Is a Provision for Penalty Interest, a Penalty?

The Supreme Court of Western Australia has recently considered the operation of what is commonly referred to as the ‘penalty interest’ provisions contained in the WA Joint Form General Conditions of Contract for the Sale of Land.

In the decision of Simmons v Love [2015] WASC 79, the Court considered whether

  1. the ‘penalty interest’ provisions, which apply when there is a failure to or a delay in settlement, are an unenforceable penalty; and
  2. whether the commencement of proceedings by a party to enforce a contract for the sale of land causes that party to cease to be entitled to the benefit of the ‘penalty interest’ provisions and instead be required to prove their loss in the ordinary fashion.

The ‘penalty interest’ provisions are a frequent area of dispute between parties. Situations frequently arise where an innocent party seeks the benefit of the ‘penalty interest’ provisions and the party in default (or their solicitor) will allege it is unenforceable as a penalty.

I have long considered the penalty interest provisions are not a penalty. It appears that position is now firmly beyond doubt.

The ‘penalty interest’ provisions do not simply apply interest in the event of a breach.  Rather, it is a liquidated damages clause. The amount of the liquidated damages, however, is calculated by reference to the purchase price of the subject property.

The decision also confirms that by commencing proceedings regarding the enforcement of a contract for sale of land, that the innocent party does not lose or forfeit the benefit of those provisions and have to resort to proving their loss in the usual way.

Rather, the Court has made it clear that the innocent party may elect what measure of damages they wish to apply. An innocent party may seek to have the defaulting party pay ‘penalty interest’ or may claim and prove their damages in the usual manner.

However, a party must elect which measure of damages they wish to claim – they cannot try to be greedy and choose both!

As always, I can be contacted in relation to this post.

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