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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Edgeworth Capital (Luxembourg) SARL & Anor v Ramblas Investments BV [2015] EWHC 150 (Comm) (30 January 2015) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2015/150.html Cite as: [2015] EWHC 150 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Rolls Building, Fetter Lane. London, EC4A 1NL
		30/01/2015

Mr Justice Hamblen:

Introduction

1. The Claimants claim the principal sum of €105,201,095.89 to which they claim to be entitled as a Fee due under an Upside Fee Agreement made with the Defendant ("Ramblas") dated 12 September 2008 ("the UFA") together with interest thereon.
2. The UFA was part of a suite of financing agreements entered into in relation to the purchase of the Ciudad Financiera ("the Property"), the Madrid Headquarters of Banco Santander SA ("Santander"), by Marme Inversiones 2007 S.L. ("Marme") in September 2008. Ramblas is the ultimate parent company of Marme. It is a special purpose vehicle owned by the property investors Mr Glenn Maud and Mr Derek Quinlan ("the Personal Borrowers").
3. The financing arrangements for the acquisition of the Property also included:

(1) A Senior Loan Agreement, under which a consortium of banks, including RBS, made a secured loan to Marme of €1,575,000,000 ("the Senior Loan").

(2) A Junior Loan Agreement under which RBS loaned Ramblas €200,000,000 ("the Junior Loan").

(3) A personal loan of €75,000,000 from RBS to Mr Maud and Mr Quinlan ("the Personal Loan").

4. The purchase price of the Property was approximately €1,900,000,000.
5. The Claimants were not party to either the Junior Loan or the UFA at the time of execution but on 17 December 2010 there was a transfer of the rights and obligations under the Junior Loan, the UFA and the Personal Loan from RBS to the Claimants.
6. Breaches of contract by the Personal Borrowers under the Personal Loan triggered cross-default provisions in the Junior Loan, entitling the Claimants to instruct RBS as Facility Agent to accelerate the Junior Loan, which it did by letter dated 30 December 2010.
7. The Claimants commenced these proceedings in January 2011 seeking payment of the outstanding principal (then €212,912,560) and contractual interest under the Junior Loan and the €105,201,095.89 Fee said to be due under the UFA.
8. The parties settled the Junior Loan claims under the terms set out in the consent order dated 17 June 2011 ("the Consent Order"). The UFA claim has proceeded to the present trial.
9. Ramblas disputed the claim on the following main grounds:

(1) On the proper construction of the UFA, a default under the Personal Loan triggering the repayment of the Junior Loan cannot be a "Payment Event" requiring Ramblas to pay a Fee under the UFA;

(2) The very large "upside" Fee for which Ramblas is allegedly liable - €105,201,095.89 - far exceeds any damages for which Ramblas could possibly be liable for a breach of the Junior Loan and is unenforceable as a penalty or disguised penalty;

(3) The Claimants are not entitled to the interest claimed by them either as part of their Fee claim or for non-payment of that claim.

