credit can properly result in a higher rate of interest. In my view that is limited to credit risk in its definitional sense and properly falls to be considered in connection with the Repayment Interest.

244. I do not regard that as the most important question, however. Applying Makdessi , the whole clause becomes unenforceable if the Default Rate responds to the breach of any primary obligation in a way that is extortionate. Once Bryan J had dealt with the repayment interest in Cargill he had dealt with everything. I am not so fortunate. The Default Rate here responds to a variety of defaults and so a variety of interests; if it is extortionate in respect of any of them, the clause fails in respect of all of them. Specifically, in respect of the Credit Risk Interest the question is the strength of the association between defaults in respect of other obligations and likely default in respect of the Loan. Cargill , in my view, simply does not address that situation because Bryan did not need to do so.

245. Ahuja was a complicated case giving rise to a number of issues. Happily, many of them are not relevant for these purposes. The penalty issue centred on a loan agreement for £800,000 provided as part of a suite of agreements in connection with the purchase of a shopping centre. Unlike Cargill , but like this case, the loan was secured and supported by personal guarantees. The relevant provisions were summarised by HHJ Hodge QC at paragraph [122]: Under its terms, Ahuja undertook to repay the advance of £800,000 on the redemption date of 21 December 2018. The loan agreement recognises two types of interest payments: (1) under clause 4.1.2, the four contractually-agreed ‘Interest’ payments of 3% per month (£24,000 each) during the term of the advance; and (2) under clause 4.1.1, interest at the rate of 12% per month payable on “the amount that may remain outstanding from the Redemption Date”.

246. Ahuja therefore involved a secured loan with personal guarantees, which makes it more like this case, but the increased interest rate was still only tied to payment default. As with Cargill, therefore, HHJ Hodge QC’s comments as to credit risk must be read in that context. For very similar reasons to those I have addressed at length in respect of Cargill I therefore do not consider that the link made between payment default and credit risk at paragraph [143] of Ahuja helps with answering the question that is central here: was the Default Rate extortionate by reference to the legitimate interests other than the Repayment Interest?

247. Finally I return to Lordsvale . The case involved two oil import facility agreements totalling US$230 million. The facility advances fell due for repayment but the borrower defaulted. The principal claimed was a little over $5.6 million. Again, it merits quoting the default interest provision: Default Interest and Indemnity. (A) In the event of default by the borrower in the payment on the due date therefor of any sum expressed to fall due under this agreement (or on demand in respect of any sum expressed to fall due under this paragraph (A)), the borrower shall pay interest on the participation of each bank in each such unpaid sum from (and including) the date of such default to (but excluding) the date on which such sum is paid in full (as well after as before judgment) at a rate per annum equal to the aggregate of (i) 1 per cent., (ii) the margin and (iii) the cost as determined by such bank of obtaining dollar deposits (from whatever source or sources it shall think fit) to fund its participation in the unpaid sum for such period or periods as the agent may from time to time determine.

248. Before addressing the provision as it was drafted, Colman J posited a counter-factual – what would the position be “ if a loan agreement were to provide that upon the happening of a default in payment by the borrower the rate of interest were to be increased with retrospective effect ” (page 763B)? He noted at page 763C that one consequence would be that “ the amount of interest payable would be unrelated to the extent of default. ” He concluded at page 763D-E, in respect of his counterfactual: “ Such a provision would therefore have all the indicia of a penalty. ” I have addressed elsewhere why I consider that it is necessary to consider each of the legitimate interests identified and for the Default Rate not to be extortionate in respect of any of them. I did not refer to this discussion in that context. While, in my view, it supports the conclusion I have reached it was not referred to by the Supreme Court in Makdessi even though other aspects of Lordsvale were. It therefore seems safer to me to proceed from Makdessi itself. What it does show is that in his discussion on credit risk Colman J was not referring to a case where “ the amount of interest which would be payable would be unrelated to the extent of default ”. By contrast, such an apparent discrepancy, between the Credit Risk Interest and the Default Rate, was something that troubled me in my First Judgment.

249. Colman J then turned to the situation where the rate of interest was to increase prospectively from the time of default. Then, he considered (at page 763E) “ a rather different picture emerges. ” In particular, “ the borrower in default is not the same credit risk as the prospective borrower with whom the loan agreement was first negotiated. ” This change in credit risk would, in his view, provide a proper basis for a “ small rateable increase ” in the interest rate (page 763F-G).

250. As I have noted, his references to credit risk are focussed on a situation where there has been a payment default and the increase in interest relates to and only to that default. For the reasons I have given, I do not find that helpful here simply because the facts of this case are quite different.

251. I am conscious that I was able to articulate my reasoning in respect of the other four interests in five paragraphs and that this has taken significantly longer. That is because it is my view that there is a very real concern about “double counting” credit risk on the facts of this case. If one treats payment default on the Loan as going both to the Repayment Interest and the Credit Risk Interest then one conflates the backward-looking questions of default (put another way, descriptive credit risk) and cause with the forward-looking question of risk (that is, predictive credit risk). That is entirely fair in circumstances where the only trigger to default interest is payment default, in particular where that default has already happened; it seems to me that it would not be correct here, however, when things that might never lead to a payment default would still trigger the Default Rate. Each primary obligation that triggers the Default Rate must stand or fall on its own merits; it cannot piggyback on a potential payment default that, at the time of assessment (that is, the date of entry into the agreement) had not happened and might never happen. Any other approach would, in my view, not be a proper application of Makdessi and would unjustifiably prejudice the Claimants.

252. The Credit Risk Interest accordingly is a legitimate interest of LCL and each of the primary obligations I have identified in respect of it seem, to me, to address some aspect of the predictive credit risk associated with the Loan. But under the terms of the Facility Letter it is structurally separate to, and so falls to be assessed separately from, the Repayment Interest. That assessment is properly something to be addressed in considering the third Vivienne Westwood question. Was the Default Rate extortionate by reference to the primary obligations that triggered it? What was the Default Rate and what was its relationship to reasonable default rates in the market?

253. There was a disagreement between the parties both as to what the Default Rate was, at least in the first year of the Loan, and what the ratio was between 4% compounded monthly, the Default Rate, and 3% (compounded monthly), which the experts had agreed was a reasonable default rate in the market at the time.

254. Taking first the issue of what the Default Rate was, this was a consequence of the way that the Facility Letter dealt with interest. The Loan amount was £1.881 million, which included the full annual interest at 12% totalling £225,720. Significantly, the interest element was capitalised on day one but, under clause 6.1 of the Facility Letter, interest accrued on a daily basis. There is an element of tension between that provision and clause 6.3, which provided that the full amount of interest was to be “ due and payable ” on the Drawdown Date. That may be thought to suggest that the concepts of what is due and what is payable are distinct, meaning that all interest was both legally due and payable as at the Drawdown Date. The parties agreed, however, that the proper interpretation of the two provisions read together was that interest had to be funded upfront but that LCL’s right to retain that interest depended on when the Loan was repaid; if it was repaid before the Repayment Date, interest would cease to accrue from actual repayment, reducing CEK’s liability. I have already addressed the rules on contractual interpretation. On a straightforward application of those rules I agree that is the proper reading of those two provisions. Parties do, at times, use the term “due and payable” as a composite term meaning simply payable, and any other reading would make the express provision on accrual of interest meaningless.

255. That result is reflected in the terms of the order that followed my First Judgment, which specified the capital amount due from CEK as at the Repayment Date as being £629,991.79. That figure was, as one might expect, calculated and agreed between the parties, but it can only be correct if the £1.2 million part payment in May 2021 stopped interest running on that part of the Loan. The parties’ conduct is not relevant to the interpretation of a contract, of course, but where an issue has been resolved by a court order the matter is res judicata and cannot be reopened as between those parties. Both parties accepted that was the case here, even were the point one that might otherwise have been in dispute.

256. Against that backdrop one comes to consider the Claimants’ rolled up interest argument. In his Report, Mr Griffiths noted that the Default Rate was applied to the whole of £1,881 million, even though, at the date of the alleged default, a significant portion of that that amount had not accrued and so was not part of the amount properly owed to LCL. The effect of this was to inflate the Default Rate, because 4% charged on £1.881 million equated to 5% charged on the sum due from CEK on 7 September 2021 when a default was declared.

257. Mr Cowen submitted, and I accept, that Mr Griffiths was not challenged on that calculation at the trial. Neither expert was recalled for this hearing. As such, his evidence as to the calculation stood unchallenged and I should accept it.

