Mr David Wells was the father of a director of a company that borrowed money to purchase a bulldozer for a new business. Mr Wells gave a guarantee that was secured over his property. The question of whether the guarantee was unconscionable and the default interest void as a penalty was decided on 8 September 2026 in the Supreme Court of Queensland (Parker Wells Pty Ltd v Lenn Financial Services Pty Ltd [2026] QSC 207 (8 September 2026).
The loan was arranged by a broker who used an intermediary to check that everything was in order for the loan to proceed, by vetting the borrower and setting conditions if that was thought necessary.
The loan was a short-term bridging loan that was initially rejected by the intermediary because there was insufficient security. The borrower offered Mr Wells’ property as security that was valued at $250,000 with an existing mortgage of about $30,000.
The loan was for $395,000 to be repaid after 6 months. The loan funds were used to pay out the existing mortgage, pay for the bulldozer and 6 months’ interest in advance.
In June 2020, the law firm advised the lender that Mr Wells had waived his right to obtain independent legal advice, and the loan was advanced in August 2020.
Before the 6-month term expired, the lender agreed to extend the loan for a further 6 months, but the borrower defaulted by failing to make the monthly payments.
In early 2022 the bulldozer was sold, and about $231,000 was paid in reduction of the debt.
The first matter for the court to decide was whether the guarantee was unconscionable and, as such, should be set aside.
His Honour explained that equitable unconscionable conduct requires one party to be at a special disadvantage relative to the other, the stronger party to know of that disadvantage, and the stronger party to exploit it unconscionably.
Actual knowledge is a necessary requirement for the claim to succeed. Mr Well’s claim did not plead that the lender knew of his special disadvantage, which he argued in submissions was his lack of business acumen and near illiteracy. The fact that the lender did not have knowledge of this disability was a flaw in Mr Wells case and this part of his case failed.
His Honour then examined the interest rate that applied to the loan. The default interest rate, being the interest rate that applied on default, was 5.65% per month.
The starting point was that parties who do not have any disability are free to enter contracts and fix the terms, including the consequences of a default. Equity can, however, intervene to declare a provision unenforceable if it is a penalty.
The High Court has held that the two essential elements of a penalty are “threat” and “punishment”. The courts have said that the enquiry as to whether a provision is a penalty can be framed in terms of whether the contractual provision requires an amount to be paid that “is out of all proportion” to, or in “gross disproportion” with, the interests damaged or sought to be protected. Such disproportion would have a punitive character.
His Honour reviewed the lender’s anticipated losses and found that an interest of 65.8% per annum was out of proportion to the loss that the lender might suffer, ordering that the standard rate of 2.15% should apply.
Although this was not a complete victory for Mr Wells, the requirement to pay less interest on the balance of the debt following the sale of the bulldozer must have offered some relief.