The factual background

10. The factual background is set out in the pleadings and the witness statement of Mr Maud and in the disclosure provided. The Claimants put forward a witness statement from an employee, Mr Smalley, but neither he nor the Claimants were involved at the time that the UFA was entered into. Ramblas objected to the admissibility of parts of his statement and I accept that his opinions are not admissible evidence. However, in so far as he comments on documents the Claimants adopt those comments as submissions. Mr Smalley's evidence as to market conditions and practice at the material time is admissible. Neither witness was required to be cross examined.
11. The Property was designed as a "financial city" based around nine office buildings with the capacity to house up to 9,000 employees, and it is said that it continues to be among the most valuable commercial real estate assets in Europe.
12. Marme's purchase of the Property from Santander for the sum of approximately €1,900,000,000 involved a sale and lease back arrangement, under which Santander took the Property subject to a 40 year lease with no break clause and an inflation proof rent starting at €82.53 million per annum.
13. At the time Marme contracted to buy the Property in January 2008, it had intended to finance its acquisition by issuing bonds supported by securitization of the rental stream. However, Marme soon turned to traditional forms of secured real estate lending when it became clear that the credit crunch had closed the market for financial instruments of this type.
14. At first, Marme engaged Bayerische Landesbank ("Bayern LB") to arrange a loan syndicate. But when RBS joined the syndicate it insisted on assuming that role, for which it claimed fees far in excess of anything Bayern LB had previously demanded for performing that role. These included an arrangement fee of 5%, amounting to a sum of €18.3 million (Bayern LB had asked for only 1%); a break fee of €7,500,000 (Bayern LB had requested a break fee of €1,000,000) and pre-payment fees in the first and second years that were double those required by Bayern LB.
15. In August and early September 2008 the Personal Borrowers, having been unable to raise the balance of the acquisition finance elsewhere, agreed the Junior Loan, Personal Loan and UFA with RBS, taking RBS's lending to a total of €641 million on the acquisition.
16. The parties envisioned that Ramblas would refinance, dispose of, or otherwise exit its interest in the Property within five years in order to meet the repayment obligations under the Loan Agreements (which had a five year term). However, Marme and Ramblas were unable to find alternative sources of finance, as a consequence of the credit crunch. They commenced voluntary administration proceedings in Spain in March 2014.
17. The Claimants also highlighted the following background matters which are borne out by the documents or Mr Maud's evidence:

(1) The UFA needs to be considered as part of a wider transaction involving the Senior Loan, the Junior Loan and the Personal Loan, in a total sum of €2,292,291,004.

(2) RBS provided its outline headline terms by email on 14 July 2008 on the basis of a €325,000,000 contribution to the Senior Loan. RBS were providing the single largest tranche of any of the banks in the syndicate. The terms required by RBS in its offer letters were significantly tougher than those required by any of the other banks and requests by the Defendant to amend these terms were refused.

(3) The discussions in relation to the additional funding from the Junior Loan only opened on or around 21 August 2008 (i.e. three weeks before closing) and increased RBS' exposure to the deal by 50%.

(4) Mr Maud informed Santander that RBS had agreed to provide the Junior Loan and may also provide an "equity bridge" and that "the cost of the provision of this equity bridge is likely to be material"

(5) There were serious concerns as to whether the transaction would proceed and this was a time of increasing concern within the financial markets.

(6) The transaction was finalised at a time when bond markets had dried up and Lehman Brothers was about to collapse, with completion being one business day before that collapse.

(7) There was a 6% fee on the Senior Loan but a margin of only 1% on the Junior Loan. In such circumstances one would reasonably expect RBS to be seeking to extract value elsewhere in the deal.

(8) The Defendant's known intention was a swift exit strategy.

The Agreements

The terms of the UFA

18. The recitals to the UFA provide as follows:

"(A) The Bank has procured the availability of, and arranged and negotiated terms in respect of, the junior loan facility provided for in the Junior Credit Agreement (as defined below) (the Facility).

(B) The Company acknowledges that the benefits derived from the provision of the Facility are real benefits of significant value and are only available to or for the benefit of the Company upon the Company entering the Agreement.

(C) In consideration for the benefits conferred on the Company by the Facility it is appropriate that the Bank should be entitled to the fees set out in this Agreement.

(D) The Company acknowledges that the fees payable under this Agreement together with the terms upon which the Facility have been or will be made available represent a fair return to the Bank for arranging, negotiating and providing the Facility in circumstances in which the Facility has been made available for the benefit of the Company."

19. The Recitals record the stated benefit on both sides of the transaction for the parties as being that RBS will receive certain fees in consideration for arranging, negotiating and providing the Junior Loan for the benefit of the borrower.
20. Pursuant to Clause 2.1 of the UFA:

"In consideration of the Bank procuring the availability of and arranging and negotiating the terms of the Facility for the Company, the Company agrees that upon each occurrence of a Payment Event it should pay a Fee to the Bank".

21. Under the definitions in Clause 1, a "Payment Event" means:

"(a) a mandatory or voluntary prepayment for any reason of the Loan or a Cure Loan or the repayment of the Loan or a Cure Loan (including any repayment made following acceleration or from the proceeds of any security realisation) or, if earlier, the date on which any such prepayment or repayment falls to be made pursuant to the Junior Credit Agreement".