258. Mr Wheeler submitted that this was not what had happened, and referred me to the redemption statement issued by LCL to show how default interest was calculated. I had a number of reservations about this. First, I accept Mr Cowen’s point that this was never put to Mr Griffiths, and if his calculation was to be challenged on this basis he should have had the opportunity to respond to that challenge. Secondly, looking at the redemption statement it seemed to me that it showed that LCL was indeed seeking to charge default interest on the full sum of £1.881 million, which was rather Mr Griffiths’ point. Finally, and critically, what LCL actually did was irrelevant to the assessment of penalty, which as I have repeatedly noted is asked at the time the agreement is entered into. The question is what it had a right to do, and that, too, is decided at the time of formation and without reference to the parties’ subsequent actions (Chitty paragraph 16-061, referencing James Miller & Partners v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603).

259. This fed into Mr Wheeler’s second, and I felt much stronger, point: if LCL had charged default interest on the full amount and not the amount due then it had done so in error. Specifically, he conceded that the correct sum on which Default Rate was to accrue under the Facility Letter was capital plus interest accrued at the date of any default. I accept that.

260. The effect of that concession, it seems to me, is to render the Claimants’ rolled up interest point unarguable. It remains the case that Mr Griffiths’ calculation is unchallenged; I therefore accept that if the Default Rate of 4% compounded monthly were charged on the full £1.881 million from 7 September 2020 it would be the equivalent of charging 5% on the actual sum due over the first year of the Loan. That is wholly academic, however, because LCL had no right to do that; under the terms of the Facility Letter it could only charge the Default Rate on the accrued interest. The question of whether the Default Rate is extortionate turns on what LCL had a right to charge – 4% – not what it might, in fact, have charged.

261. The second maths problem for the closing day of this hearing concerned the abstract operation of powers. Mathematics is an area calling for particular precision, and it is easiest and fairest simply to quote Mr Cowen’s point: Then [Mr Wheeler] says this, “Yes, it is the point about compounding, but compounding for how long? One always talks about the power of compound interest when talking about investments. The longer you invest in a compound way, the more growth you get…” Well, I hope you will forgive me by saying “I do not know about my learned friend’s maths”, but he is mixing up two different things there. 4% compounded is always 41% more than 3% compounded – always, because it is a percentage. Whether it is for a year or whether it is for 10,000 years, those two percentages are a percentage figure apart from each other. If you were talking about investing money, if I invest £100 at 3% compounded, and I invest £100 at 4% compounded, then, yes, the gap between the two gets bigger the longer you leave that investment. That is the effect of compounding. However, to say, as he says, that 3%, when you compound it, and 4%, when you compound that, if you compound for a sufficient period of time at some stage it will be 41% difference, no, it is always 41% difference, always. He says, “The more time goes on, the greater the difference would be.” No, forgive me, that is just wrong.

262. Mr Wheeler rejected this. The ratio between 3% compounded monthly and 4% compounded monthly would, he submitted, turn on the number of instances of compounding.

263. I agree with Mr Wheeler. The point can be illustrated with the difference between the linear dimensions, area and volume of a square and a cube. Assume the linear dimensions of the square and the cube are 2cm. The area of the square is 4cm 2 ; the volume of the cube is 8cm 3 . Where the length of the sides increases to 3cm the area of a face is 9cm 2 and the volume of the cube is 27cm 3 . Increasing the power produces a non-linear increase in the output. The length difference in any dimension (power of 1) between the smaller and the larger cubes is 150%; the difference in their respective areas (power of 2) is 225%; and the difference in their respective volumes (power of 3) is 337.5%. The ratio of 2 1 and 3 1 is not the same as the ratio of 2 2 and 3 2 , and both are different to the ratio between 2 3 and 3 3 . I do not see why it would make any difference that the rates here were expressed as percentages; a percentage can readily be expressed as a decimal fraction (on the facts of this case, 0.03 and 0.04) in exactly the same way that my cubes could be expressed in terms of metres rather than centimetres (0.02 and 0.03) and I see no reason why such a fraction should behave any differently to an integer for these purposes.

264. It may be that the point goes nowhere. As I have noted, Mr Cowen accepted that if one applied the compound interest formula to a sum of money then Mr Wheeler had a point. In my view, Mr Wheeler had a point in any event, but since this is a practical rather than a theoretical exercise it may be that there is agreement on it. To the extent there is not, I accept LCL’s case; in my view the number of instances of compounding was critical to the scale of the difference between 3% and 4%. In the cold, hard language of money, if the Claimants had repaid soon after default, the difference between 3% and 4% would have been far less significant than it is now. Does the “initial presumption” from paragraph [35] of Makdessi apply?

265. It will be recalled that at paragraph [35] Lords Sumption and Neuberger stated that there was a “ strong initial presumption ” that the parties themselves were the best judges of what was legitimate provided that they were properly advised and of comparable bargaining power. A similar point was made by Lord Mance at paragraph [152]. Both judgments were referred to with apparent approval by Bryan J in Cargill at paragraph [74].

266. Mr Wheeler submitted that this was just such a case: Houssein Houssein had recognised in his evidence that he and his father were “ very experienced ”. I had accepted that in my First Judgment. They had the advice of experienced solicitors and also of a mortgage broker. Finally, it was always open to them to go elsewhere – LCL was not the only show in town. In the circumstances, he submitted, the “ strong initial presumption ” arose.

267. Mr Cowen urged me to reject that submission. He noted that the Housseins were under time pressure to refinance due to the impending expiry of the Bridge Loan. Moreover, while it might have been the case in principle that there were options Andreas Liondaris only put forward LCL, such that in truth it was the only show in town. Finally, by the time the Default Rate became apparent to them, which might have been as late as 20 July when the Bridge Loan expired, they really had nowhere else to turn. That time pressure, the anxiety that Houssein Houssein and Mr Houssein felt as a result and the connected lack of options undermined any suggestion of equality.

268. I accept Mr Wheeler’s points for six reasons: i) In my view the Claimants did have options throughout this process. Most obviously, the only loan that was expiring was the Bridge Loan. Almost one third of the total debt was with other lenders – a loan from Aldermore Bank at a rate of 5.23% p.a. due to expire in 2024 and a loan from Birmingham Midshires at a rate of 2.7% p.a. due to expire in 2026 (see my First Judgment paragraph [58], which in turn was taken from the original Particulars of Claim paragraphs 16(ii)-(iii)). As I noted at paragraph 228 of my First Judgment, in connection with my findings on undue influence, objectively the Claimants would have been better off not refinancing that part of the debt: they were trading longer term, cheaper finance for shorter term, pricier finance. Presumably they felt there were collateral benefits to doing so, however; certainly, nothing required them to take that step. Yet they were prepared to borrow from LCL on the terms proposed regardless of the deadline they faced. ii) While I accept that Andreas Liondaris only put forward LCL, I do not accept that this meant there were no other options. It simply meant that he did not explore them. He was, of course, the Housseins’ agent (see paragraph [180] of my First Judgment). It does not seem to me right that if the Housseins now feel there were failings in the service he offered to them (and I stress I make no finding on that) they can hold LCL responsible for them. iii) It was the Claimants’ own case that Mr Houssein and Houssein Houssein were “ very experienced ” in property matters. I accept, as I accepted in my First Judgment, that by this stage Mr Houssein’s health was sadly failing and that, inevitably, affected his ability to engage with this transaction. I also found, however, that the matter was largely being driven by Houssein Houssein. iv) Mr Wheeler was right to emphasise that the Claimants were advised by both a mortgage broker and by experienced conveyancing solicitors throughout this process. This also goes to Mr Cowen’s point on when the Default Rate was understood by the Claimants. It was the evidence of both experts that default rates are entirely typical in this market and that precise default rates vary from lender to lender. The Claimants were fully aware of that fact because the Bridge Loan itself had a default rate and that was one of their concerns. They and their advisors would have known there would be a default rate with LCL; if they had not understood what it was, and it was important to them, they could easily have asked. v) It would seem to me odd, and deeply undesirable, if the question of whether a term was a penalty turned on the conduct of the party arguing that it was. The Claimants asserted that the issues around timing with the refinancing of the Bridge Loan arose from the Covid-19 pandemic and the vulnerability of Mr and Mrs Houssein. It is, I think, a matter of public record that the first Covid lockdown was announced on 23 March 2020 and the Coronavirus Act 2020 was granted Royal Assent on 25 March, with lockdown measures coming into force the following day. It ought to go without saying that it was evident before then that the situation was serious. The Bridge Loan did not need to be refinanced until late July. The Claimants had four months to get their refinancing in place from that point. The pressure they ultimately faced was, in my view, far from inevitable in the circumstances. It was down to the decisions (and possibly indecision) of the Claimants. Both experts agreed that it was a situation of their own making. Even very experienced and properly advised parties make mistakes; that does not mean that the court should step in and relieve them from the consequences of those mistakes. vi) By contrast, any time pressure was nothing to do with LCL. They responded promptly, indeed very promptly, to the request for a proposal and there is nothing to suggest they delayed unreasonably, or indeed at all, in negotiating the Facility Letter. Mr Griffiths’ estimate was that a refinance could take five to seven weeks; this one took a little under six. LCL did not seek to exploit the Claimants’ need for urgency, for example by increasing the Standard Rate or the Default Rate. On the contrary, Mr Theophanous’ evidence, on which the Claimants rely, was that the Default Rate was set centrally and applied to all borrowers.

