Crescent Capital Ltd as trustee for the Rockdale Central Security Trust v Chanine

1. [1]

   The plaintiff, Crescent Capital Ltd, is a security trustee and brings these proceedings on behalf of a lender, Rockdale Senior Ltd. Judgment for some $57.75 million is sought against the borrower, Rockdale Central Finco Pty Ltd, and three guarantors: Camile Chanine and his companies, Rockdale Central No 1 Pty Ltd and Rockdale Central No 1 Investments Pty Ltd. Mr Chanine also owns the borrower.

2. [2]

   There was ultimately only one issue: whether a contractual provision in respect of default interest is unenforceable as a penalty. It is convenient to review the legal principles at the outset.

Penalties

1. [3]

   The principles in respect of contractual penalties were examined by the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71, Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28. For the purposes of this case, I note five points.

2. [4]

   First, “The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships”: Ringrow at [31]. The Court elaborated at [32]:

3. [5]

   As Keane J put it more recently in Paciocco, “the penalty rule does not operate to displace the parties’ freedom to settle for themselves the contractual allocation of benefits and burdens and the rights and liabilities following a breach of contract”: at [221].

4. [6]

   Second, the evidentiary and persuasive onus of proving that a contractual provision is a penalty rests on the person asserting it: Paciocco at [167] (Gageler J). Of course, the contract may be sufficiently heinous on its face that it is sufficient for the defendant to simply tender the contract, with the effect that the evidentiary burden moves to the plaintiff to call evidence to explain why it is not a penalty. That was the case in First Cash Flow Solutions Pty Ltd v Saad [2023] NSWSC 686 at [56] (Robb J). As White J (as his Honour then was) noted in Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251, evidence is to be weighed according to the power of a party to produce it. Once some evidence is adduced by a defendant which may be sufficient to satisfy the onus, it may fall to the plaintiff to explain the nature of its business, the rates at which it is able to lend, and how it was anticipated (when the contracts were entered into) that the moneys would be re-deployed on repayment of the loan: at [51].

5. [7]

   Third, not much has changed since Lord Dunedin’s classic summary of the principles in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87:

6. [8]

   In Paciocco, Gageler J explained that Lord Dunedin used the word “construction” in Dunlop Pneumatic Tyre Co to refer to something beyond the attribution of legal meaning and extended to all of the circumstances which bore on the legal characterisation of the provision: at [146]. As Keane J put it, “construction” calls for identification of “the legal character of the provision from the effect of its terms in the commercial context in which it is to operate … which does not depend upon the parties’ … subjective intention, purpose or calculations”: Paciocco at [243].

7. [9]

   Fourth, the fact that a higher rate of interest is charged in the event of default does not render it a penalty per se, as long as the increased rate is not immodest and is payable prospectively from the event of default. The commercial reality reflected in higher rates of interest on default was explained by Colman J in Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 at 763:

8. [10]

   Colman J’s observations were cited in Paciocco at [263] (Keane J) and followed in Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231; [2016] NSWCA 328 at [106] (McDougall J, Gleeson and Sackville JJA agreeing). An increased interest rate on default may also be explained by the expectation of the plaintiff of the internal rate of return to be made on its funds: PT Thiess Contractors Indonesia v PT Arutmin Indonesia [2015] QSC 123 at [158] (Jackson J).

9. [11]

   Finally, contractual payments prescribed in the event of default may legitimately protect more than, say, the lender’s exposure to a higher credit risk or a higher cost of funds. As Kiefel J explained in Paciocco, “a sum stipulated for payment on default may be intended to protect an interest that is different from, and great than, an interest in compensation for loss caused directly by the breach of contract”: at [26]. The question is whether the contractual provision for the payment of a sum of money on default was out of all proportion to that interest, whether it be of a business or financial nature: at [29] (Kiefel J). As Gageler J put it, the interest sought to be protected may extend to “interests that the innocent party has in contractual performance which are intangible and unquantifiable”; the entitlement of a party to protect its interests cannot “be limited by considerations of common law causation of damage to protecting only against incremental loss that the party would sustain as a direct result of that breach”: Paciocco at [161].

10. [12]

    Two examples suffice to illustrate this point. In Dunlop Pneumatic Tyre Co, the tyre manufacturer had a price-maintenance agreement with its suppliers. If a supplier sold a product for less than the set price, the supplier was obliged to pay £5 for each article sold. Dunlop called evidence that undercutting its prices would lead to dislocation of its distribution arrangements, including causing retailers to move to competitors and leave the field open to rivals. Where it was difficult to prove the precise amount of loss for any given undercutting, the company had fixed a figure of £5 as a fair and reasonable sum.

