In Crescent Capital Ltd as trustee for the Rockdale Central Security Trust v Chanine [2026] NSWSC 371, the Supreme Court of New South Wales found that a payment under an agreement for a residential development project did not constitute a penalty.

In September 2020, Rockdale Senior Ltd (the Lender) and Rockdale Central Finco Pty Ltd (the Borrower) entered into a loan agreement for $28.9 million (later increased to $30.8 million) to fund a residential development in Rockdale, New South Wales.

The Borrower failed to repay the loan by the final repayment date and Crescent Capital, as security trustee for the Lender, commenced proceedings seeking judgement against the Borrower and its guarantors for $57.5 million. The central issue was whether a 10% default interest rate under clause 13.3 of the loan agreement was unenforceable as a penalty.

The Court referred to the established principles governing contractual penalties in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, as refined by the Australian High Court in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525. The following points were relevant for the purposes of the case:

• Parties of full capacity have the freedom to contract, and penalties are an exception from the general rule: Ringrow, [31]; Paccioco, [221].
• The onus of proving a provision is a penalty rests on the party asserting it, unless the contract is sufficiently heinous on its face with the effect that the evidentiary burden moves to the plaintiff: Paciocco, [167]; First Cash Flow Solutions Pty Ltd v Saad [2023] NSWSC 686, [56].
• The principles in Dunlop remain relevant including that a sum will be held to be a penalty if it is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
• An increased interest rate on default may be explained by the expectation of the plaintiff of an internal rate of return to be made on funds: PT Thiess Contractors Indonesia v PT Arutmin Indonesia [2015] QSC 123, [158].
• A contractual payment in the event of default may protect more than a higher credit risk or cost of funds: Paciocco, [26].
• The question is whether the sum was out of all proportion to the interest to be protected, whether it be of a business or financial nature: Paciocco, [29].

Applying those principles, the Court held that the 10% default interest rate was not a penalty because it protected the Lender’s legitimate interest in achieving a 20% internal rate of return on its investment, and it was neither extravagant nor out of all proportion to the maximum loss likely to result from the Borrower’s default.

The decision can be found here.