269. Obviously the Claimants have other arguments, which I will address, but what the Claimants’ position on this particular issue amounts to is saying that because they did not approach LCL in, for example, early June LCL loses the benefit of the “ strong initial presumption ” to which it would otherwise be entitled. It would be remarkable, and highly undesirable, if the question of whether the Default Rate was or was not a penalty turned, even in part, on when LCL was first approached. Was the Default Rate extortionate?

270. An immediate difficulty here arises with a mismatch between the way that the law approaches this question and the way that the expert evidence was presented at the trial. As I have set out, the law requires the identification of a primary obligation and the legitimate interest in its enforcement, followed by an assessment of whether, by reference to that interest, the provision in question is extortionate. As I have noted, Mr Cowen submitted, and I accept, that where there are multiple primary obligations subject to a provision like the Default Rate one must assess that provision by reference to each of the primary obligations, or at least by reference to the legitimate interests that underlie them since multiple primary obligations may involve the same interest, as is the case here. If, by reference to any one interest, the provision is extortionate it fails in relation to all of them.

271. By contrast, the experts presented the issue holistically, looking at what rates were typical in the market. In the case of Mr Kyriacou that was understandable, since he had not encountered dynamic default rates and so could only give evidence as to static rates. He did accept that a dynamic rate reflecting risk would be preferable.

272. Mr Griffiths had come across dynamic default rates, and I accept his evidence that such rates were offered for the reasons I have already given. He did not, however, expand on what those rates were or tie his obvious concerns about the operation of the Default Rate here to specific primary obligations in the Facility Letter.

273. Against that backdrop it seems to me that the proper way to address this question is to engage with the experts’ evidence in the terms it was given, which is essentially to ask whether a 4% rate would ever not be extortionate. If in some cases it would not be extortionate the question then turns to the strength of the interests I have identified, on which Mr Griffiths offered some insight at the trial but as to which the position became significantly clearer at this hearing.

274. Before addressing the specific interests, it is worth noting what seems to me a consequence of a focus on rates by both experts. The total cost of borrowing, whatever its shock value, does not contribute a great deal to determining whether the default rate is oppressive. The Loan was never intended to be a long-term financing option. The evidence at trial was that the Housseins were in a difficult position, in part due to their own credit position with historic difficulties with unsatisfied County Court judgments and seeking to re-re-bridge an existing re-bridging loan. Mr Kyriakou considered the latter point to be unusual and particularly significant. Mr Griffiths was less concerned by a loan being a re-bridge, noting that almost 39% of bridging loans are first re-bridges, but did not comment on the typicality or otherwise of re-re-bridging. The Housseins were also in difficulty due to the short timeframe they had to refinance which was made more acute by the disruption caused by the Covid-19 pandemic.

275. What they wanted was, in credit terms, a pause for breath, a short-term solution to allow them to take stock before moving forward. There was always likely to be an interest rate premium for that. The Loan was for a term of one year but part of it remains outstanding over five years later. The inefficiency of using a short term solution for the purposes of medium to long term financing is unsurprising; the same outcome would result from paying the minimum balance on a credit card.

276. One sees this on the figures. The Claimants make the point that the interest on the outstanding capital of fractionally under £630,000 amounts to around £3.8 million. That, obviously, is a very significant liability, but even at a rate of 3%, which both experts agreed was reasonable and in line with the rest of the market, the figure would be approaching £3.1 million. The output is simply a mathematical function of the inputs. If the inputs are reasonable, it is not clear to me how the output, just by operation of mathematics and the Claimants decision not to repay, becomes unreasonable. The experts focussed on the rate and it seems to me that I should do likewise.

277. In terms of whether a 4% rate was extortionate, Mr Kyriakou’s view was that it was not. He recognised during his cross-examination that it was high, and certainly above the range of typical rates that he had identified. You’ll see from my report that my general view was looking at the – the range of default rates in the market and given the typer of lender that we’re referring to here and the type of deals that they do, I will have seen this closer to 3%, so that was quite clear in there that I would have thought this would be more like a 3% flat default rate for a lender like this on a deal like this. It was thought – on the higher end than I would have thought but it’s not abnormal. It’s not way out there when you’re looking at all the default rates. But I do feel 3 is more in line.

278. On at least one level the rate was abnormal: LCL was the only lender of those identified by Mr Kyriacou who charged a default rate of more than 3%. That, of course, does not of itself show that the Default Rate was extortionate.

279. Mr Griffiths’ evidence requires a more forensic analysis. In saying that I mean no disrespect to him; his evidence was clear at every stage. He has, however, been involved at a number of stages and the focus at each was different.

280. The starting point comes before trial, in his expert report he prepared for the application before Falk J to which I have already referred. That earlier report, as Mr Wheeler noted, was then incorporated by reference into his evidence for trial. Mr Griffiths observed: 4.6 Although I am aware that some bridging lenders would specify rates of 3% or even 4% per month in their loan documentation with borrowers, the reality is that this type of rate is, generally, unsustainable and seldom enforced in practice because it is counter-productive in that it can prevent a borrower being able to obtain an orderly refinance and, therefore, repay a bridging loan. 4.7 In this case, the 4% per month default interest rate, when the effect of compounding is factored in, results in an actual interest rate of 60.1% p.a. 4.8 Where high rates are sometimes specified within loan documentation, it is my experience that they exist as a deterrent, to encourage borrowers not to default. It is also my experience that bridging lenders are reluctant to test the validity of such rates in court because they fear they will be viewed as penalty interest rates.

281. I pause simply to note, in connection with his last point, that since Makdessi there has been no difficulty with a rate being imposed as a deterrent. Mr Griffiths continued to observe that he would expect the default rate to be double the standard rate.

282. He returned to the issue in his expert report for trial. At paragraph 3.90 Mr Griffiths addressed the band of “commercially acceptable rates” and considered that “ 4% appears to be, at best, at the upper extremity of that band and is outside it (the actual rate initially applied also appears to have been 5%...) ”. Two points arise from this, it seems to me. The first is that, as Mr Wheeler submitted, something cannot simultaneously be at the upper extremity of a band and outside it. It is obvious that Mr Griffiths thought that 4% was at the limit of what was commercially acceptable; it is less clear whether he thought it went beyond that. By contrast, he plainly thought 5% was wholly unacceptable, but for the reasons I have given, if that figure were ever in play (and in my First Judgment I did not rely on it), Mr Wheeler’s concession at this hearing has rendered it irrelevant.

283. There followed the Joint Statement of Experts. Issue 2 was “ Whether the default interest rate charged was in line with the market and/or reasonable in the circumstances ”. The response was: “ It was agreed that in comparison with the market, and when comparing LCL with similar lenders, 3% per month would be more in line. ” Mr Griffiths repeated his point about the effective rate was 5% for the first 11 months.

284. By this stage, then, the consensus between the experts was that a 3% default rate would be “ more in line ” with the market. The Joint Statement did not go so far as to say that 4% was out of line with the market or unreasonable; it simply did not comment on it at all. Mr Griffiths obviously remained troubled by a 5% rate.

285. The issue arose again in Mr Griffiths’ cross-examination. Having described 4% as “ very high ” he observed that: “ Mr Kyriakou and I were really hovering around the 3%. ” He then returned to the 4%: For it to be four times the contractual rate to me is excessive. And of course the other point to make is that saying 4% a month is all well and good, but if you compound that it becomes 60% per annum. It’s a huge, huge penalty.

