Background
In November 2023, Blackbird First Mortgage Corporation Pty Ltd provided a secured loan to Cam Engineering and Construction Pty Ltd and associated parties to refinance a previous debt. The loan was secured by a mortgage over a residential property. The agreement stipulated an interest rate of 2% per month (24% per annum) and a repayment date of 14 June 2024.
The defendants defaulted by failing to repay the loan by the due date. Blackbird issued default notices and subsequently commenced proceedings in the Supreme Court of New South Wales seeking judgment for the outstanding debt and an order for possession of the mortgaged property. While the defendants did not contest the lender’s right to possession, they disputed the total amount claimed by Blackbird.
The Court’s Holding
Justice Muston granted the order for possession of the property but sided with the defendants on the two key issues concerning the quantum of the debt. The first issue was whether a certificate from Blackbird’s director was conclusive evidence of the debt, particularly regarding claimed “Solicitor Fees” and “Investigating Accountant Fees.” The court found the certificate did not meet the contractual requirements of a “Dobbs clause” because it failed to adequately substantiate the fees and presented two alternative debt calculations rather than a single, conclusive amount. Accordingly, the court was not satisfied that Blackbird had established its entitlement to those fees.
The second and more significant issue was whether the default interest clause was an unenforceable penalty. The loan agreement stipulated that upon default, the interest rate would double from 2% per month to 4% per month (48% per annum), compounded monthly. The court held that this provision was a penalty. Applying established principles, the judge concluded that the doubling of an already high interest rate was “extravagant and unconscionable” and served primarily to deter a breach (*in terrorem*), rather than representing a genuine pre-estimate of the lender’s potential losses from the default. As a result, the default interest provision was deemed void.
Key Takeaways
- A contractual provision that doubles an already high interest rate upon default (e.g., from 24% to 48% per annum) is at high risk of being struck down as an unenforceable penalty.
- So-called “conclusive evidence” or “Dobbs” certificates intended to prove the amount of a debt must strictly comply with the terms of the contract and be properly substantiated; merely listing fees without support is insufficient.
- Courts will scrutinize default interest rates to determine if they are a genuine pre-estimate of the lender’s loss or if their dominant purpose is to punish the borrower for a breach.
Why It Matters
This decision serves as a significant reminder for lenders, particularly in the short-term and high-interest finance market, that there are limits to the default provisions they can enforce. The court has reinforced that penalty-doctrine scrutiny remains robust in Australia, even in commercial contracts between sophisticated parties. Lenders cannot rely on steep interest-rate hikes to deter defaults if those rates are disproportionate to any conceivable loss they might suffer. The ruling underscores the need for default interest rates to have a clear commercial justification, such as reflecting a genuinely higher credit risk or administrative cost, rather than simply being punitive.