11. [13]

    Lord Atkinson concluded that Dunlop’s interest was to prevent a system of injurious undercutting which would damage their trade in globo, “They had an obvious interest to prevent this undercutting, and on the evidence it would appear to me impossible to say that that interest was incommensurate with the sum agreed to be paid”: at 91-92. It would be difficult to prove precisely the damages that might be caused by such an injury; as such, the clause contained nothing unreasonable, unconscionable or extravagant that amounted to a penalty: at 99. Lord Atkinson’s analysis was endorsed in Paciocco: at [26], [28]-[29], [38], [43]-[45], [51] (Kiefel J), [139], [142], [144] (Gageler J), [270] (Keane J).

12. [14]

    The second example is Paciocco, where a bank imposed a late payment fee on its credit card customers. The fee did not vary according to the amount overdue or the length of delay in payment. The bank gave evidence that late payments impacted its commercial interests in three respects: through operational costs, loss provisioning and increases in regulatory capital costs: at [58] (Kiefel J). The bank’s commercial interests were affected if credit card customers, as a cohort, did not make minimum monthly payments by the due date as provisioning costs directly affected profit and the costs of regulatory capital were “a real outgoing”: at [172] (Gageler J). Keane J considered that “the bank’s legitimate interests [were] not confined to the reimbursement of the expenses directly occasioned by the customer’s default” but included “the maintenance or even enhancement of ANZ’s revenue stream for the purpose of making a profit”: at [216]. The late payment fee had the purpose of ensuring that the bank’s revenues were maintained at the level of profitability required by its shareholders: at [216].

The borrower

1. [15]

   Turning to the case at hand, the borrower wanted a loan to refinance an existing loan owed in respect of the development site in Rockdale and to finance construction of 50 residential apartments and ground-floor commercial space.

2. [16]

   As earlier mentioned, Mr Chanine owns the borrower, as well as the two other guarantors, Rockdale Central No 1 and Rockdale Central No 1 Investments. Mr Chanine uses the business name “Chanine Developments”. When this loan was being considered, the lender had already financed another development being undertaken by Chanine Developments, being the construction of a 100 residential unit project in Ryde. Chanine Developments then had four active development projects, including the project the subject of the loan application, the neighbouring development (which was nearing completion), the Ryde development (which was complete) and a hotel development in Campsie. Further, Mr Chanine was reported to have a net worth of $60 million.

The lender

1. [17]

   Phoenix Property Investors corporate group (PPI) is a private equity real estate investment group that manages various funds in the opportunistic real estate, core / core-plus real estate and private debt business. PPI has offices across Asia and manages some USD15 billion in gross real estate assets in Australia and Asia.

2. [18]

   PPI’s Australian subsidiary is Phoenix Property Investors (Australia) Ltd, which holds an Australian Financial Services Licence. Trent Winduss heads the Australian subsidiary, while Miles Lee is Vice President and manages the Australian investments. Both gentlemen gave evidence. No issues of credit arose.

3. [19]

   Mr Lee explained that PPI-managed funds source capital from external investors. The market for capital is competitive, as potential investors have a range of investment opportunities available to them. PPI-managed funds pursue higher risk strategies, with the aim of achieving above market returns. The targeted returns for the funds must be high enough to attract investors who have the risk appetite for the intended investment strategy of the fund, but must also be achievable. For investors that decide to invest, this targeted return forms part of the investment mandate for the fund.

4. [20]

   The PPI-managed fund which provided the loan funds in this case was Phoenix Asia VI Fund (the Fund). PPI incorporated two special purpose vehicles for this transaction, being the plaintiff and the lender. The plaintiff is the trustee of a security trust established for this investment. Both the plaintiff and the lender are owned by the Fund and managed by PPI.

5. [21]

   The Fund comprises four PPI-managed investment vehicles: Phoenix Asia Real Estate Investments VI (A), L.P.; Phoenix Australia Real Estate Investments VI (B), L.P.; Phoenix Asia Real Estate Investments VI (C), L.P. and Phoenix Asia Real Estate Investments VI (D) S.C.S. External investors invested in the Fund via one or more of these vehicles. The constitutional documents for each investment vehicle state that the investment objective of the vehicle is to achieve a gross portfolio rate of return of 20% plus. For example, the constitutional document for Phoenix Asia Real Estate Investments VI (A), L.P. states the following investment objective and policy:

6. [22]

   The constitutional documents for this investment vehicle set out a ‘waterfall’ structure: first, investors receive back their share of capital invested into the realised asset, then their share of capital invested into assets which may have been written down or written off, and then a return of 8% per annum compounded annually. After this, returns are shared in set proportions between the investors and PPI. Mr Lee said the priority given to the 8% return to investors in the ‘waterfall’ meant that, the longer investors were out of their money, then the greater the return needed to be before PPI can share in the profit.