22. The "Loan" is defined in the Junior Loan as "unless otherwise stated in this Agreement, the principal amount of each borrowing under this Agreement or the principal amount outstanding of that borrowing".
23. The amount of the Fee is calculated pursuant to Clause 2.1(b) of the UFA. The quantum of the Fee increases in four consecutive tranches the more time that elapses from the Signing Date on 12 September 2008 (i.e. there is one fee for where the Payment Event occurs within less than 3 months of the Signing Date, another where it occurs within 3-6 months, another where it occurs within less than 1 year and a final calculation where the Payment Event occurs 1 year after the Signing Date).
24. This structure is consistent with the intention being that the preferred exit route would be via a refinancing of the facilities.
25. Where the Payment Event occurs after the first anniversary of the Signing Date (as to which, the Claimants' case is that the relevant Payment Event was the outstanding principal amount becoming due and payable on 30 December 2010), Clause 2.1(b)(iv) states that the Fee shall be the greater of:

"(A) €45,000,000 less Deductibles (subject to proportionate reduction or increase pursuant to paragraphs (c) and (d) below);

(B) an amount which generates an IRR of 20 per cent. to the Bank, calculated from Signing Date to the Payment Event, on the amount of the Loan and any Cure Loan that falls to be (p)repaid at that date; and

(c) (where the Payment Event is triggered by a Transaction) an amount equal to 35 per cent. of the Disposal Proceeds, Equity Proceeds or Refinancing Proceeds (as applicable) less the amount of any interest excluding default interest) paid by the Company to the Bank pursuant to the Junior Loan Agreement."

26. "IRR" is defined in Clause 1.1 as "the annualised discount rate that produces a Net Present Value of zero when applied to cash inflows and outflows representing principal lent or (p)repaid and interest paid in respect of the Facility".

The terms of the Junior Loan

27. Clause 19 of the Junior Loan headed "Default" sets out various "Events of Default" under the following headings:

"19.2 Non-payment

19.3 Breach of other obligations

19.4 Misrepresentation

19.5 Cross-default

19.6 Insolvency

19.7 Insolvency proceedings

19.8 Creditors' process

19.9 Cessation of business

19.10 Effectiveness of Finance Documents

19.11 Compulsory purchase

19.12 Major damage

19.13 Principal Lease

19.14 Managing Agent

19.15 Ownership

19.16 Material adverse change

19.17 Death or insanity"

28. As is indicated by the headings, and made clear by their detailed content, clause 19 covers a wide range of Events of Default. Some of them do not involve any breach of contract. Others do, including breaches of other contracts by other parties. Others may or may not involve breaches of contract depending on the circumstances. The seriousness of the breaches of contract potentially covered is extremely variable.
29. Clause 19.18 then provided that where there had been an Event of Default an Acceleration Notice could be given declaring that all or part of any amounts outstanding were immediately due and payable.
30. In the present case the relevant Event of Default was a "Cross-default" under clause 19.5 as a result of the Personal Borrowers failing to make two interest payments in respect of the Personal Loan which were due to be paid on 15 June 2010 and 15 September 2010 (this interest was paid on 4 October 2010) and/or failing to pay the total amount of the Personal Loan due and payable on 29 September 2010 as a result of those earlier defaults. This then led to the Acceleration Notice in respect of the Junior Loan given on 30 December 2010.

The Issues

31. The issues to be determined in the UFA Claim are set out in the Agreed List of Issues as follows:

Issue 1 - Construction of the UFA

"Whether, upon the outstanding principal amount of the Junior Loan becoming due and payable pursuant to the Events of Default under the Personal Loan, a Payment Event occurred, as contended by the Claimants, pursuant to clause 1.1 of the UFA and, consequently, the Defendant is liable to pay the Claimants a fee calculated in accordance with clause 2 of the UFA.

