Yarra Capital Group Pty Ltd & Anor v Sklash Pty Ltd [2006] VSCA 109

1 For the reasons set out by Chernov, J.A., I am satisfied that the appeal should be dismissed as to all grounds. I have considered the views stated by Ashley, J.A. as to the argument that the default interest provisions amounted to a penalty. This was a commercial relationship entered into between parties of commercial acumen and experience. There was no disproportionality between them in that regard. On that basis, I prefer the approach of Chernov, J.A. Accordingly, I would dismiss the appeal.

2 This is an appeal against the order of a judge of the Supreme Court, made on 11 November 2004, by which his Honour dismissed the appellants' appeal against the decision of a Master of the Supreme Court made on 7 October 2004 that there be summary judgment for the respondent in an amount that represented moneys and interest that were due and payable to the respondent by the first appellant as borrower and the second appellant as guarantor. His Honour went on to order that there be summary judgment for the respondent in the sum of $1,527,718, more particularly, for the sum of $889,467 plus interest of $1,653.50 per day from 21 October 2003 to 11 November 2004. On 25 November 2004 the appellants instituted an appeal against his Honour's decision. Before dealing with the various issues raised by the appeal, it is necessary to set out briefly the circumstances leading to the litigation.

Relationship between parties

3 At all relevant times, the first appellant[1] and the respondent each conducted a money lending business that involved making short term loans, in circumstances of

significant risk and, effectively, at unusually high rates of interest.[2] Between 29 November 2001 and 19 June 2002 the respondent made eleven short term loans to the first appellant totalling $824,500, but we are only concerned with six of the loans ("the six loans") that were made between 18 February and 19 June 2002. Each loan was made pursuant to a deed between the respondent as lender and the first appellant as borrower. In each case the second respondent guaranteed the loan, but otherwise the loans were unsecured. It was accepted by the parties that the loan agreements and guarantees were relevantly in identical terms and that Schedules A[3] and B,[4] that were attached to the Master's reasons for judgment (and that are reproduced as an annexure to these reasons), set out relevant particulars relating to the six loans. I will come back to the contents of the schedules, but for present purposes it is only necessary to refer briefly to the relevant terms of one of the six loans. As I have said, the remaining five of the six loans were, so far as is relevant, in the same terms. Thus, for example, the loan that was the subject of the first deed that is referred to in the schedules was for $100,000 and the period of the loan was 18 February to 19 April 2002. The "once only" fee for the two months' loan was $20,000 so that, if there was no default under the deed, the first appellant would relevantly pay no more than that sum by way of consideration for the loan and, obviously, the respondent's earnings on that loan would be limited to that amount. The deed also provided that, if the loan was not repaid by the due date, the first appellant was required to pay the respondent, as is shown in Schedule A, the amount of $328.50 for each day that the loan, or any part of it, was outstanding. Clause 8(b) of the deed provided that all moneys received by the respondent from the first appellant were to be applied first to the satisfaction of accrued interest and, secondly, towards the satisfaction of the principal sum. Clause 8(d) contained the usual certification clause as to the amount due under the deed and clause 10 stipulated that time would be of the essence in respect of the borrower's obligations under the agreement.

4 It was accepted by the Master and by his Honour (and not challenged on appeal) that, during the period in question, the first appellant made payments to the respondent in respect of a number of the loans and that the respondent appropriated such payments, first, to interest due under the respective loans and then to the principal debts, as shown in the "Appropriation Table" that was tendered in evidence by the respondent. On the respondent's case, notwithstanding those payments, and having regard to its attribution of the sums as I have described, a significant amount was left outstanding under the six loans. The respondent wrote to the first appellant, first on 6 November 2002, and then again on 18 March 2003, demanding payment of the outstanding balance**.** There was no relevant response and, in the result, on 21 October 2003 the respondent commenced this proceeding claiming, by way of debt, the sum of $889,467 made up as follows:

Principal sum $415,000

Fixed fee $ 52,500

Default "interest" $763,850

$1,231,350

Less - Default interest received $ 341,883

$ 889,467

By their amended defence, filed on 11 December 2003, the appellants admitted the six deeds and guarantees but denied breach. They claimed that the deeds were varied so as to postpone, in each case, the due date for repayment. Consequently, it was said, the moneys were not due as the respondent claimed. On 21 May 2004, the respondent filed a summons pursuant to Rule 22.02 of the Supreme Court (General Civil Procedure) Rules 1996 ("the Rules") seeking summary judgment for the amount claimed in the writ and, on 2 July 2004 the appellants foreshadowed a further defence**,** namely, that the default interest charged in each case amounted to a penalty and was, therefore, unenforceable. That was another reason, they said, why no moneys were due to the respondent as claimed by it.

Hearing before the Master

5 The respondent's summons for summary judgment came on for hearing before the Master on 3 August 2004. The respondent relied on three affidavits that verified the amount claimed in the writ as being due to it pursuant to the deeds. In that context, it tendered six certificates of indebtedness in respect of the six loans that were issued pursuant to clause 8(b) of the deeds and showed the amount that was outstanding under each of the respective loans as at 21 October 2003. The amounts so certified totalled $889,467. It also tendered, as I have said, the Appropriation Table, the contents of which were explained by the respondent's affidavit material. The appellants relied principally on the affidavit of the second appellant, made on 25 June 2004. He deposed to his "belief" that all principal amounts due under the relevant deeds had been paid, but no material was put forward by way of that affidavit or otherwise that supported this vague assertion or challenged the material presented in the respondent's affidavits, including the Appropriation Table.

6 A large part of the argument before the Master was taken up with the appellants' claim that the deeds were varied such that nothing was due by the appellants to the respondent at the date of the commencement of the proceeding. The Master rejected this claim and the appellants have not sought to pursue it before the primary judge or on appeal. The Master also rejected the appellants' claim that the default provisions were penalties and, therefore, were unenforceable, or that that was arguably so. He concluded, by reference to the observation on this issue by Mason and Wilson, JJ. in AMEV-UDC Finance Ltd v. Austin,[5] to which further reference will be made later, that he was not satisfied that the default interest rates exceeded "by a wide margin the greatest loss which [the respondent] ... can suffer as a result of default". In coming to that conclusion, the Master had regard to the fee that the respondent charged as consideration for the loan, the amount of the default "interest" and the fact that both parties were money lenders engaged in short term, high risk financing at, effectively, very high interest rates. The Master was also satisfied that the respondent had proved that the amount claimed by it in the proceeding was due under the deeds relating to the six loans. Relevantly, he was satisfied that, other than for the amount of $341,883, none of the payments made by the first appellant to the respondent in respect of the loans were referable to the six loans; they related essentially to the other five loans.