7. [23]

   The process for a PPI-managed fund to make an investment is that the originating team seeks a recommendation from the fund’s investment committee (the IC) to the PPI board of directors that the fund make the investment. One of the matters addressed by the originating team is whether the forecast return from the proposed investment achieves the targeted internal rate of return (IRR) for the fund, including in potential distress or default scenarios. Mr Lee and Mr Winduss agreed that the IRR is a conventional performance metric in fund finance and, within PPI, is the critical metric for evaluating potential investments.

8. [24]

   Mr Winduss has worked in finance for 22 years. He has been involved in originating some 50 investments during his time at PPI. He considered that achieving the targeted IRR was necessary to encourage future capital funding in the Fund, to ensure future investing and re-investing in other PPI funds, and to preserve PPI’s reputation among investors and those looking to invest generally.

9. [25]

   Mr Lee has worked on some 33 proposed investments in his time at PPI and understands that the IC will not recommend an investment that is not forecast to achieve the target IRR. He is not aware of any occasion where an originating team within PPI has sought approval for such an investment, nor aware of the IC recommending such an investment.

10. [26]

    Further, Mr Lee explained that PPI’s business as an investment manager depends on its ability to raise capital, and so it is extremely important to PPI that it maintains a reputation in the market for achieving its targeted returns for the funds it manages. If the targeted return for a fund is not achieved, PPI loses credibility as an investment manager in the market. Potential investors are less likely to invest or re-invest into PPI-managed funds in the future.

The loan proposal

1. [27]

   Mr Lee was involved in negotiating the terms of the loan, including as to pricing. By pricing, Mr Lee referred to the various ways that the investment generated return, including interest and fees. The pricing aspects of the investment were important, because the investment had to achieve the targeted IRR of the Fund.

2. [28]

   In May 2020, Mr Chanine signed an Indicative Loan Term Sheet in respect of an 18-month loan of $26.5 million. The loan funds were to be used as follows: $6.63 million to refinance a land loan, $16.12 million for construction, and the balance for capitalised interest and fees. The maximum loan-to-value ratio (LVR) was 70%. The interest rate was 6% per annum, calculated daily and capitalised monthly in arrears. The interest rate would be:

3. [29]

   By September 2020, Mr Lee had completed the Final Investment Recommendation to the IC in respect of the loan. By now, the LVR had increased to 74%. The interest rate and line fee had increased by 10 basis points each. Interest was now 6.1%. Default interest was unchanged. It is evident from the Final Investment Recommendation that these terms had been the subject of negotiation. The paper noted “we were able to leverage our relationship to negotiate favourable terms”. Further, “We successfully negotiated returns to meet the Fund’s minimum return hurdle despite also being in a first-ranking senior mortgage position with a personal guarantee.”

4. [30]

   Mr Lee said the key metric in the Final Investment Recommendation was the IRR, which was the primary focus of his analysis. Indeed, the Final Investment Recommendation noted six times that the forecast performance of the proposed investment achieved the 20% target IRR for the Fund. Mr Lee agreed that the 20% IRR was supported by the interest rate of 6.1%, a line fee of 4.1% and a 2% establishment cost. The paper included a table recording the metrics for the proposed loan, both as calculated in an earlier recommendation and in this final recommendation. In both cases, the projected IRR remained at 20%. Mr Winduss reviewed and signed the paper, being satisfied that the pricing of the loan enabled the targeted IRR to be achieved.

5. [31]

   The Final Investment Recommendation included a sensitivity and scenario analysis, examining the Fund’s returns in the event of a fall in the market value of the apartments, failure to achieve pre-sales and default by the borrower. The paper noted that, in the event of default, the 20% IRR was achieved for up to an 18 months’ further holding period without discounting the price of apartments, or up to a further three months holding period with 25% discounting. The analysis examined the impact of pre-sales on return, noting that the developer had been incentivised to achieve pre-sales by offering a 25 basis points discount to interest rate and line fees if 70% presale debt coverage was achieved. If the developer achieved this within three months of the loan facility, this would slightly reduce the Fund’s expected returns to 19% IRR. The paper concluded:

6. [32]

   Appendix E to the paper included a Default Sensitivity Table. Mr Lee prepared this table to account for the impact of the 10% default interest on the Fund’s targeted IRR. The table showed the IC how the potential return on the loan could be protected, including the default interest, having regard to two variables: months beyond the loan term, and a fall in the value of the collateral property. Appendix E did not specifically refer to default interest but the 10% default interest rate was an assumption included in modelling the output of the sensitivity table. Where the loan was not repaid on time, Mr Lee said the lender “would need additional pricing support to maintain a rate of return over a longer time horizon”. That, combined with the standard interest rate, loan fee and establishment fee, provided the return output. The table did not explain how the 10% had been arrived at, as opposed to other interest rates.