The Defendant contends that no fee is payable under the UFA as a matter of construction for the following reasons:

(i) the commercial purpose of the UFA was for RBS to share the upside of any disposal, refinancing or other exit, and repayment of principal under the Junior Loan solely by virtue of a cross-default under the Personal Loan is not sufficient to require the payment of any fees to the Claimants under the UFA; and

(ii) fee is only payable upon actual repayment of the Junior Loan; and/or

(iii) the Claimants are required to give credit for interest when calculating the IRR (as defined in the UFA) under clause 2.1 of the UFA.

Issue 2 - True nature of the UFA

If it is found that a fee was payable based on the Claimants' or any other construction of the UFA, whether the provisions of clause 2.1 of the UFA are equivalent to a penalty or a disguised penalty and therefore unenforceable under English law, as advanced by the Defendant; or

Whether as contended by the Defendant the law on penalties is irrelevant in this instance because the Claimants are paying a pre-agreed sum which is due from the Defendant in return for the performance of the Defendant's obligations and because the law of penalties is not relevant where a clause provides for payment upon the happening of an event other than the breach of a contractual duty owed by the contemplated payor to the contemplated payee".

Issue 1 - the construction of the UFA

The law

32. Both parties referred me to the Supreme Court decision in Rainy Sky v Kookmin Bank [2011] 1 WLR 2900 and the importance of considerations of "business common sense".
33. As stated by Lord Clarke at [30] in The Rainy Sky:

"...where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense"

34. As I commented in Cottonex Anstalt v Patriot Spinning Mills [2014] 1 Lloyd's Rep 615 at [55]-[57]:

"55...the approach of adopting "the interpretation which is most consistent with business common sense" only applies where the court considers that the words in issue have "more than one potential meaning" - per Lord Clarke at [21]. If the court concludes that the words are only capable of one meaning then that is their meaning regardless of considerations of business common sense.

56...where the words in issue have more than one potential meaning there is no rule of law or construction which requires the court to give effect to the interpretation which is most consistent with business common sense. It is "entitled" to prefer that interpretation (per Lord Clarke at [21]) and it may be "generally appropriate" to do so (per Lord Clarke at [30]), but it is not bound so to do. The more ambiguous the meaning and the stronger the business common sense arguments the more likely it is to be appropriate to do so.

57... it will only be appropriate to give effect to the interpretation which is most consistent with business common sense where that can be ascertained by the court. In many cases that is only likely to be so where it is clear to the court that one interpretation makes more business common sense. If, as frequently happens, there are arguments either way the court is unlikely to be able to conclude with confidence that there is an interpretation which makes more business common sense. It is often difficult for a court of law to make nice judgments as to where business common sense lies."

The UFA

35. The Claimants' case was straightforward. The Acceleration Notice of 30 December 2010 had the consequence that repayment of the Loan "falls to be made pursuant to the Junior Credit Agreement" as set out in definition (a) of "Payment Event". There was accordingly a "Payment Event" under the UFA.
36. Since that "Payment Event" occurred "after the first anniversary of the Signing Date" the "fee" payable under clause 2.1 is that set out in 2.1(b)(iv). Under that sub-clause, (C) is inapplicable because the "Payment Event" was not triggered by a "Transaction" and the greater of the fee amounts set out in (A) and (B) is that set out in (B).
37. Ramblas is accordingly liable to pay a fee so calculated which the Claimants contend amounts to €105,201,095.89.
38. The main arguments to the contrary advanced by Ramblas were that:

(1) The clear purpose of the UFA was to provide RBS with an "upside" share of any disposal, refinancing or other exit, it being envisioned at the time of the UFA and the Junior Loan that there would be such an exit before the maturation of the Junior Loan.

(2) The Claimants' case that any repayment of the Loan would fall within the definition of a "Payment Event" is difficult to square with various terms of the UFA and in particular the various circumstances in which RBS was entitled to call for premature repayment under the Junior Loan; the fee calculation mechanism by which the fee increases the further the "Payment Event" falls from the "Signing Date", and the fact that fee bears no relation to the cost of lending money.

(3) The Claimants' construction is inconsistent with the terms of the Junior Loan which make clear that there is no basis for RBS to look for remuneration for sums lent under it anywhere other than in the terms of the Junior Loan itself. Put another way, the UFA is money for nothing. The Claimants had already sought and obtained a return for arranging the loan under the JLA; they cannot be entitled to look elsewhere for remuneration additional to that which they had already agreed.

