A 67.8% Default Rate Was Struck Down as a Penalty. The Unconscionability Claim Failed — and That Gap Is the Part Brokers Should Read

What the court decided

Broker Daily reported on 21 October 2026 that the Supreme Court of Queensland, in Parker Wells Pty Ltd v Lenn Financial Services Pty Ltd, declared a default interest clause void as a penalty. The judgment itself is not yet publicly available, so the detail below is as that outlet reported it rather than as this masthead has read it from the primary record — a distinction worth holding onto before anyone repeats the figures to a client.

On that report, the facts are modest and entirely familiar. A newly established earthmoving business borrowed $395,000 in June 2020 to buy a bulldozer. The loan ran for an initial six months with an option to extend for up to another six. The standard rate was 2.15% a month — roughly 25.8% a year. On default, the rate stepped to 5.65% a month, roughly 67.8% a year, made up of the standard 2.15% plus a 3.5% monthly default add-on.

Justice Hindman found the default rate was a penalty and declared the clause void, with the result that the standard 2.15% a month applies during the default period instead. Two features of the reasoning are worth a broker’s attention. The first is that the loan documents separately entitled the lenders to recover default-related costs and losses — so the add-on was not the mechanism doing the compensating. The second is scale: the court treated the gross disproportion between the two rates as enough, on its own, to infer a predominantly punitive purpose. As reported, the judge said the increased risks flowing from borrower default “cannot justify a more than doubling of the interest rate”.

Notably, a separate capitalisation clause was not struck down. Final orders on possession of the mortgaged properties and on costs were left for further submissions. A finance broker and an intermediary were involved in placing the loan; neither was a party to the proceedings, and nothing in the reported reasoning turns on their conduct.

The claim that failed — and why it matters more

Here is the part that should hold a broker’s attention longer than the headline rate. Alongside the penalty argument, the guarantor ran an unconscionable conduct claim. He lost it.

On the reported reasoning, that claim did not fail because the court doubted his circumstances — the report describes him as financially unsophisticated and nearly illiterate. It failed on knowledge and pleading. Justice Hindman is reported as finding that “there is no pleading that the lenders had knowledge of that special disadvantage”, and that the evidence did not establish that knowledge either. He remains bound by his guarantee and his security.

That is a sobering inversion of how these risks are usually discussed. The informal assumption in a lot of broker conversations is that if a client is clearly out of their depth and the deal goes badly, unconscionability is the backstop. This judgment, as reported, points the other way: the backstop depended on proof of the lender’s knowledge, and the mechanical argument about the clause itself is what actually succeeded.

The test the High Court actually set

The penalty doctrine is not new and not obscure. It was restated by the High Court in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 and refined in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28. In outline, a court identifies the legitimate interest the provision is there to protect — which is not limited to damages recoverable for breach — assesses it looking forward, as at the time the contract was made, and then asks whether the stipulated sum is, in Kiefel J’s formulation, “out of all proportion to the interests of the party which it is the purpose of the provision to protect”.

The threshold is deliberately high. Mere disproportion does not do it; the sum must be extravagant, exorbitant or unconscionable. Keane J put the restraint plainly: “the courts will not lightly invalidate a contractual provision”. Legitimate interests in Paciocco were read generously, extending to provisioning, regulatory capital and collection costs.

So the practical message is not that default rates are now vulnerable as a class. It is close to the opposite: they are usually fine, and a broker who tells a client otherwise is overreaching. What made this clause vulnerable, on the report, was a specific combination — a separate contractual right to recover default costs, which left the add-on with little compensatory work to do, plus a step-up so large the court inferred punishment from its size alone.

Why this lands now

A 2020 bulldozer loan would be a curiosity if the broker channel were not steadily moving volume toward exactly this kind of credit. Broker Daily reported on 19 October that bridging specialist Bridgit has now had more than $1.7 billion committed by investors including Macquarie and Citi, that its lending grew 168% between FY24–25 and FY25–26, and that loan submissions rose 28% quarter on quarter. Its founder and chief executive, Aaron Bassin, said “Australian home owners are increasingly choosing to buy now and sell later”.

Equipment finance is stirring too. On Equifax’s September Business Market Pulse, as reported by Broker Daily on 20 October, asset finance demand fell 3.2% year on year in September — a marked improvement on August’s 12.7% decline. Brad Walters, general manager of commercial at Equifax, described “early signs that Australian businesses are cautiously stepping back into equipment replacement”, adding that “the freeze looks to be thawing”.

Put those together with a softening resale market, where properties sit longer and bridging terms get extended rather than repaid on schedule, and the exposure becomes obvious. Short-dated credit is priced on the assumption that it ends on time. The default column is the part of the term sheet that activates when it doesn’t — and in a slower market, “doesn’t” is a growing share of files.

Where the regulated line sits

This matters for understanding why the borrower was arguing general contract law at all. On ASIC’s own description of when the National Credit Code applies, the conditions include that the debtor is a natural person or strata corporation and that the credit is provided mainly for personal, domestic or household purposes, or to purchase, renovate or improve residential property for investment. A company borrowing to buy earthmoving equipment does not sit inside those conditions.

Where credit falls outside the Code, the familiar protections and the responsible lending framework do not attach, and the Best Interests Duty — which attaches to regulated credit assistance — may not either. The penalty doctrine was, in effect, what was left. Whether any particular deal is regulated turns on its facts, and that is a question for a licensee or a compliance adviser rather than a judgement call made at the point of lodgement.

The strategic implication for a brokerage is worth stating directly. A thinner statutory floor does not mean a thinner obligation in practice; it means fewer prescribed steps and more reliance on whatever the brokerage itself chose to document. If an unregulated commercial file is run with less rigour than a regulated residential one because the rulebook is quieter, the brokerage has it exactly backwards.

What to review this week

None of this calls for legal analysis at the broker’s desk. It calls for three habits on short-dated and private credit files.

1. Read the default column, and quote it. For every short-term or private credit option presented, record the standard rate and the default rate in the same comparison. A monthly rate obscures the annualised step-up; converting it is a thirty-second calculation that changes how a client hears the deal.
2. Document the exit, not just the approval. Short-dated credit is repaid from an event — a sale, a settlement, a refinance. Note what the exit is, what happens to pricing if it slips, and what the client said when that was explained. On a bridging file in a market where stock is sitting, the slipped-exit scenario is the realistic one.
3. Record comprehension and escalation. Where a client or guarantor appears to be struggling with the documents, note it, note what was done about it, and note what independent advice was recommended. That record is the thing that was missing from the evidence in this case — and it is generally the broker who is in the room when it could be made.

What to watch next

Three things. Whether the judgment is published and whether the reported reasoning survives scrutiny or appeal, since final orders on possession and costs were still outstanding. Whether private and non-bank lenders respond by trimming default add-ons or by leaning harder on separate cost-recovery clauses — the latter being, on this reasoning, the more durable drafting. And whether aggregators extend their file standards to unregulated commercial and bridging deals, which is where the documentation gap currently sits widest.

The broader point outlasts this case. A clause being unenforceable is a remedy a borrower reaches after a trial, legal costs and a year of uncertainty. No broker should treat it as a risk control. The control is the conversation held before the deal is placed, and the note that proves it happened.