7. [33]

   Mr Lee re-performed his sensitivity analysis in these proceedings, excluding the impact of the 10% default interest. The result was that the IRR fell below the targeted IRR in all of the default scenarios identified in his paper. Having re-performed the analysis without the 10% default interest, “basically in every case, it was under-performing the 20% target in a default scenario, every time”.

The loan agreement

1. [34]

   In September 2020, the parties entered into “Syndicated Loan Note Subscription Agreement – Rockdale Central” (the Loan Agreement). The facility limit was now $28.9 million and the term was now 21 months from the initial drawdown. The loan was secured over the development site. The payment of all amounts owing to Rockdale Senior by the borrower was guaranteed by each of the guarantors, who further indemnified Rockdale Senior and the plaintiff against any loss or liability sustained by the borrower’s failure to pay. The obligors were also obliged to pay the lender’s costs of exercising its rights on a “full indemnity basis”: cl 11.1.

2. [35]

   Clause 5 dealt with interest and fees. Interest was 6.10% per annum and was capitalised: cl 5.1, 5.2. A line fee of 4.10% per annum was also payable, and capitalised: cl 5.3. In addition, an establishment cost of 2% of the Facility Limit, being $578,000, was payable from the first drawdown: cl 5.4. In the event that the borrower achieved 70% pre-sales, then the interest rate was reduced to 5.85% per annum and the line fee rate was reduced to 3.85% per annum: cl 5.5.

3. [36]

   Clause 6.1 provided that the borrower was obliged to repay the Total Principal Outstanding on the Final Repayment Date, being 21 months after Financial Close. Events of Default were defined in cl 9. Default interest was dealt with in cl 13.3, which provided:

4. [37]

   In September 2020, the first drawdown notice was issued for some $6.65 million, to refinance the land loan. It followed that the Final Payment Date for the facility was in June 2022. In December 2020, the developer entered into a building contract. From January 2021 on, drawdown notices followed each month for construction.

5. [38]

   In March 2022, the parties executed a First Amendment and Restatement Deed – Rockdale Central. The Facility Limit had increased to $30.78 million. The Final Repayment Date was extended to 17 December 2022. The provisions in respect of interest were unchanged. Monthly drawdown notices continued.

6. [39]

   In December 2022, the parties signed a variation letter, extending the Final Repayment Date to 31 January 2023. The interest rate was increased to 7% per annum. The borrower did not repay the loan by 31 January 2023.

7. [40]

   The borrower fell into dispute with the builder. In February 2023, the lender met with both parties and endeavoured to broker a deal, so that construction could continue to completion. In the ensuing months, further drawdowns were made but no deal was reached. In August 2023, the borrower terminated the building contract. The lender appointed a controller to the project, as mortgagee in possession. On 2 October 2024, the lender sent a letter of demand to the borrower and guarantors. No payment was received. These proceedings were commenced.

A point of pleading

1. [41]

   It is necessary to detour to a point of pleading, to identify the metes and bounds of the issue to be determined. These proceedings were commenced in October 2024. The plaintiff sought judgment against the defendants for some $41.5 million plus interest at the various rates specified in the Loan Agreement. In December 2024, Commercial List Responses were filed. The parties put on their evidence, which was largely directed to defences which were not ultimately pressed. In July 2025, this matter was listed for hearing on 16 February 2026.

2. [42]

   On 10 December 2025, the defendants filed a motion seeking leave to amend their pleadings. Relevantly, the defendants sought to raise a further issue: whether cl 13.3 of the loan agreement providing for default interest of an additional 10% was a penalty. (Other amendments were also sought which, although allowed, were ultimately abandoned in closing submissions.)

3. [43]

   The application was opposed by the plaintiff, who was concerned that the hearing date would be lost. The plaintiff’s solicitor made an affidavit setting out the somewhat unsatisfactory procedural history of the matter, including repeated delays by the defendants in complying with directions. If the amendment was permitted, then the plaintiff’s solicitor considered that it would be necessary to adduce lay and expert evidence; this would be difficult to achieve in the time remaining until trial.