(4) The Claimants' construction of clause 2.1 would produce bizarre results and in particular the payment of an "upside" fee in circumstances where there where there was no "upside" and, indeed, where Ramblas would be least likely to be in a position to pay; the payment of a fee by Ramblas for a default under an agreement to which it was not even a party (the Personal Loan) as demonstrated by the present claim, and fee remuneration calculated by reference to factors unrelated to the potential costs of lending.

(5) Ramblas' construction makes commercial sense in that it is consistent with the notion of an "Upside Fee"; does not require the Court to disregard the express terms of the UFA and Junior Loan, and provides the most consistent explanation of the ascending fee scale, and the "greatest of" formula, which underpins the fee calculation mechanism in clause 2.1.

39. The difficulty with all these arguments is that they do not adequately address (1) the language of the UFA (2) its contractual definition of a "Payment Event" or (3) the structure of clause 2.1.
40. As to (1), although the title of the UFA links the Fee with an "upside" the Recitals (in particular, Recitals B, C and D) and clause 2.1(a) acknowledge that the Fee is payable for the provision of services, namely "procuring the availability of and arranging and negotiating" the Junior Loan (the "Facility") for the benefit of Ramblas.
41. As to (2), the definition in clause 2.1 of a "Payment Event" is expressed in general and unqualified terms. It covers any repayment of the Loan which is made or which "falls to be made". It is not limited to repayments arising in particular circumstances, as Ramblas' argument requires. Moreover, it expressly includes "any repayment" which is made or falls to be made "following acceleration".
42. As to (3), "Payment Event" cannot be limited to repayments following disposal, refinancing or other exit since such circumstances are expressly covered in clause 2.1(iv) (C), which is just one of three alternative "Payment Event" circumstances provided for. Clause 2.1 (iv) (C) provides for a Fee to be payable where "the Payment Event is triggered by a Transaction". A "Transaction" as defined by clause 1.1 as being a "Property Disposal, an Equity Sale or a Refinancing". In other words, rather than providing for the Fee to only be payable where there has been a Property Disposal, an Equity Sale or a Refinancing (as is Ramblas' case), there is an express carve-out which deals with the payment of the Fee in those circumstances, which is a separate and distinct scenario from the cross-default relied upon by the Claimants.
43. Ramblas' reliance on the terms of the Junior Loan is misplaced. Its liability to pay the Fee arises under and is determined by the terms of the UFA.
44. Ramblas' other argument of construction was that only an actual repayment of the loan constituted a "Payment Event". This argument was not developed and it is clearly contrary to the contractual definition of "Payment Event" which covers both a repayment which is "made" and a repayment which "falls to be made". The latter plainly covers a repayment which is obliged to be made rather than is actually made.
45. As to commerciality, although the fees payable under the UFA were sizeable, the UFA was entered into in challenging circumstances. Ramblas needed finance to complete the Property purchase but it was finding it very difficult to find sources of finance. The dealings with RBS were taking place during the credit crunch and in the days immediately preceding the collapse of Lehman Brothers. RBS was in a position to and it did insist on remunerative terms.
46. Further, it was common ground that it was envisaged that the finance would be provided for a short term and that there would be a refinancing. It was in effect a short term bridging loan, the costs of which may often be high. Equally those costs may well go up the longer the bridging finance is required, as is reflected in the escalating Fee due over time under clause 2.1.
47. Given the challenging commercial background there were real risks for RBS in advancing the substantial loans at that time, as subsequent events and the insolvency of Ramblas has borne out.
48. In all the circumstances I do not accept that the Claimants' construction is uncommercial. Even if it was, it would not affect the clear meaning of the language of the UFA.
49. For all these reasons I reject Ramblas' case on the construction of the UFA. In my judgment there was clearly a "Payment Event" when the accelerated loan fell to repaid and that triggered the Claimants' entitlement to a Fee under clause 2.1(iv)(B).
50. As to the amount payable, clause 2.1(iv)(B) provides that that is to be:

"an amount which generates an IRR of 20 per cent to the Bank, calculated from the Signing Date to the date of the Payment Event, on the amount of the Loan and any Cure Loan that falls to be (p)repaid at that date".

