Perpetual Nominees v Parist Holdings [2005] NSWSC 1345

This case concerned the validity of a variable interest rate clause.  In this case the interest rate was defined as the Bench Mark Rate plus 3%. The Bench Mark Rate was defined as:

the rate as determined by the lender quarterly on or about the first business days of January, April, July and October in each year. The lender will (but without having any obligations to do so) when determining and redetermining the Bench Mark Rate refer to the level at which 90 day bank bill products have been trading by the major Australian trading banks rounded up to the nearest five basis points.

The court noted that where the interest rate under a mortgage is variable the clause must be drafted so as not to offend basic contract law principles. There are three main dangers – identified by the Full Court of the Federal Court in Kabwand Pty Limited v National Australia Bank Ltd (1989) ATPR 40-950, these are:

  1. If parties to a contract do not agree on a fundamental term there will be no contract at all.
  2. There is no contract if its effect is that one party is left to choose whether or not it will perform it, since the obligation is illusory.
  3. There can be no concluded bargain if a vital matter has been left to the determination of one of the parties.

After reviewing Kabwand the court concluded:

While determination of a price or payment under a contract may be left to the party entitled to receive the price or payment, that will be so only where there are criteria – either express, or such implied criteria as “fair and reasonable” – by which that party’s decision can be tested, and that where an express formula is provided, there is no room to imply criteria such as “fair and reasonable”.

The court found the clause in this case was void because the words but without having any obligations to do so meant the formula breached the third Kabwand principle “There can be no concluded bargain if a vital matter has been left to the determination of one of the parties.” Due to the existence of an express formula His Honour determined there was no room to imply “fair & reasonable” to repair the clause. Accordingly the clause was severed and the borrower was only obliged to pay interest at 3% per annum.

His Honour then went on to say that had the determination formula for the variable interest rate not been void then the variable component of the interest would not have been owing unless the determination of the variable was communicated:

The communication is part of the determination process, and there is no determination unless and until it is communicated. The borrower cannot know the extent of its obligation to pay interest until communication takes place.

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