In the case of Fayad v B & G Properties Pty Ltd [2022] 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
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.