51. The Claimants contended that this results in a total amount due and payable under clause 2.1(b)(iv)(B) is €105,201,095.89 made up of the following sums:

(1) €200,000,000 @ 20% per annum for one year from 12/09/08 - 11/09/09 = €40,000,000.

(2) €240,000,000 @ 20% per annum for one year from 12/09/09 - 11/09/10 = €48,000,000.

(3) €288,000,000 @ 20% per annum for 109 days from 12/09/10 - 30/12/10 = €17,201,095.89.

52. The Claimants pointed out that the definition of IRR requires the application of an annualised rate and that the specified 20% return should therefore be compounded as set out in their calculation.
53. Ramblas submitted that the proper application of these provisions is unclear but it was unable to articulate any supportable alternative approach. It was argued that interest should be payable on a simple basis and that the interest payable should be taken into account. However, it could not be shown how the wording of the provisions led to either conclusion.
54. Indeed Ramblas' submissions highlighted that under clause 8.2 of the Junior Loan annual interest was capitalised rather than paid. That not only undermines the argument in respect of interest payable but it might well support application of the 20% rate to the principal plus capitalised interest rather than to the principal only, as the Claimants' calculation assumes. However, the Claimants were content to keep to their particularised calculation.
55. Although the contractual wording could be clearer, in my judgment the Claimants' construction is consistent with that wording, gives effect to the annual return provided for, is met by no clearly articulated alternative and should be upheld.

Issue 2 - Whether clause 2.1 is unenforceable as a penalty or disguised penalty

The law

56. As stated by Christopher Clarke LJ in Makdessi v Cavendish Square Holdings B.V. [2013] 2 CLC 968 at [120]:

"The underlying rationale of the doctrine of penalties is that the court will grant relief against the enforcement of provisions for payment (or the loss of rights or the compulsory transfer of property at nil or an undervalue) in the event of breach, where the amount to be paid or lost is out of all proportion to the loss attributable to the breach. If that is so, the provisions are likely to be regarded as penal because their function is to act as a deterrent."

57. It was the Claimants' case that clause 2.1 does not fall within this rationale and that the rule against penalties does not apply to it. In particular they relied on the fact that the rule only applies to provisions which apply in event of a breach of duty owed to the other party and this was not such a case.
58. That the rule against penalties only applies in the event of a breach of duty is supported by high authority. In Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 the House of Lords held that the rule did not apply to a clause which required payment to be made to the claimant in the event of a breach by the defendant of a contractual duty owed to a party other than the claimant. As stated in the lead judgment of Lord Roskill at 402H:

"....the reason why the appellants' submissions failed in the courts below can be simply stated. The clause was not a penalty clause because it provided for payment of money upon the happening of a specified event other than a breach of a contractual duty owed by the contemplated payor to the contemplated payee."

59. This restriction on the rule has been criticised, mainly on the grounds that it may lead to the rule being avoided by skilful drafting and that it may place a party who exercises a contractual right to terminate in a worse position than a contract breaker - see Chitty on Contracts Vol 1 at 26-184; The Law Commission's Working Paper No. 61 (1975). However, there is little doubt that it represents the law - see also Euro London Appointments Ltd v Claessens International [2006] 2 Lloyd's Rep 436.
60. Some clauses may trigger payment (or other penal consequence) in several events, some of which involve breach whilst others do not. In such a case the application of the rule depends upon whether breach is in fact the trigger of the penal consequence - see Cooden Engineering v Stanford [1953] 1 QB 86; Bridge v Campbell Discount Co Ltd [1962] AC 600. The position is helpfully summarised in Treitel on Contract (12^th ed.) at 20-131 as follows:

"The question whether the law as to penalties applies to such clauses has given rise to much dispute. It is said, on the one hand, that only a sum payable on breach can be a penalty; and, on the other, that the whole law as to penalties could be evaded, if it did not apply to these clauses, by simply including, among the events on which the sum was payable, one event which was not a breach. The common law does not fully adopt either of these views. If the agreement is in fact determined on the ground of the hirer's breach, the law as to penalties applies. If the agreement is determined on some ground other than the hirer's breach, e.g. because the hirer exercises his right to return the goods, the law as to penalties does not apply...".

