In a recent NZ Court of Appeal decision a late payment fee of over $30 million on a $37 million loan dodged the penalty tag. The Court held the fee to be proportionate to the lender’s interests and so enforceable.

What are the effects of this key judgment? It certainly issues a warning to commercial borrowers. Escaping late payment fees may not be as simple or clear cut.

The decision in Wilaci Pty Ltd v Torchlight Fund No 1 LP [2017] NZCA is relevant to all businesses using late payment fee clauses in their contracts. Although the case took place in New Zealand, Australian law bound the Courts in reaching a decision.

The key facts

Wilaci lent $37 million to Torchlight, a private equity fund. Torchlight needed urgent short-term funding but failed to arrange a loan from a commercial lender. The loan term was 60 days. Wilaci, not in the business of lending, sought to manage its risks. The key conditions included:

• interest of $320,000
• a lending fee of $5 million to be paid 60 days after the end of the term
• a late payment fee of $500,000 per week

Torchlight did not repay the loan within 60 days. Over a period of almost two years Wilaci unsuccessfully requested payment.  Thereafter Wilaci issued a demand for the late payment fee, which by then amounted to over $28 million.

Torchlight refused, arguing that the fee was an unlawful penalty at common law. Torchlight succeeded in the High Court but the matter came before the Court of Appeal due to an appeal by Wilaci.

The arguments surrounding the late payment fee

Torchlight argued that the fee was excessive compared to the loss Wilaci suffered on delayed payment. Therefore it was a penalty. The fee equalled an 80% return on the $37 million loan.

Wilaci denied that the late payment fee was a penalty:

• Firstly, the fee was not payable on breach of term. Rather Torchlight paid the price for the benefit of using the $37 million after the 60 day term ended.
• Secondly, Wilaci said the fee was not extravagant. It amounted to $2.5 million a month. This was less than the lending fee plus interest, which worked out at $2.66 a month.

The decision reached by the Court of Appeal

The Court of Appeal decided that the late payment fee was not a penalty. It concluded that the intention of the fee was not punitive.

In reaching its decision the Court stressed the commercial context of the two parties. Relevant factors were:

• Wilaci was not a commercial lender therefore could demand more protection than a company involved full time in the lending industry;
• it was a high risk transaction therefore Wilaci needed substantial returns;
• both parties had sophisticated commercial experience;
• the fee payable on breach was lower than the cost of credit before default therefore the Court found that it was not extravagant.

What does the ruling mean?

It seems that the Court is less likely to label a clause as a penalty if negotiated by sophisticated commercial parties. However, in cases where there is not equal bargaining power between the parties, the Court may interpret the penalty doctrine more narrowly.

In conclusion, commercial lenders and businesses should carefully examine late payment fees and other liquidated damages clauses.

Related articles

Short Term Loan Transaction Fails: Is Borrower Liable?

Penalty Doctrine: High-Risk Loans Warrant Greater Returns

Avoid Penalty Interest Rates: Pre-Paid vs Retained Interest

Penalty Interest: Higher & Lower Interest Rate Permissible

High Court Clarifies the Operation of the Penalties Doctrine

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.