286. The test for penalty had not been put to Mr Griffiths at that stage and I did not and do not take him to be saying that the legal standard was met. On the contrary, in his Report he very fairly acknowledged that this was a matter for the court, not for him.

287. There was a further exchange about the range of default rates in the market, which was 2-3%. Mr Griffiths then addressed where higher rates were appropriate in his view: So, I mean, I don’t have a particular problem with high default rates, but they tend to apply in instances where there are second charge loans, the loan to value ratio is 80% or greater, or where – where the lender is taking a huge almost kind of equity risk. And under those circumstances I see no difficulty with high default rates, but in an instance like this where the application of the default rate will actually prevent the refinancing of the loan, it’s like a lender shooting itself in the foot.

288. The legal test for penalty was then put to him: Q. [I]t’s a high rate, I think we all accept that, but there’s nothing extravagant or unconscionable about it? A. Well, I find the 5% difficult. My feeling about that was that it might have been a mistake. And I say 5% and I know there’s an issue over that, but my – my – my approach to that is I can understand the argument that, yes, this is the default rate and it applies to the gross loan, but the view that I take is that most loans – most bridging loans will go into default at the end of the period, because during that period interest is covered and certainly some event can happen to put a loan into default, but it’s relatively rare, and so by the time the loan is coming up to term and is either not repaid or whatever and it then goes into default, then you’re lending on the gross loan and the default rate applies to the gross loan. But in a situation where 11 months of interest is sitting there unutilised, then to charge 4% on top of that 1% of unutilised interest to me makes it 5% for that 11-month period. And I found that would be – as I said, I – my first reaction when I saw that was that it was an error which should have been corrected, but it appears not. Q. Well, you say they’re charging that rate for 11 months. Of course, in the normal course, as we discussed earlier, the refinance would take place relatively swiftly, one would hope. A. Well, that’s a different point. The refinance should take place swiftly in the ordinary course of events, but as I say – I haven’t done the calculation for what 5% compounded is, but even on a simple interest basis, if we take 60% being 4% compounded, plus 12% sitting there, we’re on 72% interest. (Pause). That’s going to kill any refinancing stone dead.

289. Mr Wheeler submitted that Mr Griffiths had avoided the question in respect of the 4% rate and focussed, instead, on the 5%. If that was meant as a criticism of Mr Griffiths I do not accept it, nor do I accept that he avoided the question. The reference to “ it’s a high rate ” could have been to the 4% or the 5%. Mr Griffiths was entitled to take it to mean either and he was clear in his answer that he was focussed on 5%.

290. I do take Mr Wheeler’s point, however, that what this means is that Mr Griffiths did not address in his answer whether 4% was extortionate. The one time he therefore directly addressed it was in his Report when he described it as “ at the upper extremity of [the band of commercially acceptable rates] and is outside it ”. As Mr Wheeler observed, it cannot be both; it seems to be that what was meant is that it was at the borderline of commercial acceptability.

291. He addressed the question somewhat indirectly when he said that quadrupling the rate was “ excessive ”; he further explained that doubling the rate was his rule of thumb. Mr Cowen noted that this was consistent with what HHJ Hodge QC suggested in Ahuja , where he considered that anything beyond a doubling at least called for an explanation. There are, I think, two important qualifications to that. First, as Mr Wheeler cautioned, HHJ Hodge QC made clear that his point was made against the backdrop of the evidential vacuum he faced – he was not told what market rates were; I was. Secondly, any explanation would be the start of the investigation not its end-point because the assessment is objective. It seems to me that means that if the evidence as a whole offers a basis for a higher rate that could in itself be sufficient, even where the defendant has not advanced a reason.

292. I take from Mr Griffiths’ evidence the following points: i) While the typical default rate market in the market was 2-3%, higher rates did exist, up to and including 4%. Such rates were at the borderline of what was commercially acceptable, even in the context of an interest that merited strong protection. ii) Higher rates would typically reflect a higher risk situation. Risk could include a higher LTV, but it was not limited to that. As I have noted above, properly understood risk involves an assessment of both probability of loss and its magnitude. Nothing Mr Griffiths said caused me to think he had a different view. iii) Lenders would often choose not to apply a higher rate, at least for a prolonged period, because to do so would make refinancing impossible and that was their commercial objective. It is notable that even in respect of the 5% rate Mr Griffiths expressed that conclusion by reference to the position after a year. I read his answer in respect of the 4% being a “ huge, huge penalty ” in the same way. However, his evidence both in his report and at trial was that a bridging lender at the time would have taken between 35 and 50 days to refinance, with most achieving refinancing within 40 days. I accepted that 40-day figure at paragraph [79] of my First Judgment. I agree with Mr Wheeler’s point that a borrower cannot turn a default rate into a penalty simply by delaying repayment. That would not simply defy the approach laid down in Makdessi that one is to assess the question at the time of formation, not with the benefit of knowing how things had played out by trial. It would in my view be patently wrong if the borrower, by its own continuing default, could transform a provision from acceptable to extortionate.

293. Taking into account the “ strong initial presumption ” from paragraph [35] of Makdessi , to which I have found LCL was entitled, I regard 4% as being plainly above the range of market rates but not, in itself, unreasonable. If the primary obligation gave rise to a limited legitimate interest in its enforcement the Default Rate could still be considered extortionate, but for a stronger interest that would not be so.

294. Turning to the interests, the Repayment Interest is, as I have said, a very strong interest. I wholly accept what Mr Wheeler says that it is the sine qua non of a loan from the lender’s perspective. The Court of Appeal Judgment makes the important point that the interest is not simply in repayment but in timely repayment. As I have noted, Lordsvale , Cargill and Ahuja were all cases relating to the Repayment Interest, and as I have further noted they all recognised that some uplift in the interest rate is appropriate in respect of a defaulted payment.

295. Balanced against that I accept that all this would equally be true for any other lender, but no other lender had a default rate at this level. It is, to use Mr Griffiths’ term, at the upper extremity of the band of commercially acceptable rates. Given the strength of this interest it does not, in my view, go beyond that, however. It is high, not extortionate. By reference to the Repayment Interest, the Default Rate is therefore not penal.

296. The Non-residence Interest is also a strong interest. For an unregulated lender, like LCL, to provide loans to individuals secured on their primary residence could have catastrophic consequences. Penalties under the Financial Services and Markets Act 2000 include, presumably for the most extreme cases, unlimited fines and up to two years’ imprisonment. Mr Theophanous was not asked about the percentage of defaulted loans he had experienced during his career, but I suspect he and certainly most lenders are realistic enough to recognise that it is an occupational hazard; I do not believe they would see fines or imprisonment in the same light. The point was made graphically by Mr Griffiths in his cross-examination. Certain risks he accepted with a degree of equanimity – even fraudulent loans were something he saw as a regular problem for any lender. He was nowhere near so sanguine when it came to an unregulated lender making regulated mortgages: I mean, that really brings the ceiling in. That’s absolutely horrific.

297. The starting point, in my view, is that a lender’s interest in protecting itself against the “absolutely horrific” is a strong one. Even a low probability risk can merit strong protection when it relates to a high-impact outcome.

298. As I noted above in identifying the Non-residence Interest, LCL’s protection was not limited to the Default Rate. The loan had been made to a corporate entity, CEK, which in and of itself would take the loan out of the regulated regime. That is obviously relevant, and indeed seemed to me conclusive in my First Judgment. I accept that my approach there did not properly deal with the residual risk. I am particularly conscious of the way that Mr Griffiths addressed the point in cross-examination: Q. If it was to a company it would not be a regulated mortgage? A. I am not so sure about that. On the face of it, that’s correct, but I think the FCA would take a fairly dim view if it were some kind of artificial structure.

299. He did not expand on what the FCA might consider artificial, but artificiality in one of its strongest forms – sham – was alleged by the Claimants in the case, an allegation that I rejected. It seemed to me, however, that Mr Griffiths was concerned that the FCA might not simply accept a corporate structure, even one that was not a sham, and it was in turn very much a legitimate interest of LCL that it be able to show the FCA there were no issues with the Loan. That is consistent with the need for an inspection to confirm that the Housseins had vacated 71 Hamilton Road before drawdown. Despite the fact that the loan was to a corporate entity Mr Griffiths considered that any lender who relied solely on the FCA declaration would have been “ foolish ”.