Hearing before the primary Judge

7 On appeal, his Honour was satisfied that the respondent had established the amount that was due to it under the six deeds and that the second appellant was liable in respect of it as guarantor. The only real issue before his Honour was whether the default rates were penalties and, thus, unenforceable. The learned judge considered that the effective interest rate payable by way of the fee was in the same "ball park" as the default interest. His Honour concluded that the relationship between the parties was one of "mature and sophisticated persons who arrived at the loan agreements exercising free will", that both parties engaged in high risk lending at very high interest rates and that, in the circumstances, the disproportion between the default interest rate and the loss likely to be suffered by the respondent if the loans were not repaid was not such as to characterise the default provisions as penalties. In the circumstances, his Honour was satisfied that there was no real issue to be tried in relation to the penalty interest question and, consequently, made the impugned order on 11 November 2004.

Appellants' stay application

8 On 1 December 2004, the appellants filed a summons in this Court seeking, amongst other relief, a stay of his Honour's orders pending the hearing and determination of the appeal and leave to lead further evidence on the appeal. At the hearing of the summons, on 15 December 2004, the appellants sought leave to rely on the affidavit of the second appellant of 6 December 2004 to which he exhibited, amongst other material**,** four schedules in support of the claim that the Appropriation Table contained errors and that the amount due to the respondent in respect of the six loans was non existent or was less than the judgment sum. This was the first time that there was an attempt by the appellants to challenge, in quantitative terms, the correctness of the appropriation by the respondent of the moneys that were paid by the first appellant in respect of the loans. One of the second appellant's assertions in his new affidavit was that the appellants "believe" that the respondent wrongly applied $110,000 that was paid to it by the first appellant to a loan called "McMurray & Partner Loan to Edenmark Pty Ltd". In response, the respondent produced a memorandum from the appellants that instructed the respondent to apply the above payment to the "loan made to Mr Bryn McMurray and Partner". In the event, the Court ordered that the appellants' application to lead further evidence by way of the second appellant's affidavit of 6 December 2004 be determined by the Court hearing the appeal. Their Honours also ordered, upon the appellants' undertakings that included an undertaking not to transfer or encumber their respective assets before the determination of the appeal, that there be a stay of his Honour's orders until the resolution of the appeal.

Renewed application to rely on fresh evidence

9 At the commencement of the hearing of the appeal before us, the appellants renewed the application for leave to rely on the second appellant's affidavit of 6 December 2004. They also sought leave to rely on a further affidavit of the second appellant of 24 November 2005 in which he acknowledged that he erred in his earlier claim that the respondent had misappropriated the first appellant's payment of $110,000. Nevertheless, the appellants sought to rely on the later affidavit, which annexed schedules that were intended to replace those annexed to the earlier affidavit, in support of the claim that the respondent wrongly appropriated the relevant payments made by the first appellant. It was said that the appropriation was not made in accordance with the principles applicable to running accounts, as it should have been, and that, had there been a proper appropriation of those moneys, the amount due under the six loans would have been materially less than the impugned judgment sum. Moreover, it was said that the affidavits showed that if the default amounts were unenforceable as penalties, the respondent has been overpaid by the first appellant and, therefore, there was nothing due and owing to the respondent at the date of the commencement of the proceeding. We received the two affidavits provisionally on the basis that we would rule finally on their reception when giving judgment in the appeal.

His Honour's test for resolving summary proceeding

10 Before dealing with the appellants' principal arguments relating to the loans, it is convenient to dispose of their claim that his Honour failed to apply the correct principles that govern the disposition of applications for summary judgments. I consider that the argument is without merit. It is apparent that the learned judge was well aware of the correct test for determining whether the respondent should be given leave to enter final judgment. As his Honour said, summary or final judgment should only be ordered where it is clear that there is no real issue that should be tried or investigated at trial.[6] And it is also plain from his Honour's reasons[7] that he applied this test in determining the matter before him. It is true that the appellants' claim that the default provisions amounted to a penalty raised difficult questions of law, but it does not follow that, by reason of this, the respondent should have been denied summary judgment.[8]

Default amount alleged to be penalty

11 I now turn to consider the appellants' principal case that the default provisions in the deeds are unenforceable penalties. The nature and extent of the supervisory jurisdiction of equity and the common law in respect of agreed default provisions in contracts was described by Mason and Wilson JJ. in AMEV-UDC[9] in the following terms:

"[E]quity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term." (Emphasis added)

In providing this remedy the courts seek to strike a balance between the freedom of the parties to contract as they wish and the public interest that calls for the protection by the courts of the weaker party from oppressive burdens or the unconscionable use of power by the stronger party.[10] Nevertheless, in determining whether to provide such relief, the courts treat the parties' freedom to contract as they choose as an important consideration. Thus, in AMEV-UDC, Mason and Wilson, JJ. spoke[11] of the "more recent decisions" which allow the parties greater latitude in determining what their rights and liabilities will be in respect of default provisions, such that an agreed sum will only be characterised as a penalty if it is "out of all proportion to the damage likely to be suffered as a result of breach ... ." And in Robophone Facilities Ltd v. Blank,[12] in a passage to which Mason and Wilson, JJ. referred with approval in AMEV-UDC, Diplock LJ said:[13]

"... the courts would be doing an ill turn to those whom the rule about 'penalty clauses' is designed to protect if they were to apply it so as to make it impracticable for parties to agree at the time when they enter into a contract upon a fair and easily ascertainable sum to become payable by one party to another as compensation for the loss which the latter will sustain as a consequence of its breach. It is good business sense that parties to a contract should know what will be the financial consequences to them of a breach on their part, for circumstances may arise when further performance of the contract may involve them in loss. And the more difficult it is likely to be to prove and assess the loss which a party will suffer in the event of a breach, the greater the advantages to both parties of fixing by the terms of the contract itself an easily ascertainable sum to be paid in that event. Not only does it enable the parties to know in advance what their position will be if a breach occurs and so avoid litigation at all, but if litigation cannot be avoided, it eliminates what may be the very heavy legal costs of proving the loss actually sustained which would have to be paid by the unsuccessful party. The court should not be astute to decry a "penalty clause" in every provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach by the former."

