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.

Family Law Appeals & Costs – Section 237

Following on from my previous post about applications to cancel costs agreements, I wanted to highlight a recent WA Court of Appeal decision in: S v D [2014] WASCA 224 (S).

This decision dealt with the appropriate costs orders following an unsuccessful appeal from the Family Court of Western Australia. It gives a timely reminder of the High Court’s decision in Penfold v Penfold (1980) 144 CLR 311:

It is an accurate description of s 117(1) to say that it expresses a general rule, provided that it is firmly understood that the sub-section is not paramount to s 117(2). As sub-s (1) is expressed to be subject to sub-s (2), the former must yield whenever a judge finds in a particular case that there are circumstances justifying the making of an order for costs.

Sub-section (2) requires a finding of justifying circumstances as an essential preliminary to the making of an order. Beyond this there is nothing in the subject matter or in the interrelationship of the two provisions which imposes any additional or special onus on an applicant for an order for costs. Consequently, with respect to their Honours in the Family Court, we do not agree with the suggestion made in the judgment under appeal that an order can only be made under s 117(2) in ‘a clear case’ (315).

Section 117 is, of course, in identical terms to section 237 of the Family Court Act 1997 (WA).

The Court of Appeal went on to observe that, as a matter of law, a judge does not have to specify the circumstances which justify the making of an order.

In all of the circumstances, the fact that the Appellant was wholly unsuccessful was sufficient to justify an order for costs against him.

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