300. In the circumstances it seems to me that, given the “ horrific ” consequences for LCL in making a regulated loan, it was entitled to take a firm approach to deterring any breach of the non-residence provisions of the Facility Letter. Again, I accept Mr Griffiths’ evidence that it did so in a way that was not market standard. Presumably other lenders in the pool considered by Mr Griffiths and Mr Kyriacou were unregulated but felt comfortable addressing this risk with a lower default rate. It was again at the upper extremity of commercially acceptable rates in respect of this interest. It was, however, within that range. A single defaulted loan would not bring down LCL’s business; a single regulated loan could. LCL was reasonably entitled to be somewhat more conservative, in protecting its interests, than other lenders. In those circumstances, it seems to me that the Default Rate in respect of the Non-residence Interest does not approach the level of being extortionate.

301. The Security Interest is obviously highly significant in principle. It is the lender’s primary protection if there is default in respect of the Repayment Interest. At paragraph 3.74 of his Report Mr Griffiths made reference to the significance of LTV in setting the Standard Interest: “ in my opinion, it is a reasonable assumption that the lower the LTV, the lower the interest rate should be, in order to reflect risk to the lender. ” As I have noted above, he made a similar point in his cross-examination: he would have no issue with higher default rates if the LTV was over 80%.

302. Of course, for LTV to mean anything, the value element of the calculation must be preserved. Each of the primary obligations that were underpinned by the Security Interest involved the security being at least materially prejudiced and at worst destroyed, materially increasing the risk to LCL. The protection of its security was plainly an important aspect of the Loan and, on Mr Griffiths’ evidence, a significant risk mitigant. If it was threatened or compromised, LCL had a strong interest in ensuring that steps were taken quickly to remedy the position or repay the Loan. Again, the Default Rate obviously went beyond what was normal in the market in respect of this interest. Given the importance Mr Griffiths attached to it, however, I accept that it was an important interest and it merited significant protection. Again, it sits at the upper extremity of what was commercially acceptable, but it is within that bracket.

303. The historic aspect of the Representation Interest is, as I have noted, the basis on which the loan is advanced in the first place. It is open to a lender to specify what is important to it in making its decision to lend at the rate that it does. It was never suggested that these were not significant factors at the inception of the Loan. I entirely accept that a Lender has a very strong interest in understanding the basis on which it is lending, since that is how it assesses risk. Focussing the borrower’s mind on the accuracy of its representations is a fundamental aspect of protecting that interest. The Default Rate was a market outlier, but it seems to me still reasonable given that this element of the interest goes to the heart of the decision to lend.

304. As I have also noted, the position shifts somewhat for the deemed repetition of the representations and warranties, in that an event after drawdown cannot undermine the basis for it. It is one thing to say that if one had known the truth one would have acted differently; it is another to say that when circumstances change one would like to get out. The latter is much more akin to the Security Interest and the Credit Risk Interest. For reasons already addressed, the Security Interest is in my view a strong one: maintaining the security is what buttresses the Repayment Interest. That leaves the Credit Risk Interest.

305. It was the Credit Risk Interest that most concerned me in my First Judgment, although I recognise that I should have been much clearer about why.

306. I have addressed the theoretical aspects, as I understand them, of credit risk above. Essentially, at least in this context credit risk is an attempt to predict the future. Typically, the future uncertainty is the likelihood that the borrower will default within the term of the loan. As the Court of Appeal has noted, as Bryan J and Colman J noted, as the experts in this case noted and as, in any event, is well known, if the credit risk goes up, the interest rate typically goes up to reflect that. Put simply, there is no issue with having a default rate as such; it is the size of the increase that matters. Again, that is entirely in line with Lordsvale , Cargill and Ahuja

307. My concern had two distinct but related aspects. The first concerns the reference class problem that I have addressed at paragraphs [230]-[231] of this judgment: why would one reasonably expect the different events of default within the Credit Risk Interest group to have the same impact on the probability of CEK defaulting on the Loan? Put another way, why are (to use the example of paragraph [230]) Party B and Party C in the same reference class? That is important because if the probability of future default is lower for some of those present defaults, the interest in enforcing those provisions is on its face weaker.

308. The second aspect went to the evidence I had about risk magnitude. This was the issue of the £20,000 unappealable judgment. There was an obvious parallel to be drawn between that event of default in the Facility Letter and a County Court Judgment rendered against the Housseins before the Facility Letter was entered into. Mr Theophanous explained in his evidence that in setting the Standard Rate this was a risk factor that he considered. The judgment was in the amount of £15,442.81, and I note that during his cross-examination Mr Theophanous confirmed this was the figure he considered. I equally note, however, that an enforcement order in respect of that judgment was made in the sum of £20,404.90 on 26 February 2019. Payment was made in respect of that judgment a little under three weeks later. Mr Theophanous further explained that the County Court Judgment, combined with other factors, caused him to increase the Standard Rate on the Loan by 0.3% per month. Mr Griffiths thought that even this was too much, but assume for current purposes it was appropriate.

309. Had that judgment post-dated the Facility Letter it would not necessarily have resulted in a payment default on the Loan; it would have remained a risk factor that might or might not mature into the cause of such a payment default. CEK’s credit risk would be somewhat further impaired in that the Claimants would now have something of a record of such judgments being rendered against them – one may be bad luck but two starts to look like carelessness – but since this remained a risk rather than a cause of payment default, in principle one might expect an impact on the interest rate of a similar order of magnitude – 0.3-0.5% per month. That is not how the Facility Letter works. The Default Rate that applies when a £20,000 judgment is rendered and left unpaid for a short period during the term of the Loan is very significantly more than the increase to the Standard Rate reflecting an almost identical judgment rendered before the date of the Facility Letter. I accept Mr Wheeler’s point that the ratio will vary depending on how many compounding periods there are, but even at the outset the difference is a factor of ten. That was particularly striking where, as here, the loan was heavily secured with an LTV below 55%. That had been a significant factor for Mr Griffiths, and at the time it likewise seemed significant to me.

310. No explanation for this difference in treatment was offered by LCL. For the avoidance of any doubt or confusion, that is not to say that had Mr Theophanous and his colleagues at LCL given their reasons for what they did I would simply have accepted them, nor would I simply accept them now. As I have noted of Mr Theophanous before, he is an experienced and sophisticated businessman who is robust but fair in his dealings with LCL’s clients. I have not heard from others at LCL involved in setting the Default Rate, but I have no reason to think they are any different. I am sure that, in their minds, the discrepancy was justified. That is not the point.

311. The point, it seemed to me, was that a key risk identified in connection with historic payment defaults was risk of future payment defaults under the Loan. Historic payment defaults, most notably the County Court Judgment, were addressed by a relatively small rise in the Standard Rate; by contrast, an almost identical default after the Loan had been entered into was addressed by a much greater increase. Nor could this be dismissed on the basis that the historic default was years in the past. Had that been the case then, objectively, I can see it would limit the predictive force of the past event. Here, however, the County Court Judgment was only around a year in the past.

312. Again, this was against a backdrop of the risk being, at least in part, further addressed by personal guarantees from Mr and Mrs Houssein and, critically, charges over 71 Hamilton Road and the Downhills Way Properties. Where default on the Loan was already well guarded against, where historic actual default merited a 0.3% change in rate, where the experts had opined that this magnitude of increase to address credit risk reflecting historic default was reasonably standard in the market (which seems to me the necessary implication of the answers in the Joint Statement of Experts on issue 1) I considered that a further 3% increase linked to the risk of payment default was, objectively assessed, extortionate.

313. In that I was wrong. In particular, while I still consider that I identified the right factors in assessing credit risk purely on the question of likely default, following this hearing I now recognise the link that a reasonable lender in LCL’s position would make between any of the defaults that relate to the Credit Risk Interest and the impact on a potential refinancing.

314. Both experts agreed that by far the preferred exit from the Loan was a refinancing and that enforcement of the security was a last resort. Mr Griffiths’ evidence was, I feel, captured by an answer he gave in respect of the Bridge Loan: …no bridging lender really wants to go down the route of appointing LPA receivers, putting properties into auction, all this kind of thing. Ultimately, it will – it will have an effect of creating distressed sales, it will depress the selling prices, chances of it being a long drawn out process, chances of there being challenges to it, all of those kinds of things. And so if a bridging lender can hang in on [sic] there for a couple of weeks and wait for a refinance to happen, then they will certainly do so. The recoveries process is a painful and uncertain one, which is to be avoided if at all possible.

315. As I noted earlier in this judgment, in Cargill Bryan J expressed the view that where the loan is secured, default is simply a path to the security. It seems that is not the case in this market.

