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Fee Provisions triggered by event default under loan not a penalty clause

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Fee Provisions triggered by event default under loan not a penalty clause

Fee Provisions triggered by event default under loan not a penalty clause

Where a borrower was obliged to pay fees due to an event of default (non-payment of principal under a loan), the fees provisions were enforceable and did not amount to a penalty because:

  • there had been a commercial interpretation of the construction of the fees provisions, which did not affect the clear meaning of the language of the agreement; and
  • although the fees payable were sizeable, the agreement had been entered into when the borrower needed finance to complete a property purchase but was finding it difficult to find sources of finance (during the credit crunch and in the days immediately preceding the collapse of Lehman Brothers). The bank was in a position to insist on remunerative terms.

A clause will be a penalty clause (and therefore unenforceable) where it is "extravagant and unconscionable with a predominant function of deterrence". A clause will not be a penalty if it is a genuine pre-estimate of loss, but even if it is not a genuine pre-estimate of loss it will not be a penalty where it is commercially justifiable and it can be shown that its predominant function is not deterrence.

Edgeworth Capital (Luxembourg) Sarl v Ramblas Investments BV [2015] EWHC (Comm)

For more information, contact Cathy Goodman.