4. [44]

   The application to amend was heard by Peden J on 16 December 2025, being the last week of Court term. The defendants’ counsel indicated that no evidence was going to be served on the issue of penalty; the defendants would simply rely on the construction of the contract. It would suffice if Mr Lee put on evidence addressing that subject, which the defendants’ counsel undertook not to object to under s 79 of the Evidence Act 1995 (NSW). Nor would the defendants put on any evidence in response. The defendants would simply rely on cross-examination of the plaintiff’s witnesses and submissions. On this basis, her Honour granted leave to amend the Commercial List Response, noting that the defendants would not be entitled to file and serve any evidence in relation to the penalty claim.

5. [45]

   As filed, the Further Amended Commercial List Response noted in Part B that the “Issues likely to arise” included:

6. [46]

   However, in Part C, “Defendants’ response to plaintiff’s contentions”, the defendants denied that the borrower was in breach of the Loan Agreement and, further:

7. [47]

   This is an obvious inconsistency between Part B and Part C. On 22 January 2026, the plaintiffs’ solicitors sought clarification:

8. [48]

   There was no response. In February 2026, Mr Lee and Mr Winduss made further affidavits on the issue of penalty, as well as other matters added to the defendants’ case (essentially, in respect of the lender’s dealings with the builder). The deponents did not address how line fees or other amounts under the Loan Agreement were set, other than default interest. The trial began as scheduled. The other amendments to the defendants’ case added on 16 December 2025 occupied the bulk of the trial, but were ultimately abandoned.

9. [49]

   The format of pleadings in the Commercial List is prescribed by Practice Note SC Eq 3. Part A of a Commercial List Statement or Commercial List Response sets out the “Nature of dispute”. Part B sets out “Issues likely to arise”. Part C sets out the parties’ contentions. The contentions should avoid formality, state the allegations the party makes with adequate particulars, and identify the legal grounds for the relief claimed: Practice Note SC Eq 3, pars 9, 11. As Bergin J explained in Brambles Australia Ltd t/as CHEP Australia v Tatale Pty Ltd [2006] NSWSC 204 at [9]:

10. [50]

    Oft cited are Hammerschlag J’s observations (as his Honour then was) in Swiss Re International SE v Simpson [2018] NSWSC 233, “In this List, whilst the Court does not operate as one of strict pleading, it is also not one of no pleading”: at [34]. More precisely, the Commercial List Statement and Commercial List Response stand in the place of pleadings, to which the rules governing pleadings in the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) apply: Capello v Hammond & Simonds NSW Pty Ltd [2021] NSWCA 57 at [26] (Leeming JA, Macfarlan and McCallum JJA agreeing).

11. [51]

    A general rule of pleading is that a party must plead specifically any matter that, if not pleaded specifically, may take their opponent by surprise: r 14.14, UCPR. This rule “secures a party’s right to th[e] basic requirement of procedural fairness”: Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286 (Mason CJ and Gaudron J); [1990] HCA 11. The rule minimises the risk of injustice arising from surprise: Arthur Young v Tieco International (Aust) Pty Ltd [1995] SASC 5173; (1995) 182 LSJS 367 at 370 [14] (Lander J), followed in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets (No 6) [2007] NSWSC 124 at [279] (McDougall J). This rule applies to pleadings in the Commercial List: Malek Fahd Islamic School Ltd v Australian Federation of Islamic Councils Inc [2017] NSWSC 1712 at [85] (Ball J); Resources Equities Ltd v Garrett [2009] NSWSC 1385 at [205] (McDougall J).

12. [52]

    As Practice Note SC Eq 3 makes plain, “Issues likely to arise” as enumerated in Part B are ‘fleshed out’ in Part C. In Cenric Group Pty Ltd v AIG Australia Ltd [2020] NSWSC 624, Stevenson J noted that raising a matter in Part B without then setting out the matters of substance relied upon in support of that issue in Part C is a deficiency in the pleading: at [18]. Nor is it satisfactory that an allegation is made only in the course of reciting “Issues likely to arise”: Tang and Kassem (in their capacity as joint and several liquidators of Elite Plant Hire Pty Ltd (in liq)) v Mecon Winsure Insurance Group Pty Ltd [2020] NSWSC 441 at [22] (Stevenson J).

13. [53]

    It may depend on the detail of the particular pleading. In Commonwealth Bank of Australia Ltd v Chamos [2012] NSWSC 1345, a Commercial List Response stated that one of the “Issues likely to arise” was whether a bank had made a particular representation to the guarantors. Stevenson J concluded, “Although that statement did not appear amongst the defendants’ contentions in the List Response, its presence amongst the issues “likely to arise” was, in my opinion, sufficient notification to [the bank] of this aspect of the defendants’ case”: at [42]. I note that the representation was described in significant detail in Part B in that case. But “the usual way” is that the pleadings in Part C determine the limits in which the trial will be conducted: Cenric Group at [10]; Brambles Australia at [9].