316. In his expert report Mr Griffiths explained that in assessing the viability of the exit strategy the lender would have two issues at the forefront of its thinking: the LTV (basically, was the security robust) and the interest cover (could the rental income support the interest payments, since the replacement lender would only be prepared to fund a refinance if the interest on its loan could be paid). As he explained at paragraph 3.57, both were critical: Lenders set criteria for both LTV and interest cover and both must be satisfied for a loan to proceed. This is simply because a loan proposal may well have a low LTV but unless there is sufficient income to service interest, then the chances of default are very high.

317. LTV is straightforward to calculate: one values the security, one knows the value of the loan and the LTV is the latter divided by the former and expressed as a percentage.

318. Interest cover is a little more involved and requires certain assumptions as to what the refinancing lender would want to achieve. A document that I understand was in LCL’s disclosure showed that LCL had assumed that any lender refinancing the Loan would charge interest at 5.5% and would want rental income to be 145% of that amount to be comfortable that the interest could be paid. Mr Griffiths specifically commented, I think it is fair to say somewhat critically, that LCL’s assumed interest cover ratio of 145% and interest rate of 5.5% was “ a very conservative assumption and, overly-cautious in taking a ‘worst-case’ approach ”. Despite that, he went on to note that 5.5% was “ common because even where the actual contractual rate is lower, there is an allowance for rates to rise. ” He also referred to an article from July 2020 in Business Moneyfacts that gave 17 pages of buy to let mortgage products with interest cover requirements between 125% and 160%. Unfortunately, that does not seem to have been exhibited to his report so one cannot determine how many lenders were at each level. However, simply taking what Mr Griffiths said, which I do not doubt is true, 125% would represent a best-case scenario, 160% a worst-case and 145% would be roughly halfway.

319. Mr Griffiths then calculated the maximum loan available showing both the amount achievable if 71 Hamilton Road was part of the rental portfolio and the position if only the Downhills Way Properties were rented. He very helpfully included a sensitivity analysis to show different interest cover ratios of 125%, 130%, 135% and 140%. Interest Cover 125% 130% 135% 140% All Properties Rental Income p.a. £145,000 Interest Cost (£145,000/interest cover ratio) £116,000 £111,538 £107,407 £103,714 Maximum Loan Available at 5.5% interest rate £2,108,880 £2,027,761 £1,952,659 £1,885,709 Downhills Properties Rental Income p.a. £114,400 Interest Cost (£145,000/interest cover ratio) £89,120 £85,692 £82,519 £79,571 Maximum Loan Available at 5.5% £1,620,201 £1,557,880 £1,500,195 £1,446,600

320. Somewhat curiously he did not address the position for an interest cover ratio of 145%, the figure used by LCL, nor did he address higher interest cover ratios even though they were referred to in his Business Moneyfacts article, but he was not challenged on that.

321. There is, I believe, an error in his table for the scenario premised on the Downhills Way Properties. As I have set out, the calculation for Interest Cost is described as “ £145,000/interest cover ratio ”. The figure of £145,000 is his rental figure for all the properties; the equivalent figure for the Downhills Way Properties is £111,400. I note this purely by way of completeness; the cells in the table seem, at least to me, to reflect the correct calculation.

322. To obtain the Maximum Loan (i.e. the maximum amount a refinancing lender would lend) he took the Interest Cost and multiplied it by 18.18, on the basis that 5.5% (which was the assumed interest rate) equates to a multiplier of that figure. Put simply, if you multiply 5.5 by 18.18, you arrive at 100%. Technically the .18 recurs, but Mr Griffiths had rounded and the difference is minor.

323. Mr Griffiths then calculated the amount required for refinancing. He took the gross amount of the Loan – £1.881 million – and deducted the 12% interest element and 2% of the fee to reflect the fact that the properties were generating a rental income. I understand the rationale for such an approach, and in any event he was again not challenged on it. That produced a net refinancing figure of £1,618,380.

324. From that he concluded that even based just on the Downhills Way Properties refinancing in the amount required by the Claimants was “ achievable ”. To be clear, I think he was right to assume that only the Downhills Way Properties were income generating. LCL had been told that 71 Hamilton Road was still undergoing renovation work following which the Housseins were to move back in, and a lender in LCL’s position understanding that would not allow for any income from such a property. Even if that is the wrong assumption, and LCL’s corporate knowledge, through Mr Stylianides, that the Housseins remained in residence throughout is the relevant understanding, the outcome is the same. Only the Downhills Way Properties were available for the purposes of interest cover. As will be seen from the table, so far as it related to those properties Mr Griffiths’ conclusion could only be on the basis of a 125% interest cover. That was the best-case scenario according to the figures from Business Moneyfacts, but obviously Mr Griffiths thought that was appropriate. It seems from his report that he drew comfort from the LTV based on what he knew about the Downhills Way Properties and 71 Hamilton Road at the time of the trial.

325. Matters, in my view, changed at this hearing. First, the effect of the Housseins remaining in 71 Hamilton Road on the LTV became clearer, certainly to me. It was put to Mr Theophanous, in the context of the settlement negotiations, that he was unreasonable to refuse an offer where outstanding sums were secured by a charge over 71 Hamilton Road, the family home. Mr Theophanous did not accept this: Q. But you were secured for the interest, were you not, because you would retain first charge over 71 Hamilton Road? A. Which was occupied by the owners. Q. So that was the reason, was it, that 71 Hamilton Road was occupied by the owners? A. Yes. Q. Why does that mean that you are not able to accept the offer? A. For various reasons. One reason is that if it is owner-occupied it would not be possible to obtain a buy-to-let loan on it. That would probably affect its value. There would not be rental income to support a refinance, and in case of enforcement, that would not be straightforward.

326. It was then put to him that Gunnercooke had later suggested that security over 71 Hamilton Road was sufficient in respect of costs and accrued interest. Mr Theophanous explained that in fact the interest was to be paid into HCA’s client account, providing additional security.

327. I accept Mr Theophanous’ evidence that 71 Hamilton Road was worth less with the Housseins in than it was with them out. That inevitably impacted the LTV. That enforcement would not be straightforward chimes with what Mr Griffiths had said in the evidence I have quoted above, and again in my view would impact the LTV. I also accept that if the property was not let it would not be producing income but I attach no real weight to that point. As I have noted, Mr Griffiths in his calculations allowed for such a scenario and still concluded that the interest cover was achieved, albeit the position was quite marginal.

328. I was also struck by the evidence of Jack Liondaris at this hearing. As I have noted much earlier in this judgment, he has been involved in this matter at different stages, all after the initial alleged breach of the non-residence provisions of the Facility Letter, assisting the Claimants in attempting to secure the finance to repay the Loan. In his witness statement he explained how he selected Kent Reliance as a potential lender for the refinancing. Of particular relevance for these purposes was his view that: (i) Kent Reliance was more flexible than mainstream lenders; (ii) it was more focussed on the security properties than the borrower’s credit record; and (iii) applications to Kent Reliance had a high approval rate.

329. Despite all this, in 2023 Kent Reliance declined an application for refinancing of 205 Downhills Way because the property was being used as a house in multiple occupation ( HMO ) and used for “assisted living tenants”. Precisely when that happened is unclear; Jack Liondaris suggested it was July but the document to which he refers is dated 19 September 2023. That detail makes little difference. It is the fact of and reasons for the refusal that seem, to me, significant.

330. Very obviously, if a lender who is known to be flexible and to whom applications had a high approval rate would not lend, that would inevitably call into question the exit strategy because it seems likely that other, less flexible lenders would take the same view. To be clear, I recognise that earlier applications on 205 Downhills Way to Kent Reliance had been approved at the level sought. The point is that LCL had no control over how (in the sense of single unit or HMO) the Claimants let the Downhills Way Properties or to whom. Yet a shift in these factors at any time during the term of the Loan could prejudice the refinancing.

331. The analysis of the second application in July 2023, in respect of 207 Downhills Way, is somewhat more nuanced. Mrs Houssein applied for a loan of £425,000. Kent Reliance were only prepared to offer £326,755 on the basis that the monthly rental income of £2,400 was insufficient to service a loan of any greater amount. I note immediately that Kent Reliance, known for its flexibility and high approval rate, by July 2023 was using a minimum interest cover ratio of 140%. That obviously does not tell me what the correct figure was three years earlier, but coupled with Mr Griffiths’ evidence regarding the range of rates it suggests that he was optimistic in using 125%.