61. If the rule does apply the locus classicus remains the judgment of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at p86-88 in which he summarised the law as follows:

(1) "Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages.

(2) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine preestimate of damage.

(3) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not as at the time of the breach.

(4) To assist this task of construction various tests have been suggested which, if applicable to the case under consideration, may prove helpful or even conclusive. Such are: (a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach. (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. (c) There is a presumption (but no more) that it is a penalty where 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage…. (d) It is no obstacle to a sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties".

62. The principles there stated have been developed in recent case law, as explained in the Court of Appeal decisions in Murray v Leisureplay Plc [2005] EWCA Civ 963 and most recently in the Makdessi case.
63. The modem law is addressed in considerable detail in Christopher Clarke LJ's judgment in the Makdessi case at [44] to [128]. Whilst I have regard to all that is there said, the main points may be summarised as set out below.
64. There are a number of general matters to be taken into account in deciding whether a clause is penal, namely (see [75]):

"(i) It is for the party who claims that it is to establish that. It may be possible to do so by reference to the terms of the clause itself in the context in which it was agreed: Robophone at 1447F-G. It may, however, be necessary to adduce evidence as to its effect or any other matter which is said to render it unconscionable;

(ii) The contract must be examined as a whole in the circumstances and context in which it was made;

(iii) The court will not be astute to find that a clause contained in a commercial contract is unenforceable because it is penal, especially if the parties are of equal bargaining power and have had high level legal advice. The court recognises the utility of liquidated damages clauses and that to hold them to be penal is an interference with freedom of contract. It is, therefore, predisposed to uphold clauses which fix the damages for breach: per Jackson J in Alfred McAlpine;

(iv) To that end it will adopt a robust approach. If the likely loss is within a range, an average figure or a figure somewhere within the range is likely to be acceptable. If the loss is difficult to assess a figure which is not outrageous may well be acceptable. A pre-estimate does not have to be right to be reasonable: per Jackson J in Alfred McAlpine. The fact that it may result in overpayment is not fatal and the parties are allowed a generous margin. Further the fact that a breach may give rise to trifling or substantial damage may not be determinative if the parties can be regarded as having regarded the trifling as unlikely;

(v) But the fact that the clause has been agreed between parties of equal bargaining power who have competent advice cannot be determinative. The question whether a clause is penal habitually arises in commercial contracts, which enjoy no immunity from the doctrine."

65. Having had regard to those general matters (see in particular [104], [105], [117])

(1) A clause will be a penalty where it is "extravagant and unconscionable with a predominant function of deterrence".

(2) A clause will not be a penalty if it is a genuine pre-estimate of loss.

(3) 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.

66. In considering whether a clause is a genuine pre-estimate of loss the cases establish the following guidelines (at [71] subject to the qualifications set out at [72-74]):

"(i) A sum will be penal if it is extravagant in amount in comparison with the maximum conceivable loss from the breach;

(ii) A sum payable on the happening or non happening of a particular event is not to be presumed to be penal simply because the fact that the event does or does not occur is the result of several breaches of varying severity;

(iii) A sum payable in respect of different breaches of the same stipulation is not to be presumed to be penal because the effect of the breach may vary;

(iv) The same applies in respect of breaches of different stipulations if the damage likely to arise from those breaches is the same in kind;

(v) But a presumption may arise if the same sum is applicable to breaches of different stipulations which are different in kind;

(vi) There is no presumption that a clause is penal because the damages for which it provides may, in certain circumstances, be larger than the actual loss; and

(vii) Where there is a range of losses and the sum provided for is totally out of proportion to some of them the clause may be penal."

