In the case of Fayad v B & G Properties Pty Ltd  NSWCA 129 (22 July 2022), Mr Sam Fayad guaranteed the repayment of a loan from B & G Properties Pty Ltd to his company NR Developers Pty Ltd of $4 milliion. The loan agreement and guarantee was dated 15 February 2015 and the loan was repayable after 6 months. Interest was 25% and was payable in 2 instalments of $250,000. The default interest rate was 30%. The loan agreement was varied to extend the repayment date to 15 December 2018. Some payments were made in reduction of the debt, however, an amount in excess of $1 million remained owing at the time of the proceedings.
There were two issues for the court to decide:
- whether the default rate of 30% applied only to unpaid amounts of principal or extended to unpaid amounts of interest; and
- whether the default rate of interest was an unenforceable penalty.
The first question arises because of the drafting of the clause dealing with default interest. In part it reads as follows: “Default interest and charges will be at the rate of thirty (30%) per centum of the advance per annum or part thereof.” The judges of the Court of Appeal held that there was no reason to apply a different rate of interest to principal and interest that was in default. This is how a reasonable businessperson would construe the contract and that was the test that the High Court had said should apply to the interpretation of a business contract.
As to the default interest rate the court found that an increase of 5% was modest and therefore not a penalty. The court noted that the rate of 25% for a short-term loan to a developer was not challenged as being unreasonable
The appeal by Mr Fayad was dismissed.