Court rules against BoI’s 9% surcharge rate
Lawyers at William Fry have highlighted a recent High Court ruling that Bank of Ireland’s imposition of a 9% surcharge on an outstanding loan was “extravagant and unconscionable”.
The bank had started applying the surcharge in 2018 on a loan facility agreed in 2017 after the defendant, now deceased, had continued to default on the original loan agreement.
In a note on the firm’s website, the William Fry lawyers note that the bank stopped charging surcharge interest in May 2020 because of the defendant’s unlikely repayment of any of his debt.
Bank of Ireland later suspended entirely its previous practice of applying surcharge interest on all its accounts because of uncertainty about the legality of such interest.
The bank eventually obtained judgment against the defendant in 2022, but the judgment did not include the surcharge interest claim of €204,501.23, which was adjourned to the High Court.
‘Dunlop principles’
In Governor and Company of the Bank of Ireland v O’Boyle & Anor, the bank argued that its 9% surcharge interest was a genuine pre-estimate of the probable loss accrued due to the defendant’s failure to repay the loan.
The defendant argued that managing his default could never have cost the bank the €204,501.23 claimed and that the 9% rate was a generic charge set in 1993.
The court noted that it was bound by the ‘Dunlop principles’, which have been endorsed by the Irish courts.
William Fry explains that, under these principles, an amount is considered a penalty if it is “extravagant and unconscionable” compared with the greatest loss that could conceivably be proved to have flowed from a breach of an agreement.
Loss estimate ‘not genuine’
In this case, the High Court found that Bank of Ireland’s calculation of surcharge interest rates reflected a “low level of commitment” to cost recovery, adding that the use of repeated and pre-filled information showed that the rate was not a genuine pre-estimate of the loss that would be sustained if the defendant failed to make repayments.
“This judgment clarifies that the Irish courts’ approach to penalty clauses is still as set out in Dunlop,” the William Fry lawyers state, adding that penalty clauses are “unenforceable”.
“Clauses that are a genuine pre-estimate of damages are permissible, but where there is difficulty in genuinely pre-estimating those damages, provided the clause is not extravagant and unconscionable, it may be upheld,” they add.
William Fry says that it remains to be seen if the bank will appeal the judgment, given the consequences of the decision and the fact that BOI previously indicated to the court that the case was a ‘lead case’ on surcharge interest.