His Lordship went on to say that the onus of showing that such a stipulation is a penalty clause lies upon the party who is sued upon it, although the terms of the clause may be sufficient to give rise to the inference that it is a penalty. Similarly, in Amev Finance Clarke, JA. said,[14] in the context of discussing the principles underlying the doctrine of penalties, that "courts should afford primacy to the parties' freedom to settle for themselves the rights and liabilities following a breach of contract except to the extent that unconscionable or oppressive obligations are imposed upon one party". His Honour concluded[15] that "contractual terms providing for the payment of agreed liquidated damages should be struck down as a penalty only if the agreed sum be either extravagant in amount or impose an unconscionable or unreasonable burden upon a party".

12 It is clear law in Australia[16] that the principles by which the courts determine whether the damages clause gives rise to the inference that it is a penalty have their foundation in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v. New Garage and Motor Company Ltd[17]. It is instructive, therefore, to refer to the relevant parts of his Lordship's speech. Lord Dunedin said[18] that the "question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach". His Lordship went on to suggest various tests that might be applied to "assist this task of construction", the most relevant (and best known) of which is in the following terms:

"It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach".

That Lord Dunedin thought that the disproportion between the agreed sum and the likely loss at least must be significant before the former is regarded as impermissibly extravagant or unconscionable seems evident from his reference to the example given by Lord Halsbury in Clydebank Engineering and Shipbuilding Co v. Don Jose Ramos Yzquierdo Y Castaneda[19] of what might render the agreed default amount unconscionable and, therefore, a penalty. Lord Halsbury said: "For instance, if you agreed to build a house in a year, and agreed that if you did not build the house for [sterling]50, you are to pay a million of money as a penalty, the extravagance of that would be at once apparent".

13 Earlier in his speech, Lord Dunedin referred to the distinction between a penalty and liquidated damages. His Lordship said that the essence of a penalty is that it is "a sum as in terrorem of the offending party" and the essence of liquidated damages is that they constitute "a genuine ... pre-estimate of damage". But it does not follow from this that his Lordship was saying that the default sum cannot be regarded as a genuine pre-estimate of damage unless the promisee establishes that it had actually calculated the amount by reference to the likely loss that it may suffer by reason of the promisor's breach of contract or that there is an arithmetic relationship between the two amounts. I think that in this passage of his speech Lord Dunedin was doing no more than giving a contextual definition of the two terms. Critically, his Lordship went on to say, as I have mentioned, that whether the default sum is one or the other - a penalty or liquidated damages - comes down to a matter of construction in the context of the circumstances existing at the time of the making of the contract. And as was pointed out in AMEV-UDC, in the passage to which I have referred,[20] the drawing of the distinction between a penalty and liquidated damages is one of degree, having regard to the circumstances of the case. It seems to me that those circumstances would include the parties' freedom to determine the terms of the agreement between them as well as the difficulty involved in establishing the quantum of the loss that would be suffered by the promisee by reason of the promisor's breach of contract.

14 Before us the appellants argued that the requirement to pay the daily amount on default was plainly a penalty, having regard to the following factors. First, it was said, the annualised interest column in Schedule A makes it apparent that the agreed sum is so extravagant, when compared with the greatest loss that the respondent was likely to suffer by reason of the appellants' default, that it plainly amounts to a penalty. It was further said that the extravagant and oppressive nature of the impugned default charge is made evident by the fact that the fixed amount accrues daily even where part of the loan has been repaid, so that the position could be reached where, notwithstanding that only a few hundred dollars are outstanding, the daily penalty provision continues to operate at a rate of interest equivalent to many hundreds of per cent. Moreover, it was said, since the respondent led no evidence of the loss it was likely to suffer by reason of the appellants' breach, the court should be more ready to infer that the impugned sum is a penalty.

15 In my view, however, this argument is misconceived in as much as it essentially disregards the relevant terms of the contract and its intended operation at the time of its making, which include the following. First, each of the six loans was made for a very short term, as is apparent from Schedule B, and clause 10 of the deeds that makes time the essence of the contract. It follows from this that, at the time of the making of the loans, the parties must have contemplated that they would be repaid in full within a relatively short time. Hence, the notion that the default amount can operate at a rate of interest that is hundreds of per cent, as was argued by the appellants, is an unrealistic reflection of what the parties relevantly contemplated at the time of the agreement. I also consider that, given the short term nature of the loans, the annualisation of the default amount expressed as a percentage of a loan that was to last only a few months, unfairly exaggerates the true burden of the default provision. The second relevant circumstance to bear in mind in considering whether the default amount is a penalty is that the loans were essentially unsecured. Hence, one would expect that the amount charged for the loans would be substantial. Next, the extent of the loss that was likely to be suffered by the respondent if the appellants breached their obligations under the deeds can be gleaned from the amount of the fee that it charged in respect of the loans as it appears in Schedule B. This shows that, absent default by the borrower, the respondent's expected earnings averaged out, broadly, at about $175 per day and there is nothing in the material that suggests that this did not reflect, in general terms, the minimum loss that the respondent was likely to suffer by reason of the appellants' breach of contract.

16 The appellants' argument also does not take account of the difficulty and expense that would be involved in establishing the quantum of the damage that would arise by reason of their breach of contract given the market in which the parties operated. The default clause obviates the need to undertake such an investigation. That difficulty and expense in estimating damages for breach is a relevant consideration in determining if the agreed sum is a penalty has been recognised in a number of cases. For example, in Dunlop Lord Atkinson cited[21] with approval the following observation of Tindal, C.J. in Kemble v. Farren:[22]

"[W]e see nothing illegal or unreasonable in the parties, by the mutual agreement, settling the amount of damages, uncertain in their nature, at any sum upon which they may agree. In many cases, such an agreement fixes that which is almost impossible to be accurately ascertained; and in all cases, it saves the expense and difficulty of bringing witnesses to that point."

Similarly, Lord Halsbury, in Clydebank Engineering,[23] said: "The very reason why the parties do in fact agree to such a stipulation is that sometimes, although undoubtedly there is damage and undoubtedly damages ought to be recovered, the nature of the damage is such that proof of it is extremely complex, difficult and expensive". And Lord Parmoor observed in Dunlop:[24] "... when competent parties by free contract are purporting to agree a sum as liquidated damages there is no reason for refusing a wide limit of discretion. To justify interference there must be an extravagant disproportion between the agreed sum and the amount of any damage capable of pre-estimate".

