You should therefore review your contractual provisions to ensure that they do not fall within the scope of the criminal rule and to amend all necessary provisions to reflect the change in the law. Almost all credit agreements (and most other contracts providing for regular payments) contain a provision for default interest. A late payment interest rate system provides that a borrower who does not make a scheduled payment must pay the lender an additional amount as interest on the amount owed. Before Cavendish Square, lenders would typically ask for a slight increase (between 1% and 3%) in the contract interest rate, as a modest increase like this was likely immune to challenge as an unenforceable penalty. in Cavendish Square Holdings BV v Makdessi; ParkingEye Ltd v Beavis  UKSC 67, the court stated that a penalty clause could be applied if: The judge decided that a CVA is not a contract and that, therefore, the rule against sanctions cannot be applied to it. However, the court added that even if the penalty rule were valid for the duration of the CVA, it would still not have been punished. The judge noted: “For the purposes of criminal law, the owners have. had a legitimate commercial interest in the success or failure of the CVA and could only be regarded as an exorbitant, extravagant or unscrupulous provision if the CVA failed, they had to return to their position before the CVA”. It has long been recognized that the rule against sanctions should apply only in cases of law contrary to the Treaty.
On Cavendish Square, this was confirmed once again. However, the application of the penalty rule may depend on whether the obligation in question is formulated in the contract as a conditional principal obligation or as an ancillary obligation. The Court held that the first clause was a principal obligation and could therefore be applied. The second clause was considered to be an ancillary obligation, since it depended on the fulfilment of the main obligations contained in the agreement. Irrespective of any contractual provisions, however, the courts have made it clear that they will fully consider the actual nature and content of the transaction when deciding whether to impose a primary or secondary obligation. Therefore, in order to ensure that the provisions do not fall within the scope of the sanction clause rule, the parties should structure the provisions as main obligations, while providing for appropriate provisions to ensure that they are not considered a `disguised` sanction clause and are therefore not applicable. The Supreme Court, which ruled in two related cases, reinforced the common idea of freedom of contract between well-advised and demanding parties. . . .