by Joe O'Malley , John Deignan April-17-2025 in Commercial & Business, Insolvency & Restructuring
In the case of the Governor and Company of the Bank of Ireland and Declan O’Boyle as Administrator in the Estate of James Boyle Deceased, the High Court recently considered the legality and enforceability of surcharge/default interest in circumstances where the underlying loan agreement allowed for surcharge interest at a rate of 9% per annum. In summary, the High Court (Bolger J) found that the clause in the loan agreement providing for surcharge interest was a penalty clause and, on that basis, held that it was unenforceable. We consider this judgment and the issues arising in further detail below.
Background
The background to this case is that Mr James O’Boyle (deceased) (the “Borrower”), entered into a loan agreement with the Governor and Company of the Bank of Ireland (the “Bank”) in 2004 for the purposes of developing land which he owned. The loan was not repaid in accordance with its terms, and it was subsequently restructured in 2015. In 2017, the Borrower entered into a new loan agreement with the Bank, and pursuant to that loan agreement he was required to repay the loan by 15 May 2018 from the sale of certain assets. The new loan agreement contained a clause allowing for surcharge interest to be charged under certain circumstances, such as where the borrower defaulted on his loan repayments. In particular, the new loan agreement allowed the Bank to charge surcharge interest of 9% per annum in respect of “any amount not paid by the Borrower to the Bank by its due date”. The borrower defaulted under the terms of the loan and the Bank then began to charge surcharge interest.
In 2021, the Bank commenced High Court proceedings against the Borrower, seeking summary judgment for the full amount which it claimed was due and owing, which included surcharge interest in the sum of €204,501.23.
In 2022, the Bank obtained judgment against the Borrower in the amount of €1,154,639.94; however, its claim for €204,501.23 in respect of surcharge interest (that had accrued between August 2018 and May 2020) was adjourned to plenary hearing. It was therefore the Bank’s residual claim for €204,501.23 which fell to be considered by the High Court in this case. In 2023, the Borrower passed away and as such the Bank’s residual claim became one against the Borrower’s Estate (the “Defendant”).
Expert Evidence & Submissions
At the plenary hearing, the High Court heard detailed evidence and submissions from both sides, including expert evidence.
In summary, the Bank’s expert opined that the purpose of surcharge interest is for the Bank to recoup the cost of administering defaulting borrowers arising from collection costs, greater capital requirements and the resulting loss of opportunity and general administration costs. Conversely, the Defendant’s expert contended that the purpose of surcharge interest is both to deter customers from defaulting on their repayment obligations and to penalise customers who have defaulted on them. The Defendant’s expert also disputed that the surcharge interest was a genuine pre-estimate of the bank’s loss in the event of a customer defaulting on their loan.
In its legal submissions, the Bank contended that its rate of 9% surcharge interest was a genuine pre-estimate of the probable loss occasioned by reason of the Borrower’s breach in failing to repay his loan on time and, therefore, accords with the Dunlop Pneumatic Tyre Co v. New Garage and Motor Co Ltd [1915] AC 79 principles, as applied in this jurisdiction. In a similar vein, the Bank urged the Court to revisit the treatment of surcharge interest in Irish law and to prefer what it referred to as the recalibrated approach of the UK Supreme Court in Cavendish Square Holding BV v. El Makdessi [2015] UKSC 67, in which the UK Supreme Court adopted a more liberal approach. In particular, in that case the UK Supreme Court held that a clause will not necessarily be penal in nature simply because it is not a genuine pre-estimate of loss or because it is aimed at deterrence.
In response, the Defendant strongly disputed that the rate of 9% was a genuine pre-estimate of the Bank’s loss and argued that instead it amounted to a “one size fits all” approach. It also argued that the High Court had no jurisdiction to prefer the approach of the UK Supreme Court, given previous decisions, including the Dunlop case and Pat O’Donnell & Company Ltd v. Truck and Machinery Sales Ltd [1998] 4 IR 191.
Court’s Ruling
In its decision, the Court referred extensively to the decisions of the High Court in Sheehan v. Breccia [2016] IEHC 67 and the related case of Flynn v. Breccia [2016] IEHC 68, and the decision of the Court of Appeal in that litigation. In particular, the High Court cited the finding in that case that the impugned clause “was not a genuine attempt to agree upon liquidated damages payable by the borrower on default and hence should be construed as being a penalty”. Ultimately, the Court found the imposition of surcharge interest on the Borrower was a penalty as well as a means of cost recovery for the Bank. The Court also found that the level of surcharge interest (9% per annum) was not a genuine estimate of the Bank’s loss and in this regard, it noted that much of the work that the Bank had to do because of the Borrower’s default was a repeat of what it had done previously in respect of the Borrower's previous loan default. On that basis, the Court held that the surcharge interest claim could not be justified and that it was “unconscionable and extravagant”. The Court therefore found in favour of the Defendant in respect of the Bank’s residual claim for €204,501.23.
Comment
Clearly, this is a case where High Court was bound by the previous decision of the Court of Appeal in the Sheehan v. Breccia litigation and its judgment reflects this. However, this judgment may yet prove to be an important decision, given that at an earlier hearing in this case the Bank referred to this as a “lead case” on the enforceability of surcharge interest. It therefore seems likely that this decision will be appealed by the Bank. It remains to be seen whether an appellate court will reach a different decision. However, as referred to in the judgment itself, this may ultimately be a matter for the Supreme Court to determine. In the meantime, a surcharge/default interest provision in a contract is likely to be considered a penalty and therefore unenforceable in this jurisdiction.
For further information in relation to this article please contact Joe O’Malley, Partner or John Deignan, Senior Associate.
Back to Full News
Share this article:
About the Authors
Joe O'Malley
Joe is Managing Partner and Head of the Commercial Litigation & Dispute Resolution team at Hayes solicitors. He handles a wide variety of commercial disputes involving high value claims, complex issues and voluminous data for financial institutions and corporate clients.
John Deignan
John Deignan is an associate solicitor in the Commercial & Business team at Hayes solicitors. John predominantly specialises in commercial litigation and dispute resolution, and has acted for a wide variety of private companies, State bodies and financial institutions in contract law cases, enforcement and recovery actions, commercial landlord and tenant disputes and defamation actions.