The legality of penalty interest charges levied by mortgage lenders on “defaulting” domestic and commercial borrowers, yesterday moved one step closer to re-consideration by Australia’s highest court.
Upholding the time honoured practice of charging a higher “standard” interest rate when in default compared to a “concessional” rate when not, Queensland’s Court of Appeal – bound by the doctrine of precedent – refused to “consign the rule to history” and dismissed the borrower’s appeal against the fairness of a 7.5%/month “penalty” rate.
But in so doing, one of the appeal judges added support to the notion that the semantic distinction that justifies lenders collecting interest at penalty rates for periods of default – because they are labeled as a “standard” rate rather than being plainly called a “default” rate – was an idea whose time had long passed.
Wendy Kellas-Sharpe was ordered in February to pay syndicate lender PSAL Limited $1,366,330.95 – calculated by reference to a (reduced) default interest rate – in connection with the mezzanine loan she took up to acquire a waterfront Lake Cooroibah cattle property in 2009.
Her argument – that the differential between base and default mortgage interest rates was a de facto illegal “penalty” – was refused at first instance but with the trial judge acknowledging that such practice “may have unsatisfactory origins” and that “the time may have arrived for it to be replaced”.
In her appeal, she asserted that “the rule had its origin by way of mistake in the very late 17th century but that in the 19th century it was apparently accepted and adopted by the text writers as settled law”.
Referring to the “so-called rule”, Justice Fryberg on appeal noted “it may express a practice which had some economic utility in the 19th century (although even that is far from clear), but it does not do so in the 21st. There is much to be said for reconfiguring the law in this area”.
Observing that “the correctness of the rule appears never to have been affirmed after a deliberate examination of it by the High Court”, Justice Gotterson cautioned that he was “not convinced that it is plainly wrong”.
Three Supreme Court justices have now declared their support that the principle – which is applied universally throughout the nation’s commerce and any change in which will have far reaching and immediate consequences – is deserving of higher judicial consideration.
The way is now open for Ms Kellas-Sharpe to seek the leave of the High Court of Australia to hear her further appeal.
Kellas-Sharpe & Ors v PSAL Limited  QCA 371 Brisbane, Margaret McMurdo P, Gotterson JA and Fryberg J 21/12/2012