332. The Bank of England base rate, of which I believe I can take Judicial notice, had risen from 0.1% in July 2021 to 5% in July 2023, and was still on an upward trajectory (it increased to 5.25% in August 2023, where it remained for some time). Looking at the European Standardised Information Sheets from Kent Reliance one sees something similar, albeit to a lesser order of magnitude. The July 2021 offer from Kent Reliance was based on a fixed period loan, whereas the July 2023 offer was not, making the calculation of average interest rates in the latter case subject to assumptions about repayment for which I have no evidence. However, the annual percentage rate of charge (the APRC ), which is principally driven by the interest rate, had risen from 5.5% to 7.9%. A move of around 2.4% in interest rates had reduced the available loan by approaching a quarter.

333. That was against a backdrop of a significant increase in rents. The application for a mortgage in respect of 207 Downhills Way from February 2021 gave the rental income as £1,950 per month. Jack Liondaris was uncertain whether that was accurate and Ms Huseyin was unable to assist with the point because she was not responsible for managing the properties. The figure given in the Alexander Lawson valuation carried out in July 2020 for the purposes of the Loan equated to £1,600 per month, and I have no reason to doubt that was reliable. Despite, then, a 50% increase in rents over the three-year period the shift in the APRC would have rendered a refinancing of the Loan impossible.

334. The final point from the evidence is the obvious one, that credit default can affect interest rates. The point is addressed at some length above. There was a question in about how much difference it would make, and certainly Mr Griffiths appeared to be of the view that the 0.3% per month applied by LCL to reflect historic defaults was too high by reference to other rates in the market. As I have noted, however, he accepted in his cross-examination the general principle that rates reflect, in part, credit risk (in its predictive sense). A reasonable lender would, I think, have taken the same view.

335. Here, even quite a small change in the assumed rate could have had a significant effect. If I have understood Mr Griffiths’ approach to the multiplier correctly, if the interest rate moved from 5.5% to 5.6% the multiplier would move to 17.86. Even on Mr Griffiths’ best case scenario of a 125% cover ratio, assuming only the Investment Properties as security, the maximum loan would be £1,591,428, insufficient to refinance on Mr Griffiths’ figures. At a 130% cover ratio the maximum loan for refinancing would be £1,530,214, a shortfall of almost £90,000.

336. The position can be viewed from another perspective. Mr Griffiths calculated the refinance amount as being £1,618,380, which as I have noted was not challenged and which I accept. Using Mr Griffiths’ model, if the interest cover ratio is 140% the multiplier needed to get there is 20.34 (which is the £1,618,380 refinancing divided by the £79,571 interest cost). That produces an interest rate of around 4.9%: if the assumed interest rate rose above that figure, a lender assuming an interest cover ratio of 140% would conclude that refinancing would not happen. That is obviously an assumed rate well below the level Mr Griffiths thought was used in the market at the time. Such a rate therefore already had much less of a buffer against shocks, including credit risk shocks. Yet using Mr Griffiths’ model, that is the rate that would need to be used on Kent Reliance’s interest cover ratio.

337. In light of Jack Liondaris’ evidence and the apparent use of an interest cover ratio by Kent Reliance of 140%, I do not consider that a lender in LCL’s position could properly be criticised for assuming that any incoming lender on the refinance would operate on the basis of a 145% interest cover ratio. That was around the mid-point of the spread from Mr Griffiths’ figures in any event. Yet at anything approaching that level, a lender in LCL’s position would be entitled to conclude that even the smallest of moves in the interest rate charged to the Claimants on refinance would destroy any prospect of refinancing and leave them faced with enforcing against the security, the outcome that Mr Griffiths considered was “ painful and uncertain ” and “ to be avoided at all costs ”.

338. That, in my view, explains why the Credit Risk Interest would be so critical to a lender in LCL’s position. To return to my now frequently used example, it is not simply that a £20,000 judgment debt would mean the Claimants’ total debt would increase by that amount (which is only a little more than 1% of the Loan). If the Claimants further defaulted or faced further credit issues in respect of other obligations there was a material risk that the assumed interest rate they would face on refinance would increase, just as the Standard Rate they had to pay to LCL had increased to reflect historic credit issues. That, in turn, would affect the interest cover ratio and the consequence could be anything from a reduction in the loan amount (which in itself could be terminal for a refinancing) to some or all of the Investment Properties not being capable of supporting lending at all (which obviously would be terminal).

339. Nor is that analysis limited to judgment debts. This comes back to the question of the correct reference class, and in particular to Professor Oberdiek’s point that in assessing that question, and so in turn in assessing probability and risk, one must consider causation. A refinancing of this portfolio was far from straightforward. Applying realistic assumptions, a reasonable lender in LCL’s position in July 2020 would, in my view, properly conclude that there was no or almost no margin for error. Even on the best case of a 125% interest cover ratio used by Mr Griffiths the refinancing squeaked home. Any of the events of default that I have referred to in the Credit Risk Interest could reasonably be expected, in my view, to move the interest rate sufficiently to cause the refinancing to collapse. Some, such as unpaid judgment debts, might be more dramatic in their effect than others, but they would all cause the same outcome – realisation of the security. There was nothing available to LCL to suggest that the Housseins had alternative means of bridging the gap – beyond a certain point, a miss was as good as a mile. All the events of default listed could have the same effect; it was right to treat them in the same way.

340. Nor do I think such a lender would place so much faith in the apparently robust LTV of 55% as Mr Griffiths did. I say this for two reasons. First, as part of the process of applying for the Loan a valuation of the various properties carried out in July 2020 by Alexander Lawson Chartered Surveyors. Those valuations recorded that 199 Downhills Way was not let; the other properties were let on assured shorthold tenancies, albeit in most cases to sharers. They valued the Downhills Way Properties on different bases, but the basis relied on for the 54% LTV figure had them valued at between £510,000 and £525,000. On the same basis, 71 Hamilton Road was valued at £875,000.

341. However, in reaching those figures each of the valuations recognised the uncertainty caused by the Covid 19 pandemic and the process of the United Kingdom withdrawing from the European Union: The Bank must also be aware that values can fall, as well as rise, over time and can change rapidly in periods of economic decline and uncertainty. This is perhaps more prevalent today with the risk of further destabilization and uncertainty to the property market following the Coronavirus disruption and the Referendum vote of the UK to leave the European Union. Uncertainty appears [sic] that it will remain for a term uncertain [sic] and we therefore recommend the lender takes a prudent approach to Loan to Value (LTV) terms and completes a high level of due diligence in all aspects of the transaction.

342. Lenders in LCL’s position were therefore already being told to be cautious about LTV. It is not clear to me whether Mr Griffiths saw this part of the valuations. He does make reference to the valuations in his Report, but only briefly and what he says could have been derived from the Particulars of Claim, where certain aspects of the valuations were summarised. They do not appear in his list of documents seen. In many ways it does not matter; these were the valuations prepared for LCL, and a reasonable lender is entitled to rely on what is said in them.

343. One adds to that what Jack Liondaris explained about the impact a change in tenants could have; in a realistic worst case one or more of the Downhills Way Properties would fall out of the LTV calculation altogether – the loan would remain constant but the value would fall. While, as this case demonstrates, the outcome can be binary – a property is simply excluded altogether – there are presumably cases where the situation is less stark and the lender will lend but adopts a more conservative valuation of the property. It would be wrong to speculate as to precisely what the impact might be. Similarly, while I accept Mr Theophanous’ evidence that the value of 71 Hamilton Road with the Housseins resident would be lower, I do not know how much lower. What is clear is that the LTV could be higher than the 54% that was presented to LCL, even leaving aside the uncertain market conditions at the time.

344. This, it seems to me, is highly significant in considering the Credit Risk Interest. Makdessi requires me to ask what an objective party would have thought at the time the agreement was entered into. At that time LCL knew that the preferred exit was refinance, had a reasonably standard interest cover model for assessing the prospects of refinance, knew that only the Investment Properties would produce an income and knew that as a general rule further credit default would probably affect the rate at which the Housseins could borrow to refinance.

345. Applying Mr Griffiths’ model to what LCL knew or is deemed to have known at the time, it would have been obvious that the preferred exit route was at best viable, but no more than that, and that its viability would quickly be called into question if the interest rate sought by the refinancing lender changed for any reason. One reason why they might move was any further defaults of the borrower, whether on the Loan or any other lending. Even a claim or a threat of a claim could have such an impact.