14. [54]

    The problem here is that Part B and Part C of the Further Amended Commercial List Response are apt to confuse. The issues which the defendants consider are “likely to arise” are more expansive than the minimalist contention set out in Part C. The plaintiff sought to clarify the position by correspondence, but was not favoured with a reply. The plaintiff proceeded to prepare for trial in the limited time available, as it said it would in its correspondence.

15. [55]

    Given these pleading deficiencies, the defendants did not ultimately allege that the line fee was a penalty. Rather, the defendants relied on the line fee in support of their argument that cl 13.3 was unenforceable as a penalty. The defendants’ approach was appropriate in the circumstances.

16. [56]

    Part B serves as an introduction to the details which follow in Part C. I consider that the defendants were bound by the contentions in Part C to the extent of any inconsistency with the broader “Issues likely to arise” in Part B. To proceed otherwise would create the risk of injustice, particularly having regard to the defendants’ failure to clarify exactly what their case was, and where the plaintiff had to meet the defendants’ additional allegations within a short timeframe.

Submissions

1. [57]

   Turning to the ultimate issue, the defendants submitted that the predominant purpose test was the true test which had to be applied, although accepted that Paciocco did not clarify whether the sole purpose or predominant purpose test was correct. The defendants submitted that the default rates of interest were imposed on an already high rate of interest. The standard interest rate was 7% per annum compounding monthly. Including line fees, it was 12% per annum compounding monthly. For defaults in final repayment, the interest rate became 17% per annum compounding monthly and, with line fees, 22% per annum compounding monthly. It was the compounding nature of the interest and line fees that rendered the default rates penalties: Bellas v Powers [2023] NSWSC 1198 at [79] (Robb J); Aquamore Credit Equity Pty Ltd v Hung [2021] NSWSC 1681 at [143] (Meagher JA); Commercial N Pty Ltd v Huang [2024] NSWSC 23 at [305] (Henry J) (this case concerned unconscionable conduct, not penalties, and thus is of limited assistance); JCP Holdings Pty Ltd v Ulrich Pty Ltd [2025] NSWSC 911 at [95] (Pike J); Xu v Cao & Du Management Pty Ltd [2025] NSWSC 1077 at [121] (Elkaim AJ).

2. [58]

   The defendants submitted that the contract must be looked at as a whole. This was not a short-term loan. (The term of the loan was originally less than two years, which I consider to be a short-term loan.) It was a years-long loan to facilitate construction of a development. It was also not an unsecured loan, which might otherwise justify a higher default rate. The lender had the benefit of a mortgage against the real property and guarantees from multiple persons including the first defendant. In construing the interest provision, the defendants relied on the whole of the contract including the line fee, which should be taken into account in the course of making an evaluative judgment as to whether the interest clause was a penalty. The line fee formed part of the contract, being an obligation to pay a high amount. It formed part of the context against which the default interest rate fell to be considered.

3. [59]

   The defendants submitted that Mr Lee’s evidence as to why the 10% default rate was necessary should not be accepted. He was not a disinterested expert but an employee who was closely involved in this project. (I reject this submission, where Mr Lee was a fair witness and, particularly, in the circumstances where the plaintiff had to meet the issue of penalty within a short timeframe and where the defendants’ counsel assured Peden J on the amendment application that he would not object to Mr Lee’s affidavit on the basis that he was not an expert.) Mr Lee’s table did not establish that the 10% default compounding rate was necessary for the financial viability of the loan, but rather that the lender would be better off and better protected with the 10% default rate than without it. Mr Lee’s evidence did not attempt to distinguish between the 5% default rate and the 10% maturity default rate. His evidence did not establish that the 5% default rate would not be sufficient to protect the lender’s interests. As to the 5% default rate, it applied when there is any kind of default. The lender had not sought to justify that default rate either. (Nor was the lower default interest rate of 5% relevant to the circumstances at hand.)

4. [60]

   The plaintiff submitted hat this case was far removed from JCP Holdings, Bellas v Powers and Commercial N, where provisions resulted in rates such as 118.6% per annum or 151% per annum. The line fee did not impact on the question of purpose or whether the default interest was a genuine pre-estimate of loss. Further of the plaintiff’s submissions are set out below, where I have accepted those submissions.

Conclusion

1. [61]

   Returning to the principles summarised at the outset, the first point (upholding the freedom to contract) is significant in this case. The defendants accepted that they were experienced property developers. When this loan was in contemplation, Mr Chanine had a net worth of some $60 million. He was involved in four property developments and appears to have enjoyed some financial success, presumably in that field. Mr Chanine was well placed to assess whether the terms of the loan were commercially acceptable.