17 In the present case it is self-evident that the market in which the respondent operated was materially different from one in which banks and like institutions lend money. In the latter case there would probably be acceptable industry benchmarks as to the cost of money and the prevailing interest rates against which one could establish, with relative ease and accuracy, the loss to the lender arising from its inability to use its money caused by the borrower's default in repayment. But the respondent operated in a completely different market. It was, as I have said, a short term money market where the loans, effectively, were unsecured and where the cost of borrowing was, on any view, unusually high, if not exorbitant. In those circumstances, it would be a complex and expensive exercise to seek to establish, with any sort of precision, what damage is likely to flow from a failure by the appellants to repay the principal on the due date. Thus, the default amount that has been struck by agreement of both parties probably obviated a "minute and somewhat complex system of examination which would arise if you were to attempt to prove the damage".[25] In those circumstances, as I have indicated, the courts are even more reluctant to grant relief on the basis that the agreed damages clause is a penalty.

18 Given the terms of these particular agreements and their intended operation, as I have described, I am not persuaded that it is reasonably arguable that the default clause is so out of proportion with the loss that it is likely to flow from the appellants' breach that it can be properly characterised as being oppressive.

19 The appellants nevertheless claimed that, even if the default rate was not oppressive, it would be unconscionable for the respondent to enforce it and, for that reason, it should be treated as a penalty. Thus, there was some argument before us as to whether unconscionability is a separate basis for treating an agreed default sum as a penalty. The respondent contended that Lord Dunedin in Dunlop did not regard oppression and unconscionability as separate bases for characterising an impugned provision as a penalty. In particular, the respondent pointed to Lord Dunedin's use of the conjunctive "and" when he spoke of the sum stipulated for being "extravagant and unconscionable in amount". I consider, however, that the better view is that, in Australia, unconscionability is a separate ground for striking down an agreed default provision as a penalty. That this is so seems to have been recognised by Mason and Wilson, JJ.A. in the passage of their joint judgment in AMEV-UDC to which I have referred earlier.[26] In that case, their Honours spoke of relief against provisions that are (either) unconscionable or oppressive and went on to identify the degree of disproportion between the amount of the agreed sum and the loss likely to accrue from the breach as a factor relevant to "oppression". The circumstances which their Honours said might render it unconscionable to enforce a default provision were essentially limited to those that arose from the nature of the relationship between the parties, rather than from the amount of the default sum. In Amev Finance, Clarke, J.A. followed this approach in the sense that he considered that the agreed default sum may be struck down as a penalty if it is oppressive or if it would be unconscionable to enforce it. Relevantly, his Honour said that "contractual terms providing for the payment of agreed liquidated damages should be struck down as a penalty ... if the agreed sum be either extravagant in amount or imposes an unconscionable or unreasonable burden upon a party".[27]

20 I note, however, that the recent High Court decision of Ringrow Pty Ltd v BP Australia Pty Ltd[28] is silent on the question whether unconscionability is a separate basis for striking down a default provision in a contract as a penalty. In that case, the court[29] refused to strike down the option clause because, it said, it could not be concluded that it was "oppressive, or was unconscionable and extravagant in comparison with the [relevant] loss". Their Honours said that Dunlop "continues to express the law applicable in this country" and left open "any substantial reconsideration or reformulation ... to a future case where reconsideration or reformulation is in issue".[30] It will be recalled that, in his speech, Lord Dunedin does not appear to contemplate "unconscionability" as a separate basis for striking down the default provision.

21 In the circumstances, however, it is unnecessary to determine the question whether unconscionability constitutes a separate ground for striking down an agreed default sum as a penalty[31] because I consider that neither the burden of the impugned amount nor the relationship between the parties was such as to render unconscionable the enforcement of the default clause by the respondent.

Attack on his Honour's reasoning

22 I mention for completeness the appellants' criticism of his Honour's comparison between the notional annualised fee, expressed as a percentage of the principal, and a like extrapolation of the default charge for the purpose of determining if the latter was impermissibly extravagant. It was said that there were significant differences between the "annual" fees and the "annual" default rates and that, therefore, "the factual premise upon which the learned Judge proceeded was not established by the evidence". Whilst it may be accepted that there is a significant variation as between the several fees charged by the respondent and as between the several default sums, as well as between the fees and the default sums, I think that the comparison undertaken by his Honour was not irrelevant to the determination of the question whether the default provision was, in truth, a penalty. Putting aside the question whether it was appropriate to "annualise" the respective sets of figures, I consider that, for the reasons I have given, it was relevant to have regard to the respondent's earnings on the loans for the purpose of seeing if the default amount is unduly extravagant.

Conclusion on penalty issue

23 In the circumstance, I would reject the appellants' claim that it is reasonably arguable that the default provisions in the six loan agreements are penalties and, thus, unenforceable.

Respondent's allegedly wrongful appropriation of payment

24 I now turn to consider the appellants' claim that the respondent erred in the manner in which it appropriated the various payments made by the first appellant under the loan agreements and that, as a consequence, has overstated in the Apportionment Table[32] the amount due to it. It is convenient to consider this claim together with the appellants' application for leave to rely on the second appellant's affidavits of 6 December 2004 and 24 November 2005 to which reference has been made earlier. The appellants seek to rely on this material to establish that the appropriations were wrongly made by the respondent. In my view, the appellants' claim that the respondent made the appropriation on an impermissible basis is misconceived. If that be so, then there is no purpose in giving the appellants leave to rely on the affidavits, even if one were to disregard the problem that they contain no fresh evidence, and no sensible explanation has been provided for the failure to raise this complaint or to produce this material before the court below.[33]

25 In support of their claim that the respondent had wrongfully appropriated the payments, the appellants contended that the respondent was required to appropriate the money in accordance with the rule in Clayton's Case,[34] namely, by appropriating each consecutive payment to the earliest outstanding loan - the "first in first out" rule. Instead, it was said, the respondent wrongfully appropriated the payments first to interest and then to principal. In my view, however, the rule in Clayton's Case has no application here. The operation of the rule was explained in that case by Sir William Grant M.R. in the context of a current, or running, or blended, account that was in existence between the parties, such as a bank account. In those circumstances, his Lordship said:[35] "[t]here is no room for any other appropriation than that which arises from the order in which the receipts and payments take place and are carried into the account. Presumably, it is the sum first paid in that is first drawn out. It is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side; the appropriation is made by the very act of setting the two items against each other." But it is clear enough that the rule is "a mere rule of evidence and not an invariable rule of law"[36] and, as Lord Halsbury said in Cory Brothers & Co. Ltd v. The Owners of The Turkish Steamship "Mecca" ("The Mecca"),[37] the rule has no operation where the payment in question was properly appropriated by the creditor (or debtor) or where there are distinct and separate debts.

