In one of the first cases to apply Cavendish Square v Makdessi  UKSC 67, the Supreme Court's seminal decision on penalty clauses, the Commercial Court has held that default compensation at a rate of one-month LIBOR plus 12% pa was enforceable and not a penalty.
The parties had entered into steel supply agreements under which Cargill made advance payments to Uttam Galva, who then either had to sell steel of the requisite value or repay the advance. Uttam Galva received the maximum advance of some US$61 million but failed to repay it. Uttam Galva claimed, amongst other things, that the interest rate payable on amounts outstanding under the contract was a penalty.
Bryan J held that:
- The default interest rate in the contract was not a penalty because Cargill had a legitimate interest in securing repayment. The increase in the interest rate following default was justified at a commercial level because the default increased the credit risk;
- The default interest rate was not exorbitant or unconscionable by comparison with rates for unsecured loans in the relevant Indian markets; and
- The default interest rate had been validly incorporated into the contract.
Stephenson Harwood comment
This case follows the line of authority since the Supreme Court's decision in Cavendish Square, that where a party can show a legitimate interest in the purpose of a clause, it is increasingly less likely to be struck down as an unenforceable penalty.