High/Low Interest rate clause does not amount to a penalty

Commercial N Pty Ltd v Huang & Ors [2024] NSWSC 23

By a loan agreement made on 2 October 2019 as varied by Deed of Variation signed on 14 October 2019, the plaintiff advanced $430,000 to T&C Excellent Pty Ltd (of which Stephanie Wei-Jen Chien was the sole director), Connie Hsing-Yi Huang and her adult daughter, Stephanie Wei-Jen Chien. The term was 26 weeks. The loan was secured by a mortgage over a property owned by Connie and Stephanie in Burwood Road, Burwood. The interest rate was 1.36% per week (70.72% per annum) lowered to 0.35% per week (18.2% per annum) if the borrower was not in default.

In their defence and cross-claim, the defendants alleged that the interest claimed by the plaintiff of 70.72% per annum compounding monthly was excessive and amounted to a penalty. The agreement and Deed of Variation, which reduced the sum to be advanced from $588,000 to $430,000, were unenforceable and/or liable to be set aside by reason of the plaintiff’s misleading or deceptive and/or unconscionable conduct, in contravention of ss 12DA, 12CA or 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) or ss 18, 20 or 21 of Sch 2 of the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law) (ACL), and/or as an unjust contract under the Contracts Review Act 1980 (NSW).

The defendants also brought a cross-claim against Peter Ronis, the solicitor who advised them about the agreement. They allege breaches of Mr Ronis’ retainer and his duty of care by failing to protect their interests and adequately advise them about the agreement and Deed of Variation.


On the question of whether interest at the Higher Interest Amount (calculated on the formula in cl 5.5) or at the Higher Interest Rate compounding monthly under cl 5.12(b) was a penalty, her Honour found (at [213]) that the higher interest rate was not a penalty based on the recognised distinction between provisions in agreements, such as a mortgage or a guarantee, which incentivise prompt payment in comparison with clauses which increase the rate of interest upon failure to make prompt payment, where the latter may be held to be a penalty clause and the former are not. Her Honour referred to Kellas-Sharpe v PSAL Ltd [2013] 2 Qd R 233; [2012] QCA 371 (Kellas-Sharpe); O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 366–7; [1983] HCA 3; David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 29; [1990] FCA 186 (Full Court); and Jin Lian Group Pty Ltd (In Liq) v ACapital Finance Pty Ltd[2021] NSWSC 931 at [31]–[37].


Her Honour referred (at [220]) to Oxygen Funding Solutions Pty Ltd v Dick-Telfar [2020] NSWSC 582, at [80]:

“However, courts have consistently held that, as long as the provisions for the lower and higher rates of interest are drafted in such a way as to make clear that the lower rate is payable by way of a discount, or reward, for timely payment and the higher rate is the rate otherwise applicable, the rate does not amount to a penalty and the lender’s conduct is not unconscionable. Thus, it is irrelevant that 10% cannot possibly be a genuine pre-estimate of the plaintiffs’ loss if the payment at 4% is not made on time since this is not the test. While trial judges and intermediate courts have railed against the consequences of this distinction, which is to immunise the result of a drafting device from scrutiny on the basis of equitable principles relating to penalties and unconscionability, it has been said, time and again, that the principle is too well established to be disturbed other than at the highest level, by the High Court or by Parliament: Kellas-Sharpe at [2]-[4] (Margaret McMurdo P), [32]-[49] (Gotterson JA) and [57]-[60] (Fryberg J).”

As to the balance of the matters in the defendants’ defence and cross claim, Her Honour found that the plaintiff had not engaged in misleading or deceptive conduct by misrepresenting the amount to be advanced. Even if it had, there had been no reliance. If there had been misrepresentation and reliance, advancing a lower amount than represented did not cause loss. Subject to one matter, the lender had not engaged in unconscionable conduct in that the higher interest rate itself did not make it unconscionable to enter into the arrangements. However, the capitalisation and monthly compounding on the higher rate of 70.72% per annum on a loan of $430,000 for six months was inherently oppressive and unconscionable. The defendants were entitled to orders declaring void or removing those parts of the contract that provided for interest at the higher rate to be capitalised or compounded. Interest was calculated at the higher rate based on simple interest. The same would have applied under the Contracts Review Act 1980 (NSW). The defendants’ cross-claim against their solicitor failed, as they had not established any breach of the retainer or duty of care, or that any breach caused their loss.

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