Clause 2.1

67. The first point to note about clause 2.1 is that a Fee is payable thereunder in any event. Moreover, after the first anniversary date that Fee was always going to be that payable under clause 2.1(C). If, for example, the Junior Loan had been repaid after five years in accordance with its terms then the clause 2.1(C) Fee would have been payable. The effect of the triggering event is therefore to advance the time for payment of the Fee, but it does not increase Ramblas' overall obligation. As such it is akin to an acceleration clause and such clauses have generally not been regarded as being penal - see Chitty Volume 1, 31^st edition at 26-187 and the cases there cited. Further, if Ramblas had performed the Junior Loan according to its terms and repaid the Loan after five years there could have been no suggestion that the Fee which thereupon became due was a penalty. It would be perverse if Ramblas was somehow placed in a more advantageous position by breaching rather than performing the Junior Loan.
68. The second point to note about clause 2.1 is that its application in this case was not triggered by any breach of duty by Ramblas. The relevant "Event of Default" in this case was a breach of duty by the Personal Borrowers under the Personal Loan. On well established authority the rule against penalties only applies if the clause in question is triggered by a breach of duty owed by the party claiming relief to the party seeking to enforce the clause. Indeed a clause's function cannot be deterrence of breach if it does not apply to a breach.
69. Ramblas argued that a breach of the Personal Loan was "in effect" a breach of the Junior Loan and should be so treated. It stressed the linkage between the two Loans and the close relationship between the Personal Borrowers and Ramblas. However, the Personal Loan is both a different contractual agreement to the Junior Loan and is one involving different contractual parties. A breach by A of contract X is not and cannot be treated as being a breach by B of contract Y. That C may be the counterparty to both contracts makes no difference.
70. On both these grounds I find the rule against penalties to be inapplicable.
71. If that is wrong and the Fee is somehow to be treated as having been triggered by a breach of Ramblas' contractual duty to the Claimants then, as submitted by Ramblas, there are grounds for considering that the amount of the Fee is not a genuine preestimate of the loss caused by such a breach. However, that is because it has nothing to do with damages for breach and therefore with deterrence of breach. The essence of the Fee is that it is a charge payable for the provision of the Junior Loan. That is made clear by the express terms of the UFA. Further, the amount of the Fee depends on the passage of time. The fact that the trigger for a Payment Event is an Event of Default involving a breach makes no difference to the amount payable. Exactly the same Fee would be payable if the trigger had been an Event of Default which did not involve a breach.
72. Given in particular the challenging commercial circumstances in which the financing agreements were concluded and the fact that the Junior Loan was in effect a bridging loan there is a clear commercial justification for a large fee being charged, which the clause 2.1 Fee undoubtedly is. However, that was the bargain made.
73. If the rule against penalties does apply to clause 2.1 I would accordingly have held that even though the Fee is not a genuine pre-estimate of loss for breach, the clause is commercially justifiable and that its predominant function is not deterrence. As such it would not be a penalty.
74. For all these reasons I find for the Claimants on Issue 2 and hold that clause 2.1 is not a penalty.

Interest

75. There was an issue between the parties as to whether the Claimants could claim contractual interest under clause 8.4 of the Junior Loan. I agree with Ramblas that this has not hitherto been pleaded. I also agree with Ramblas that this is a claim which arises under the Junior Loan rather than the UFA. As such, it could and should have been brought as part of the claim made under the Junior Loan, which claim has now been compromised under the terms of the Consent Order. The rule in Henderson v Henderson applies and the Claimants cannot now make such a claim.
76. The Claimants can however claim interest under S.35A of the Senior Courts Act 1981. Although they need permission to amend to make that claim, I grant such permission. Such a claim is for simple interest.
77. As to the rate of interest there was no evidence as to the rates available to the Claimants or to borrowers of that class and the contractual rate provides no such evidence. Given the low rates prevailing over the relevant period I consider that an uplift from the 1% over base rate that used commonly to be granted is appropriate. In all the circumstances I consider in the exercise of my discretion that the appropriate rate is 2% above the applicable Euribor rate.

Conclusion

78. For the reasons outlined above I find that Ramblas is liable to pay to the Claimants the Fee claimed of €105,201,095.89 together with simple interest thereon at 2% above the applicable Euribor rate.