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The enforceability of high interest rates is often before the courts at the moment because of the large number of short term high interest loans …

At the end of 2014, Mr Ross Love guaranteed a seven month loan of $245,000 that his company Love Properties was granted by Quantum Asset Management Pty Ltd (“Quantum”). There were extensions and variations of the loan over the following two years.

Love Properties defaulted on the loan and Quantum sued for recovery of the debt. Quantum obtained judgment and then Love Properties paid the judgment sum in full.

Love Properties then sued to recover from Quantum the amount that it had paid because it claimed that the charge was a penalty and the claim by Quantum was unenforceable and Love Properties should be given restitution.

The Supreme Court of Western Australia was asked to decide whether the high interest paid by Love Properties was a penalty. If “yes”, then the amount should be repaid to them by Quantum to Love.

Firstly, the loan had an interest of 9.75% per annum, however, after the default occurred, the interest rate rose to 4.43% per month (being 53 .16 % per annum).

Quantum submitted that it was artificial to compare the two rates because the lower interest rate (also taking into account the various fees and charges) was approximately 53% and there were no fees and charges in the default period when the higher rate of interest was charged. Quantum argued that the significantly higher interest rate at default compensated for the fact that no fees and charges were incurred by the borrower.

Quantum gave evidence of the factors that it took into account in determining the interest charged to Love Properties. These were the credit report on Love Properties, the number of writs and default judgments, the fact that Love Properties was in default with the existing lender and the loan application involved a subdivision that was in litigation.

Judge Banks – Smith summarized the legal principles that governed when a high interest rate was a penalty; the party claiming that interest rates are a penalty must prove the following:

1. whether the sum agreed was commensurate with the interest protected by the bargain;
2. a sum that it is merely disproportionate to the loss suffered does not quality as a penalty;
3. the penalty must be “extravagant, exorbitant or unconscionable” and out of all proportion “to the interest of the party which it is the purpose of the provision to protect”;
4. the court will not lightly interfere with the bargain struck between the parties; and
5. whether it is intended only to punish the defaulting party.

After examining the facts before him, his Honour concluded that the high interest imposed by Quantum was not a penalty (and therefore Love Properties were not entitled to recover any of the interest they had paid) in circumstances where:

1. the facility was high risk and in the short term money market; and
2. Quantum adduced evidence which persuaded the Court that the facility, together with its applicable interest rate was never intended to punish Love Properties for their default and it was dependent on the risk/financial position of Love Properties.