26 In the present case, there is "room" for appropriation of the payments as made by the respondent for a number of reasons. First, there was no account current (or running account) between the parties. A running account, as Dawson, Gaudron and McHugh, JJ. explained in Airservices Australia v. Ferrier:[38] "is merely another name for an active account running from day-to-day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. ... Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt... ." The evidence in this case makes it apparent that the parties conducted their affairs on the basis that each of the six loans constituted a separate transaction,[39] as distinct from a current account. Similarly, each loan was subject to separate documentation, and the communications between the parties relevantly bear out that they treated each loan as being independent of the other loans. Thus, for example, the communication from the respondent to the first appellant of 29 May 2002 makes it apparent that each of the loans referred to in that letter was treated separately from the others. A like observation can be made in respect of the respondent's e-mails to the first appellant of 3 September 2002 and 15 October 2002 and the first appellant's memorandum to the respondent of 11 October 2002. Secondly, and perhaps more importantly, the payments were plainly appropriated by the respondent in accordance with clause 8(b) of the deeds, namely, first against interest and then against the principal.

27 In the circumstances, therefore, the appellants' reliance on Clayton's Case as demonstrating wrongful appropriation of the payments by the respondent is plainly misconceived. It follows, as I have said, that there would be no point in giving the appellants leave to rely on the two affidavits in question.

Sundry matters

28 There are two further matters that were raised by the appellants that should be dealt with. The first was the contention that the first appellant has an arguable set off (of approximately $50,000) against the respondent's claim for the moneys due under the deeds. It was said that the right to the set off arises because the respondent wrongfully debited amounts by way of default interest against at least two of the remaining loans. It was claimed that the respondent had no entitlement to such interest because it was "unenforceable" and was paid under a mistake of law. Consequently, the argument ran, the first appellant can set off these amounts against what is due to the respondent in respect of the six loans and, therefore, the respondent was not entitled to the impugned judgment sum.

29 I think that there are sound reasons why this claim should be rejected. First, it was not contended that even if the appellants have an arguable case for a set off this means that the respondent would not be entitled to the judgment for the balance. Secondly, and assuming that the default amounts were debited by the respondent as the appellants contend, no reason was advanced why the respondent was not entitled to make the impugned appropriations. If it is assumed that the appellants would claim that the default interest was a penalty and, thus, unenforceable, then such a claim would have to be rejected for the reasons that are relevantly the same as those that I gave for concluding that the default "interest" payments in respect of the six loans were not penalties.

30 The second matter relates to the breach by the appellants of their

undertakings to this Court to which I have referred earlier. Contrary to the undertakings, on 2 October 2005, the first appellant gave a fixed and floating charge over its assets. The documentation was executed on its behalf by the second appellant. By summons dated 25 November 2005, the respondent sought various orders against the appellants as punishment for the contempt. It seems clear enough on the material that, upon being informed of the breach in late November 2005, the second appellant caused the charge to be removed, and in his affidavit of 30 November 2005 swore that, at the time of executing the charge, he had forgotten that the undertaking had been given. He said that he did not intend to the breach and apologised for doing so. The respondent's summons came on for hearing at the same time as the appeal and, by consent, the hearing of it was adjourned pending completion of argument on the principal appeal. In the event, the respondent did not seek any orders under its summons. Although it is difficult to accept the second appellant's explanation for the breach, I consider it appropriate, in the circumstances, that, given the respondent's practical approach to the matter, and for the purpose of finalising it, the summons be dismissed. Subject to hearing the parties I consider that the appellants should pay the respondent's costs of and incidental to the summons.

Conclusion as to appeal

31 For the reasons I have given, I would refuse the appellants leave to rely on the affidavits of the second appellant of 6 December 2004 and 25 November 2005. I would dismiss the appellants' appeal and the respondent's summons of 25 November 2005 and, subject to hearing the parties, make consequential costs orders in favour of the respondent.

32 Chernov, JA has very clearly set out the circumstances of this matter, the matters argued below and on this appeal, and why it is that he has concluded that there is no real issue to be tried or investigated at trial whether the provisions

pertaining to default interest in each of the loan agreements identified by the statement of claim amounted to a penalty. I agree in his Honour's analysis save in one respect. We differ in that I would grant the appellants leave to defend - but only so that the appellants might agitate their contention that, in the case of each loan deed, the provisions for default interest amounted to a penalty. I would also make grant of leave conditional upon the appellants paying into Court the minimum amount which the respondent could recover by judgment at trial. I would reserve leave to the respondent to move for judgment for the entire amount claimed in the event that the appellants did not pay moneys into Court as was required.

33 I would grant leave to the appellants to defend so as to agitate the respondent's entitlement or otherwise under the default interest provisions because I have concluded that there is a real question for trial whether the pertinent provisions in each of the loan deeds should be characterized as amounting to a penalty. Central to that conclusion is the provision in each deed that, in the event of default, the interest was to be a fixed amount per day, regardless whether the balance of principal outstanding was every dollar, or one dollar, of the principal sum. Such provision must be considered at the times of formation of the individual agreements. It was then unknown whether there would be default in any particular case. Neither could it be known whether, in the event of default, the principal outstanding would be the entirety of the principal sum, or some part thereof from one dollar upwards.

34 The annualized rates of default interest shown in Schedule A of the Annexure to the reasons of Chernov JA, which are derived from the daily amounts payable in the event of default, are accurate so long as it is appreciated that in each instance they are calculated on the whole principal of the particular loan.

35 But where does that circumstance lead? It might be said, first that the annualized rates of default interest were not always higher, or greatly higher, than the rates of annual interest implied in the fixed fees payable for the various loans. The latter, it might be argued, provided some guide to what the lender could have obtained on its money elsewhere, in which case the default interest might not be shown to be evidently exaggerated.

36 Second , it might be argued that to annualize the rates of default interest, and to rely upon the annualized rates as being indicative of a penalty, was misleading because the relationship between lender and borrower in this case involved a multiplicity of short-term dealings between experienced businessmen, the intent being that the principal of each loan should be repaid on the due date, or at all events in the short-term.

37 Third, emphasis might be laid on the fact that the borrower and lender, personalising their identities, were businessmen evidently operating in a high-risk area of financing - one aspect of which was that loans were in substance unsecured - where high rates of interest could be expected to be paid and to be received; and, in that context, that the borrower and lender, having freedom to contract, willingly entered upon the agreements which they made.

38 Fourth, it is a corollary of the matter last-mentioned, I agree with Chernov JA that, in the milieu in which the parties operated, the reliable quantification of loss deriving from failure to repay principal on the due date might be difficult.

