Cavendish Square – How The New Penalties Test Affects Banking Transactions

In Cavendish Square Holding BV v. Makdessi and ParkingEye Ltd v. Beavis, reported together at [2015] UKSC 67 (Cavendish Square) the Supreme Court reviewed, and significantly recast, the basis on which a contractual term will be treated as an unenforceable penalty. For a detailed review of the judgment and its general implications, see this Dentons client alert: Supreme Court unshackles the rule on penalties. Adam Pierce considers how the new rules are most likely to affect banking transactions.

Default interest

An easier test to apply

Most facility agreements include a "default interest" clause under which the borrower must pay interest on overdue amounts at a higher rate than would otherwise apply on the loan. This is the context in which banking lawyers most commonly consider the penalty test. Other than for very modest uplifts in the rate (e.g. 1 per cent), in the past it has often been difficult to get entirely comfortable that this type of obligation was