Lenders: Can I claim my default interest on enforcement?

An issue which often comes up when a borrower defaults is establishing what can be recouped by a lender in the course of enforcement. In order to redeem a loan both the capital made available and interest accrued must be repaid to the lender, however how do the courts view other items such as default interest when it comes to redeeming a loan?

The treatment of default interest remains a sticking point for lenders, borrowers and their advisers and one that is treated differently between the Irish and English courts. Care must be taken when drafting these clauses. Such provisions will generally provide that default interest will apply to a sum due but unpaid under a loan agreement for the period that the sum remains unpaid stating the default rate that will apply.

Recently[1] the Irish High Court (as affirmed by the Court of Appeal) considered a clause applying to a loan agreement which provided for a default interest rate of 4% above the normally applicable interest rate (of 2%) to be applied to any due but unpaid sum. It should be noted that the default interest provision was contained in the lender’s standard terms and conditions. The Court’s decision was that the clause amounted to a penalty clause on the basis that:

  • The default rate was not a genuine pre-estimate of the loss which would be incurred by the lender in the event of default; and
  • The additional default interest rate was intended to discourage a breach of the agreement by the borrower.

It should be noted that the English court’s approach to this issue[2] is more flexible in that such a clause will only be held to be a penalty if the detrimental effect of the default rate on the borrower is completely disproportionate to the loss incurred by the lender.

Key Points

  1. The Breccia cases sought to rely on a default interest provision contained in the standard terms and conditions issued at origination. Such a standard clause will most likely not be considered to be a genuine pre-estimate of loss. Lenders would be advised to include a bespoke default interest clause in the facility letter.
  2. The Court of Appeal declined to consider the English approach in The Irish position is unlikely to change until the Irish Supreme Court has the opportunity to consider this issue.
  3. In the event that the lender’s claim for default interest fails the lender can still recover the capital and interest owing.

[1] Sheehan v Breccia and Flynn v Breccia (HC, judgment granted in Court of Appeal on 30 July 2018)

[2] Cavendish Square Holding BV v El Makdessi (UK Supreme Court)

How we can help?

If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Brian Baily, Partner, Head of Litigation & Dispute Resolution (bbaily@bhsm.ie) or Conor Mac Nally, Senior Associate, Banking & Finance (cmacnally@bhsm.ie) for further information.

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.

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