39 The matters to which I have thus far referred tell against the borrower being able to establish - as it must - that the default interest provisions in each of the loan agreements constituted a penalty. But other considerations tell to the contrary.

40 First, the very high rates of default interest demonstrated by annualizing the daily rate represent, in fact, the minimum rates of annualized interest. That is so because, as I intimated a little earlier, they were calculated by reference to the entirety of the principal sum which was loaned in each instance. If, assuming default occurred in the case of a particular loan, only a small part of the principal had remained outstanding, the annualized interest rate must have been extraordinarily high. It is not wrong to consider such a situation because, as I have earlier observed, the quality of the default interest provisions must be considered at the time which the pertinent agreement was made - and at that time it was unknown whether there would be default, and, if so, then what amount of principal would remain unpaid and so constitute the default.

41 Second, whilst one could infer that the parties to the loans, most particularly the borrower, intended and expected, at the time when the agreements were entered into, that the principal would be repaid on the due date, or at least very shortly thereafter, it does not necessarily follow that it is misleading to contemplate the consequences of the default interest provisions on an annualized basis. The usual intention and expectation of contracting parties is that moneys loaned will be repaid on time. But often enough that intention and expectation is not borne out by the course of events. Such intention and expectation, where held by business people - witness the law reports and the financial press - seems to be in no different position. Provisions for default interest address the situation where intentions and expectations turn out to be wrong. There is no necessary time-frame within which a failure to repay will be made good in a particular case. This case illustrates the point.

42 The due date under the sixth and last relevant loan deed was 18 August 2002. The due dates under the first to fifth loan deeds were still earlier. The respondent first demanded payment of outstanding principal in November 2002. It made other demands before commencing this proceeding on 21 October 2003. By that date, of a total of $440,000 principal loaned under the six agreements - and depending upon the validity of the default interest provisions - only $25,000 had been repaid.

43 Third, subject to the circumstance that some payments were applied to default interest, it is the fact that, at the times of default, the entirety of the principal in the case of five of the six loans was outstanding.[40] But that does not gainsay the prospect, when the agreements were made, that in the event of default only a small part of the principal might be left outstanding - this bearing upon the effective rate of interest.

44 I have kept steadily in mind the fact that the appellants carry the burden of showing that the default interest provision in each of the loan deeds amounted to a penalty. I recognize that very substantial weight should be given to the circumstance that the borrower, lender and guarantor were respectively businesses and a businessman on apparently equal terms, and willingly chose to agree as they did. Nonetheless, it appears to me that each default interest provision arguably was capable of imposing a burden upon the first appellant (and the second appellant as guarantor) very far exceeding the loss likely to be suffered by the respondent for being out of its money. That, as I perceive it, is where the evidence presently stands.

45 In those circumstances, I think that the appellants could hope to successfully argue that the default interest provisions amounted to a penalty.

46 Thus far I have focused upon the issue of disproportionality. That leaves open the question whether the appellants must show both that the default interest provision was in each case apt to impose a burden upon them which was greatly disproportionate to the loss which could ensue if the respondent was put out of its money, and that it would be unconscionable for the respondent to rely upon such provisions; or whether it is enough for the appellants to show one or the other. Chernov JA tentatively opines that the latter is the case. If that is the true situation, then on the view which I take the appellants would be advantaged on this appeal. But if that is not so, the appellants' position would be more difficult; for, upon the material presently before the Court, the relationship between the parties was one of mature and experienced equals operating in the field of high risk, high return finance.

47 As I understand the authorities, the question whether, in Australia, disproportionality and unconscionability, or one only of them, must be established by a defendant is not altogether clear. I do not think that it is appropriate to attempt to resolve that question on an appeal such as this, in the context of evidence which is necessarily compressed by contrast with the evidence likely to be adduced at trial. If resolution of that question proved to be decisive, it would be best resolved in a context where all relevant evidence had been adduced, and pertinent findings had been made. In the event, I think that it is enough to conclude, as I have, that the appellants have a properly triable issue whether the default interest provisions amounted to a penalty by reason of potential disproportionality.

48 Other matters require mention. First, it should not be thought that I have overlooked the fact that the appellants, by their defence, by foreshadowed amendments to their defence, and by affidavits sworn by the second appellant, raised a number of issues that were without merit, and which may be said to have reflected adversely upon the second appellant's reliability as a witness. In the context of the default interest argument, however, as the evidence stands, it is not in point whether the second appellant was an unreliable witness. For the appellants' argument focused upon the pertinent provision in each of the loan deeds.

49 Second, it does not follow, from the circumstance that the bare terms of such provision are decisive for present purposes, that such terms will be decisive at trial. So, for example, it may be the case that viva voce evidence will show that it was either possible, or the norm, to obtain from borrowers, in the field in which the parties operated, agreement to pay default interest as a daily amount unrelated to the amount of principal outstanding on a loan. Such evidence might be adduced from a witness called by one or other party. Indeed, it might be the case that the first appellant on-lent the loan moneys, or other loan moneys, under such a regime. It might then be argued that such evidence tended against a conclusion that the terms of the default interest provision in the loan deeds amounted to a penalty, rather than in favour of a conclusion that there was wholesale imposition of penalties in this area of finance agreements. Again, at trial it could be expected that the role of unconscionability would be addressed in the evidence; and that the significance of pertinent evidence, and the question whether unconscionability is a conjunctive requirement if a provision is to amount to a penalty, would be addressed by submissions. In all, the evidence, the submissions, or both, might yield the result that the appellants could not make out their defence to the default interest claim.

50 Fourth, the obligation to pay default interest was imposed by clause 12 of each deed, which relevantly provided:

"The Principal Sum or so much thereof as shall remain unpaid and all other moneys hereby secured or otherwise due hereunder and interest thereon at the Higher Rate together with an Additional Sum being equivalent to the Additional Sum specified in Clause 20.1 shall immediately become due and payable ... upon the happening of one or more of the following events ...:

(a) If default be made by the Borrower in the due and punctual payment of the Principal Sum or any part thereof . . . if such default shall not be remedied by the Borrower within seven (7) days after service of a notice upon the Borrower by the Lender specifying the default and requiring that the same be remedied."

51 The 'higher rate' was defined by clause 1.1 to mean:

"the rate set out in item 6 of the Schedule (subject, if applicable, to variation pursuant to clause 14)."