2. [62]

   It is apparent from the Final Investment Recommendation that the pricing of the loan was the subject of negotiation: see [29]. The borrower had plenty of time to consider whether to proceed with this loan, between the term sheet in May 2020 and the Loan Agreement executed four months later. As such, there must be “good reason” to interfere in the parties’ bargain, specifically, the contractual provision must be “extravagant and unconscionable” and “out of all proportion”: Ringrow at [32].

3. [63]

   And this first point is also the answer to the defendants’ various complaints about the line fee “or other amounts”. Even if the defendants’ pleading permitted it to contend that the line fee “or other amounts” were penalties, the line fee and the establishment fee were agreed at the outset and did not increase in the event of default. Clearly, Mr Chanine thought the pricing of this loan was acceptable and he was in a position to know.

4. [64]

   As to the second point (onus of proof), I do not think it can be said that the Loan Agreement is so heinous on its face that it is sufficient for the defendants to simply tender the contract and pass the evidentiary burden to the plaintiff, to explain why it was not a penalty: First Cash Flow Solutions v Saad. To submit that the interest rate and fees were ‘high’ is devoid of meaning in the absence of evidence of the rates of interest and fees then available in the market for this type of loan. The fact that an experienced property developer thought the fees were commercially acceptable at the time suggests otherwise. Indeed, I do not think the evidentiary burden passed to the plaintiff in this case at all. This judgment can end here.

5. [65]

   If I am wrong about this, then I proceed to the third point (applying the principles in Dunlop Pneumatic Tyre Co). The cases relied on by the defendants are a long way from the case at hand.

6. [66]

   In Aquamore Credit Equity Pty Ltd v Hung [2021] NSWSC 1681 (upheld on appeal in Hung v Aquamore Credit Equity Pty Ltd [2022] NSWCA 272), the interest rate was 30% per annum but increased to 60% per annum in the event of default. Meagher JA held that the clause amounted to a penalty. His Honour considered that the lower interest rate charged at the commencement of the loan reflected what the parties regarded as a commercially acceptable interest rate, having regard to the lender’s then assessment of the borrower’s credit risk and the nature of the finance as short-term lending for the purpose of property development: at [142]. Doubling that interest rate could not have been thought at the time to be a genuine pre-estimate of an interest rate that would take account of the increased credit risk that the borrower represented in the event of default; rather, it was intended to discourage actions that might result in an increased credit risk by imposing a sufficiently exorbitant interest rate to have that effect: at [143], [145].

7. [67]

   In Bellas v Powers, an interest rate of 21.3% per annum was increased to 118.6% per annum on default. Robb J referred to “the exorbitance of the difference”: at [72]. Unpaid interest was capitalised and, when this was taken into account, resulted in interest of 200% in the first year, 600% in the second year and so on exponentially: at [57]. His Honour accepted that the lenders had an interest to protect, being their ability to enjoy interest on their monies in the market in which they operated, extending bridging finance secured by a mortgage over real property: at [73]. But the evidence did not support a finding that, in the event of any default at all, the credit risk would increase sufficiently to justify the exorbitant increase in interest rate: at [78]-[79].

8. [68]

   In JCP Holdings, Pike J considered a short-term loan where default interest applied on and from the third month, with default interest to be paid at 8% per month on the balance of the loan outstanding and capitalised monthly. The provision had the result that interest of 151% per annum was payable in the first year, and 382% interest payable in the second year. As to the lender’s interest sought to be protected, there was some evidence that the moneys, if repaid on time, would have been used to pay interest on loans. Pike J concluded that the provision was a penalty, “Having regard to the exorbitant effect of the capitalisation … and absent the identification … of any legitimate interest of the plaintiff that the clause is designed to protect, I am driven to the conclusion that the predominant purpose of the clause is to punish the defendants for breach, and thus compel performance”: at [95].

9. [69]

   Similarly, in Xu v Cao & Du Management, a loan of $3.3 million increased to over $71 million in seven years due to “staggering” default interest provisions. Specifically, default compound interest was 3% per month. Beyond the fact that the unsecured loan was risky, there was no evidence that the compounding interest rate was a genuine pre-estimate of loss, where Elkaim AJ noted that a guarantee given in respect of the loan was designed to lessen the risk: at [120]. His Honour concluded that the compounding interest rate was in “extravagant or unconscionable disproportion” and therefore unenforceable as a penalty: at [121].