346. It would, objectively assessed, therefore have been very much in the interests of any lender in LCL’s position to see that the Housseins did not so default. Using the language of Makdessi at paragraph [99]: “ there [was] a legitimate interest in influencing the conduct of [CEK] which is not satisfied by the mere right to recover damages for breach of contract. ” The Credit Risk Interest was not tied simply to the fact that the Claimants had defaulted on a debt; had that been the case it would have been hard to see (indeed, I did find it hard to see) why a default a few days before the Loan meant an increase of 0.3% to the interest, whereas an identical default a few days later would have meant an increase of 3%. That would seem, and did seem to me, extortionate. Far more importantly it was tied to the need for refinance in order for the hypothetical lender in LCL’s position to be repaid, and so in turn the Credit Risk Interest is tied to the sensitivity of that refinancing to any move in interest rates. That was the point that was not clear to me based on the evidence at trial.

347. As I have noted, Mr Griffiths plainly thought that 4% was, at best, at the limit of commercially acceptable rates. As I have also noted, however, that is not the test. Moreover, and in any event, in light of the evidence I now have I consider that Mr Griffiths’ use of a 125% interest cover ratio was too optimistic. A lender in LCL’s position, working with Mr Griffiths’ model, would have understood the critical importance of the refinancing interest rate remaining at or below the assumed rate of 5.5%; even a small change could derail any refinancing. It would have therefore attached, and rightly attached, very significant weight to anything that might affect that refinancing rate. The weight to be attached to it would only be increased where, as here, the LTV on the portfolio was already compromised by the Housseins’ residence of 71 Hamilton Road and could be further compromised by such things as a change in the Downhills Way Properties letting arrangements to HMOs or even a change in the nature of the tenants to assisted tenants.

348. Given those factors, it seems to me that it was not extortionate for LCL to attach an above market default rate to the Credit Risk Interest. This was a marginal prospect; LCL had every reason to want to ensure that it did not deteriorate further. Again, therefore, I do not consider the Default Rate to be a penalty.

349. Unlike Cargill , Lordsvale or Ahuja , the Default Rate in this a case applies to different primary obligations and different legitimate interests, yet it treats them all in the same way. I accept that the starting point is therefore that this gives rise to a presumption, but no more than that, of penalty. In some respects that presumption is easily rebutted because LCL’s interests in enforcing their primary obligations obviously significant ones. Repayment is, from the lender’s perspective, what loans are all about; secured lending is cheaper than unsecured lending because of the additional risk protection it offers.

350. The exception was the Credit Risk Interest, which seemed to me at trial to deal with almost identical events in radically different ways depending on whether they occurred before or after the Facility Letter was entered into. I could see no explanation for that, and none was offered by LCL, whether in its evidence or its submissions. In the course of this hearing I came to appreciate that Mr Griffiths, through no fault of his, had based his conclusions on the refinancing on too rosy a picture of the Claimants’ portfolio. The refinancing was much more finely balanced than he had thought, and even a slight change in the assumptions could destroy its prospects of success. In particular, if the Claimants’ credit risk increased to the point that the assumed interest rate shifted by as little as 0.1%, significantly less than the change Mr Theophanous had applied to reflect historic defaults, LCL could find itself trying to realise the security, a security that was itself more volatile than I had understood.

351. In those circumstances, LCL’s interests in keeping so finely balanced a structure from keeling over was, in fact, a very strong one. I have noted repeatedly of Mr Theophanous that he is robust but fair in his dealings with LCL’s borrowers. The Default Rate was also robust, more so than was the case for other lenders, but it was not more than LCL was entitled by law to charge. It was not a penalty. The counterclaim for statutory interest under the Senior Courts Act 1981

352. The counterclaim was advanced as an alternative to the application of the Default Rate. In light of my conclusion that the Default Rate provision is not a penalty and so is enforceable, this point falls away. Conclusion

353. In the course of his submissions Mr Cowen prioritised the penalty issue because, as he put it, “ in terms of the money, that is the most important point ”. Without wishing to downplay the other aspects of this judgment, it is also highly significant in another respect: the critical difference between what I concluded in my First Judgment and what I have decided here is that I no longer consider the Default Rate to be a penalty. It merits being clear as to why.

354. First, I accept that I was wrong to conclude that LCL did not have a legitimate interest in enforcing the non-residence provision. It remains the case that the structure of the Loan, being made to a corporate entity, already contained a provision to address that risk. It is also the case that the Claimants’ attack on that structure was very weak and failed entirely. Having reached that conclusion I considered that the risk was addressed. That was to look at the point from the wrong time period and to focus too heavily on the probability element of risk and not sufficiently on magnitude. At the date of the Facility Letter, which as Makdessi makes clear is the relevant date, LCL could not know what a judge might later conclude. There was a risk and LCL had a legitimate interest in addressing it.

355. That, in itself, made no difference to the outcome of my First Judgment because I was also concerned, indeed more concerned, with the fact that the Default Rate responds equally to breaches of different primary obligations, the enforcement of those obligations involved different interests, and the risks associated with those interests were apparently of quite different orders of magnitude. As I observed in my First Judgment, why does a final and unappealable judgment for £20,000 merit the same protection as a letter of claim in respect of the same amount? Moreover, the best evidence that I had at the time was that such a judgment merited a 0.3% increase in interest if rendered before the date of the Facility Letter but a 3% increase after. I could find no explanation for that other than punishing the borrower.

356. What has become clear to me in the course of this hearing is how finely balanced, indeed precarious, the refinancing was. Mr Griffiths had concluded that the interest cover ratio was achievable, but it was a close-run thing and required a best-case assumption of a ratio of 125%. That now seems to me unduly optimistic in light of Jack Liondaris’ evidence regarding the view of Kent Reliance, a lender known for its more flexible approach, in respect of the security portfolio, and the evidence from Kent Reliance of the actual interest cover ratio it used. Mr Griffiths, of course, did not have the benefit of that evidence at the time of his Report. I now do, and it would be wrong to ignore it.

357. Similarly, Mr Griffiths drew comfort from the LTV, but again the evidence of Mr Theophanous concerning the realisation of 71 Hamilton Road and the evidence of Jack Liondaris about the factors that have impeded the attempts to refinance show that a fully apprised lender would likely be less comforted by them.

358. Finally, Mr Griffiths did not carry out, presumably because he was not asked to carry out, an interest rate sensitivity calculation. He recognised, however, that the rate he used of 5.5% (which was the rate LCL had used) was an industry standard rate and further recognised that interest rates would shift where there were issues with the security portfolio or the lender’s credit history. Even a small change could result in a funding shortfall on refinancing of tens of thousands of pounds or more.

359. This, it seems to me, explains why a lender in LCL’s position would legitimately be concerned even by an apparently small shift in the Claimants’ creditworthiness. Even something as apparently minor as the threat of proceedings presented a risk to such a finely balanced structure. Moreover, again as Jack Liondaris’ evidence demonstrated, while apparently small changes might simply reduce the amount offered by a refinancing lender (as was the case on the refinancing of 205 Downhills Way in 2023) it could equally cause them to pull out altogether (as was the case with 207 Downhills Way). Either way, the effect on these facts would be that the refinancing would fail.

360. LCL, indeed any lender, accordingly had a very strong interest in ensuring that the Claimants’ creditworthiness did not deteriorate, even slightly, during the life of the Loan, and that if it did shift that the Claimants were heavily incentivised to find a solution quickly. That, in my view, is an objective justification for the difference between the 0.3% shift to reflect defaults on debts owed to third parties before the Facility Letter was entered into – a known known in terms of their impact on the refinancing – and the Default Rate in respect of similar such defaults in the after – a known unknown. That, fundamentally, is what has changed in terms of my reasoning.

361. Before concluding it is right that I should express my gratitude to counsel for the way they have presented their respective clients’ cases before me. As may be apparent from the length of sections of this judgment, risk and probability are areas with which I have had to engage independently of this dispute. I therefore had questions on those issues that might not have been raised by other judges. Specifically, Professor Perry’s 1995 essay was not something to which either party referred but was, rather, something on which I asked for submissions. Mr Cowen and Mr Wheeler responded with analysis of admirable clarity, particularly given how little time they had to consider the points. I should further note that I did not raise with them Professor Perry’s 2014 essay, Professor Turton’s 2014 article, Professor Oberdiek’s 2017 book or Professor Pearl’s points on confounding from his 2016 book. This hearing was quite a short one, and there was limited scope to include within it a course on philosophy and statistics. In any event, it seemed to me that the points raised there either developed on points made in the 1995 essay, on which I was addressed, or were obvious and should be uncontroversial.