Penalty Doctrine: High-Risk Loans Warrant Greater Returns

penalty doctrine

The penalty doctrine again came under the spotlight in Quantum Asset Management Pty Ltd v Love Properties (WA) Pty Ltd [2017].

A 53% per annum interest rate may seem steep, but the Court declined to label it a penalty. The decision took into account the high-risk nature of the loan.


Quantum is a private financial institution lending money to mainly high-risk borrowers. Generally the loans are short term, often not more than six months. Quantum aims for a 36% per annum rate of return across its portfolio. It argues the reason for this is its exposure to higher risk.

In November 2014 Quantum loaned Love Properties $245,000 for a seven month term. Three later deeds of variation increased the term and principal.

Structure of the Facility Deed

The interest rates were set out as follows.

Lower Rate

9.75% per annum (period A)

3.43% per month (period B)

Higher Rate

14.75% per annum (period A)

4.43% per month (period B)

Provided Love Properties made repayments on the due date the Lower Rate in period A of 9.75% per annum applied. This together with the fees reflected in the Special Conditions section of the Memorandum was the cost of the loan.

If Love Properties failed to repay the loan in period A then period B starts and continues until the loan repayment is complete. In this instance the interest rate is 4.43% per month. Period B attracts no fees, only the monthly interest rate which is significantly higher than period A.

Notice of default

Love Properties failed to repay the loan at the end of the term. Therefore Quantum issued a notice of default.

In June 2016 the Court granted summary judgment in favour of Quantum. It ordered Love Properties to pay over $660,000, interest at a daily rate of $952.31 and costs.

Love Properties claimed the amount was excessive and that the interest provision was unenforceable as a penalty. It entered an appeal from summary judgment. This brought the penalty doctrine into focus.

How does the penalty doctrine apply?

When applying the penalty doctrine, each case turns on its own facts. The relevant issues in the current case are:

  • Whether the agreed sum is equal to the interest protected by the bargain
  • Is the sum exorbitant and out of proportion to the legitimate interest of the party?
  • Is the intention only to punish the defaulting party?
  • What is the context of the loan?

At common law it is accepted that risky credit will cost the borrower more.

What the Court decided

The Court asked the following questions.

  • Did the period B interest rate have a purpose other than to punish Love Properties in the event of default?
  • Does Quantum have a legitimate interest that explains the period B rate?

The Court found the answer to be yes to both questions. Here are the reasons why:

  • The context of the loan was the short-term money market and high risk
  • Both parties were commercially experienced
  • Quantum needed to protect its interest in receiving payment, and on time. This included both fees and interest

The period A fees and interest amounted to an annual return of 52.86%. By comparison the period B rate of 53.16% per annum was not exorbitant.

The Court concluded that the purpose of the period B rates were to protect Quantum’s legitimate commercial interests. They were not out of proportion to that interest therefore not acting to punish Love Properties.

The Court dismissed the appeal.


Related articles

Short Term Loan Transaction Fails: Is Borrower Liable?

Late Payment Fee Escapes the Penalty Tag

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.


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