10. [70]

    Closer to the facts at hand is Fayad v B & G Properties Pty Ltd [2022] NSWCA 129, where both the lender and borrower were experienced property developers. The lender had recently enjoyed a return on an investment of some 27.5% per annum over four years and was seeking to reinvest those funds. No issue was taken about an interest rate of 25% per annum for a short-term loan of six months for the purposes of property development. On default, the interest rate increased to 30% per annum, which was “a relative increase of one fifth”, reflecting “a modest increase”: at [36]. The default rate was not penal.

11. [71]

    As the plaintiff submitted, the central question is whether cl 13.3 had as its predominant purpose to punish the borrower for breach, and thus to compel performance: Arab Bank at [74(2)]. Mr Lee’s evidence made plain that the purpose of cl 13.3 was to protect a legitimate interest of the lender, being the all-important IRR of 20%. It was not stipulated in terrorem of the borrower as the party in breach of the Loan Agreement. Given the calculations undertaken by Mr Lee at the time of entering into that agreement, it could not be said that the stipulation in cl 13.3 was extravagant or out of all proportion to, or unconscionable in comparison with, the maximum amount of damage that might be anticipated to follow from the borrower’s ‘maturity default’: Arab Bank at [74(3)], [74(5)].

12. [72]

    Turning to the fourth point (default interest generally), this was not a case where the default rate applies to any default, either retrospectively or irrespective of the nature and potential impact of that default on the lender. Clause 13.3 differentiates between two different classes of Event of Default, being:

13. [73]

    There was also the potential for the interest rate to come down if the 70% pre-sales target was reached. In that event, the lender would have more security for repayment of the loan. The lender has factored this in, even dipping slightly below the required 20% IRR in that event. Nor is compound interest penal per se. As Ball J (as his Honour then was) explained in B & G Properties Pty Ltd v Fayad [2021] NSWSC 1382 at [31]:

14. [74]

    And finally, the evidence of Mr Lee and the contemporaneous documents make plain the lender’s interest which was sought to be protected by cl 13.3. That interest was the need to ensure that the Fund, and its investors, achieved an IRR of 20%. Mr Lee’s evidence as to the central importance of the IRR is corroborated by the Final Investment Recommendation. It was necessary to achieve this in order to meet the IRR promised to investors in the Fund, and to ensure the ongoing competitiveness of PPI in the marketplace.

15. [75]

    As the plaintiff submitted, it is not sufficient for the defendants to contend that some lesser rate of default interest may have protected the interest of the lender in achieving the targeted IRR: Arab Bank at [74(6)]. Here, the lender sought a particular return and a sophisticated borrower took no issue with the terms on which the lending was offered: Fayad v B & G Properties at [34]-[37] (Leeming JA, Bell CJ and Basten AJA agreeing). It was clear from Mr Lee’s evidence that the default interest factored into the sensitivity analysis and was relevant to whether the lender would make this loan at all. True it is that the lender did not take the guarantees into account in this analysis. But there is no evidence that doing so was “unconscionable”, as opposed to prudent. The defendants have failed to discharge their burden of proving that the default interest provision was out of all proportion to the lender’s interest sought to be protected by that provision. This defence fails.

Orders

1. [76]

   The plaintiff sought its costs on a full indemnity basis, in accordance with cl 11.1 of the Loan Agreement. Upon determination of the penalty issue, the plaintiff would provide a certificate under cl 23.4 of the Subscription Agreement: Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643; [1935] HCA 49.

2. [77]

   The plaintiff is entitled to its costs in accordance with the parties’ agreement as documented in the Loan Agreement: Macquarie International Health Clinic Pty Ltd v Sydney South-West Area Health Service (No 3) [2010] NSWSC 1139 at [22], [39] (Nicholas J); Westpac Banking Corporation v Mason [2011] NSWSC 1241 at [38] (McCallum J); Secure Funding Pty Ltd v StarkSecure Funding Pty Ltd v Conway [2013] NSWSC 1536 at [6] (Black J). The defendants did not contend otherwise.

3. [78]

   For these reasons, I make the following orders:

   1. (1)

      Declare that cl 13.3 of “Syndicated Loan Note Subscription Agreement – Rockdale Central” (the Loan Agreement) dated 17 September 2020 between the plaintiff and defendants is not unenforceable as a penalty.

   2. (2)

      Declare that the plaintiff is entitled to judgment against the defendants as sought in the Summons filed on 14 October 2024, including with interest at the various rates specified in the Loan Agreement.

   3. (3)

      Direct the plaintiff to provide a certificate under cl 23.4 of the Loan Agreement of the amount owing, including interest, within seven days, so that judgment may be entered against the defendants.

   4. (4)

      Order the defendants to pay the plaintiff’s costs of these proceedings on a full indemnity basis, in accordance with cl 11.1 of the Loan Agreement.