52 Clause 1.1 also defined the 'lower rate,' in exactly similar language.

53 Item 6 read this way (I take the first loan as an example):

"REPAYMENT OF THE PRINCIPAL SUM AND PAYMENT OF INTEREST:

The Borrower shall repay the Principal Sum together with a fee of $20,000.00 a total of $120,000.00 on the due date herein and failing repayment on the due date shall pay interest to the Lender in the sum of $328.50 per day for each day beyond the due date that the loan is not repaid."

54 Argument proceeded, in effect, on the footing that the daily amount (in this instance, $328.50) was interest at the 'higher rate'. Although the amount was not specifically so identified, and although interest at the 'lower rate' was not specifically identified in item 6, the foundation upon which argument proceeded was probably sound; because the daily amount was expressed to be payable in the event of default in repayment on the due date.

55 Fifth, argument proceeded on the footing, in effect, that clause 12 itself was relevantly unambiguous. That approach ignored the reference in that clause to there also becoming payable, in the event of default -

" ... an Additional Sum being equivalent to the Additional Sum specified in clause 20.1 ...".

56 The particular reference appears to be meaningless. There was no clause 20.1 in the loan deed. Assuming that it was meaningless, no occasion would arise for an argument that provision made for payment in the event of default - by clause 12 and item 6 of the Schedule in combination - more evidently amounted to a penalty because it obliged payment of something even more than the payment of default interest.

57 Sixth, the respondent alleged by its statement of claim that the amount of unpaid principal on the six loans was $415,000, and that the amount of the unpaid fixed fees thereon was $52,500. Whether that was so depended upon the validity of the default interest provisions. The appropriation clause, in the case of each loan deed, provided for the application of payments firstly in satisfaction of accrued interest. The Appropriation Table[41] which went into evidence, the reliability of which was accepted by the learned Master and the learned Judge, shows that a good deal of money paid by the first appellant was so applied.

58 According to the respondent's submissions on this appeal, material before the Court showed that the minimum amount of unpaid principal and fixed fees was $125,617, in respect of which the respondent was entitled to statutory interest, as at 1 December 2005, of $30,845. Counsel for the respondent submitted that in the event that the Court gave the appellants leave to defend, such leave should be conditional upon the appellants paying not less than $156,462 into Court.

59 According to the appellants' submissions, grant of leave to defend should be unconditional. No amount of principal or fixed fees remained outstanding, and the default interest provisions amounted to a penalty. But if that was wrong, the amount of principal unpaid, and interest, might be as little as $112,950; and the appellants had an arguable set-off for some $46,576 besides. It would be wrong in principle to require a payment into Court as a condition of leave to defend. But if such a payment was to be required, it should be for no more than $80,000. That said, appellants' counsel indicated that their clients would consent to an order granting them leave to defend on condition that they pay $42,291 into Court, that amount being calculated on yet another basis.

60 I have already expressed my opinion that the only triable issue which has been revealed - despite the efforts of the appellants to manufacture a number of issues - is whether the default interest provision in each loan deed amounted to a penalty. If those provisions were so characterised at trial, it would impact upon the amount of outstanding principal. In that connection it is to be remembered that the respondent claims that the first appellant, in breach of the loan deeds, failed to repay the principal and the fixed fee,[42] and to pay default interest. So, it is pleaded, the first appellant is indebted to the respondent in the aggregate amount made up of those constituent parts; whilst the second appellant is liable for such amount under the guarantee which he gave in each instance.

61 If the default interest provisions were struck down, the respondent would remain entitled to a remedy against each appellant. The first appellant defaulted on the loan deeds, and the second appellant became liable under the guarantees. The respondent's entitlement could not be less than the amount of unpaid principal and fixed fees plus statutory interest,[43] even allowing that, as presently drafted, the respondent by its claim seeks continuing default interest and not statutory interest. The arguments now unavailable to the appellants being put to one side, I consider that the minimum amount recoverable by the respondent, as at 1 December 2005, was correctly identified - subject to a small error in calculation of statutory interest[44] by the submissions made on its behalf. The case is not one like Associated Bulk Carriers Ltd v Koch Shipping Inc[45] where the plaintiff was evidently entitled to heavy damages but it could not be said that any minimum sum had been quantified. In the event, and updating interest to 30 April 2006, I would grant leave to defend, only in respect of the issue which I have identified and conditional upon the appellants paying into Court, in a form satisfactory to the Prothonotary, the amount of $162,035, being as to $125,617 the minimum amount unpaid in respect of the first, second, third, fourth and sixth loans, together with the amount of fixed fees unpaid in respect thereof; and as to $36,418 statutory interest from 21 October 2003 to 30 April 2006 calculated at the penalty interest rate applicable from time to time.

62 In concluding that the appellants should have to defend upon a condition as to payment into Court, I have kept in mind the fact that whilst the discretion conferred by Rule 22.06(1)(b) of Chapter I has commonly been exercised

". . . when the judge perceives the defence to be 'shadowy', 'insubstantial', 'tricky', 'suspicious', or 'almost one in which summary judgment should be ordered', "[46]

yet the discretion is not so fettered.[47] In the present case, I think that a number of circumstances are in point.

63 First, the respondent will surely be entitled to judgment for no lesser amount than the amount which I propose the appellants should pay into Court.[48] The respondent should have some comfort that the appellants will not fritter away or otherwise dispose of assets between now and trial so as to deny the respondent, de facto, that certain entitlement.

64 Second, it is a related matter, the first appellant admittedly breached undertakings which it gave to this Court in December 2004 not to encumber or transfer any interest in any of its assets. After complaint was made, the breach was remedied. The second appellant deposed that the breach had been innocent. His reliability otherwise as a deponent being doubtful, I would treat that particular assertion with some reservation.

65 Third, the conduct of the appellants thus far in this proceeding seems to me to be of some significance. They have raised a number of utterly untenable arguments. The second appellant has deposed to matters in a manner which in my opinion throws doubt on his reliability as a witness. I consider that the appellants' conduct might well be explained as manoeuvring designed to conceal a reluctance, or an inability, to pay moneys to which the respondent is (at least in part) surely entitled. If reluctance be the explanation, the appellants should reasonably be precluded from continuing to act in such a way.

66 Fourth, the question whether the default interest provisions amounted to a penalty is at least most unlikely to turn on the provisions detached from the identity and experience of the contracting parties, the nature of their long-term relationship, and the field of business in which each of them operated. The present difference of opinion between Chernov JA and me shows that, even upon the limited material presently before the Court, the question whether the provisions should be considered to amount to a penalty is controversial; and at trial, having regard to all the evidence which it can be foreseen will be introduced, and bearing in mind the onus resting on the appellants, the prospect that their argument will succeed may at least be characterised as doubtful, if not insubstantial.

