15% p.a. Interest Clause Held To Be A Penalty And Not Enforced

At the end of 2010 the High Court in Northern Ireland declined to enforce a clause providing for interest to accrue on unpaid monies at 15% per annum. The judgment is notable for contracting parties throughout the British Isles as well as those using English law elsewhere. The case is one of many to arise out of the property boom in Northern Ireland from 2005 to 2007 and the subsequent crash. The facts were simple. The defendant defaulted on a contract to buy an apartment (having bought in good faith but been unable to raise the necessary mortgage finance when the time came). The vendor-claimant obtained a judgment for damages. This included the interest that the claimant had lost on the purchase monies that the defendant had not paid.

The judge (Deeny J) declined to enforce the contractually agreed interest rate holding that: "the high and round figure of 15% was clearly, on the balance of probabilities, a penalty designed to deter a purchaser from defaulting on completion". When the contract was concluded in April 2007 the Bank of England's base rate was 5.25%, in contrast to 0.5% when the case was decided. The judge instead awarded the claimant interest to reflect its actual loss finding that "a fair measure" was 5% per annum.

While the courts of Northern Ireland (despite being a separate jurisdiction) have provided cases that have helped develop English law, this judgment is unlikely to be followed in England and Wales because of the following:

In a similar case in 2009 the English Court of Appeal held: "a contractual rate of 15% was [not] in any way exorbitant in July 2001 [when the base rate was also 5.25%]" (Taiwan Scott Company Ltd v The Master Golf Company Ltd, at [17]). For Deeny J that judgment was only strongly persuasive, adding that such English judgments may be less relevant to Northern Ireland following the constitutional devolution of justice there. Deeny J distinguished Taiwan Scott because the contract in issue was between two commercial concerns, whereas the contract before him was between a commercial entity and an individual. While the courts may be likelier to find penalty clauses in contracts challenged by individuals (and some appellate authority confirms this), there is no basis under English law for the judge's distinction. The key is the function of the alleged penalty clause, not whether one of the parties is an individual. In fact, Deeny J felt he did not need to apply the authorities because the...