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Forum Law Newsletter - September 2006

CASES OF INTEREST

DEFAULT INTEREST & PENALTY INTEREST

In Yarra Capital Group and Sklash the Victorian Court of Appeal decided that a default rate of interest was a penalty, and therefore unenforceable.

In this case, the parties were in the business of money lending and the making of short term high risk loans at high interest rates. There was a once only fee paid for the loan with no further fees if the loan was repaid on time. If a default occurred a daily rate of interest applied. The primary judge found that default provisions were not "penalties". On appeal the appellant argued that the default provisions were unenforceable as they were penalties, and did not reflect any real damage incurred by the lender.

Justice Chernov said the courts need to strike a balance between the parties being free to contract as they wish, on one hand and the public interest in protecting a weaker party from oppressive burdens or the unconscionable use of power by the stronger party, on the other hand. The court noted the parties operated in an environment where the high rate of interest was usual for these types of loans, the loans were for a short term and the parties intended they would be repaid in full in a relatively short time. Further, the loans were unsecured. To now say that the default interest amounted to a penalty would unnecessarily burden the lender.