67 Finally, this should be said. The condition that money be paid into Court should not be a toothless tiger. Hence my proposal that, failing compliance, the respondent should be at liberty to move for judgment in the total amount claimed.

[1] At all relevant times the second appellant was the sole director of the first appellant.

[2] In the course of the hearing before us it was contended for the appellants that there was no evidence that the first appellant on lent the moneys borrowed from the respondent. It was said that, in the main, the borrowings were used by it as working capital. But the material before the Court, including, for example, the second appellant's email of 15 February 2002 exhibited by the respondent, his affidavit of 6 December 2004 and an affidavit, filed for the respondent, of 15 June 2004, makes it apparent that moneys from most, if not all, of the loans in question were directly or indirectly applied by the first appellant as loans to others such as "Rose" and "W. Porteous".

[3] Schedule A was prepared by the appellants.

[4] Schedule B was compiled by the Master.

[5] [1986] HCA 63; (1986) 162 C.L.R. 170 at 181.

[6] See, for example, Australian Can Co Pty Ltd v. Levin & Co Pty Ltd [1947] VicLawRp 47; [1947] V.L.R. 332 at 333-334 per Herring, C.J. and Lowe, J., Fancourt Mercantile Credits Ltd [1983] HCA 25; (1983) 154 C.L.R. 87 at 99 per Mason, Murphy, Wilson, Deane and Dawson, JJ., and Ticco Pty Ltd v. Complete Family Healthcare Services Pty Ltd [2005] VSCA 221 at [36] per Charles, J.A. and at [20] per Hollingworth, A.J.A.

[7] See para. [7] above.

[8] See, for example, Sunbird Plaza Pty Ltd v. Boheto Pty Ltd [1983] 1 Qd.R. 248 and Civil & Civic Pty Ltd v. Pioneer Concrete (NT) Pty Ltd [1991] NTSC 3; (1991) 103 F.L.R. 196 at 215-216 per Asche, C.J.

[9] At 193.

[10] See Amev Finance Ltd v. Artes Studio Thoroughbreds Pty Ltd (1989) 15 N.S.W.L.R. 557 at 577 per Clarke, J.A. (with whom Kirby, P. generally agreed and McHugh, J.A. agreed).

[11] At 190.

[12] [1966] 1 W.L.R. 1428.

[13] At 1447.

[14] At 576.

[15] At 576-577.

[16] See, for example, AMEV-UDC at 190 per Mason and Wilson, JJ. and Ringrow Pty Ltd v. BP Australia Pty Ltd [2005] HCA 71; (2005) 222 A.L.R. 306 at 308-309.

[17] [1914] UKHL 1; [1915] A.C. 79.

[18] At 86-87, citations omitted.

[19] [1904] UKHL 3; [1905] A.C. 6 at 10.

[20] See para. [11] above.

[21] At 95.

[22] [1829] EngR 590; (1829) 6 BING 141, at 148; [1829] EngR 590; 130 E.R. 1234 at 1237.

[23] At 11.

[24] At 101.

[25] Clydebank Engineering at 11 per Lord Halsbury.

[26] At para. [11] above.

[27] At 576-577 (emphasis added). See also Multiplex Construction Pty Ltd v Abgarus Pty Ltd (1992) 33 N.S.W.L.R 504 at 511 per Cole, J.

[28] (2005) 222A.L.R. 306.

[29] At 312 (emphasis added).

[30] At 309, citing O'Dea v. Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 C.L.R. 359 at 400 and Amev v. Artes Studio Thoroughbreds at 566 and 574. I note that in O'Dea at 400, Deane, J. analysed the question in terms of whether the agreed sum provision is "extravagant and unconscionable in amount in comparison with the greatest loss" or whether it is "unreasonable in the burden which it imposes in the circumstances which have arisen", judged at the time of the making of the contract.

[31] See also State of Tasmania v Leighton Contractors Pty Ltd [2005] TASSC 133.

[32] See para. [4] above.

[33] See, for example, Weston v. Connor (Unreported, Supreme Court of Victoria, Court of Appeal, Charles, Callaway and Batt, JJ.A., 9 February 1998, ) at 2 per Batt, J.A.

[34] Devaynes v. Noble; Clayton's Case [1815] EngR 77; (1816) 1 Mer 572; 35 ER 781.

[35] At 608; 793.

[36] Re British Red Cross Balkan Fund [1914] 2 Ch. 419 at 421 per Astbury, J.

[37] [1897] A.C. 286 at 290. See also Lord MacNaghten at 293-294.

[38] (1996) 185 C.L.R. 483 at 504-505 and see also Queensland Bacon Pty Ltd v. Rees [1966] HCA 21; (1966) 115 C.L.R. 266 at 280-281 per Barwick, C.J.

[39] I mention for completeness that the same applies to the remaining loans.

[40] I have assumed that the fifth loan was for $25,000, the fixed fee thereon being $10,000. That is what is pleaded. The copy loan deed exhibited as Exhibit BK 9 to Mr Kamer's affidavit affirmed 15 June 2004 is evidently not the relevant document, despite paragraph 7(i) of that affidavit. It is a document pertinent to another loan made on 3 June 2002. See Exhibit BK 19.

[41] Exhibit BK 20 to Mr Kamer's affidavit sworn 15 June 2004.

[42] In five instances.

[43] The appellants' written outline of argument, at paragraph 27, explicitly conceded that the respondent was able to claim statutory interest on any unpaid principal.

[44] The penalty interest rate reduced to 11% on 1 October 2005.

[45] [1978] 2 All ER 254 at 263 f - j per Browne LJ and at 266 a-d per Geoffrey Lane LJ.

[46] See DMS Shipping & Trading Co Ltd v Lionheart Asia Ltd [1996] 2 Qd R 20 at 23, per Thomas J.

[47] DMS at 21-22, per McPherson JA.

[48] At the last moment, the appellants sought to argue that the respondent had appropriated moneys paid by them to default interest on another loan, and that the amount of such interest could be set- off against any successful claim by the respondent. The submission appeared to be opportunistic, and the basis upon which set-off was said to be available was not developed. Even if the default interest provisions in the loan deeds now under consideration were held to amount to a penalty, a similar conclusion would not necessarily follow in respect of default interest provisions in other loan deeds. Nor would it follow, if the default interest provisions in another loan deed could be shown to amount to a penalty, that default interest paid would be recoverable; still less that a juridical basis for a set-off could be established. In my opinion, the circumstances did not oblige to moderation of my assessment of the minimum amount for which the respondent would be entitled to judgment.