Criminal Rate of Interest #243

By Gerry Neely
B.A., LL.B.

An interest rate in excess of 60% is illegal under Section 347 of the Criminal Code. In one case, a $10,000 bonus on an advance of $180,000, secured by a mortgage for $190,000, to be repaid in 30 days without interest, resulted in an effective annual interest rate of 89%.

The lawyer who drew this mortgage was held to be negligent because he failed to consider the effect of Section 347. The case does not establish new law, but serves as a reminder to all professionals who may be involved in the preparation of contracts for short-term loans, that a relatively small bonus can lead to a criminal rate of interest.¹

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The question of whether a contract is enforceable often turns upon whether its essential terms are certain. This question arose in a case involving a defaulting purchaser who was trying to recover a $100,000 deposit made in a contract containing the terms of a vendor takeback mortgage.

The first argument that the contract was uncertain because it failed to state whether the mortgage was "open" or "closed," was lost when the judge said that this was not an essential term of the mortgage. The second argument did involve an essential term, namely, that interest was payable at "12% from closing date" upon a principal sum, which was to be repaid in two equal annual installments.

Nothing was stated as to when interest would be paid or how it would be computed. In earlier cases, the absence of these terms led to findings of uncertainty which made the contracts unenforceable. In this case, both parties had stated on cross examination their understanding that the interest would be annual interest and each payment would include principal and interest. The judge admitted this evidence to give the vendor the deposit.²

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While the principles establishing fiduciary duties may have arisen in cases involving agency, trustees, partners, directors, accountants, lawyers and other persons giving advice, a BC court has extended the relationship to a contract between two homeowners and a project manager.

The homeowners, who were new immigrants to British Columbia, were prepared to purchase an existing house if it could be renovated for between $50,000 and $60,000. The project manager, who claimed to be familiar with construction practises, said that the work could be done for close to that amount.

A contract for $63,000 was entered. The work was done slowly and badly and ultimately was completed by another contractor at a cost that was $29,000 in excess of the contract price.

In the court action that followed the homeowners found that the project manager had obtained three bids for the renovations ranging from $80,000 to $132,000. The lowest bidder was persuaded to reduce his bid to get the job and the project manager was aware that the work would not be high quality. The homeowners also found that the project manager was paid $2,500 by the builder to get the job.

The homeowners were entirely dependent upon the project manager's advice in all matters, and they expected the project manager to exercise his discretion in their best interests. Their lack of knowledge of the country to which they had immigrated made them particularly vulnerable in attempting to exercise any control over the project manager's discretion.

The judge found that the project manager's failure to act in the best interests of the homeowners, to the exclusion of his own interest, was a breach of fiduciary duty. The damages which were awarded included the $29,000 cost to the renovations, the $2,500 secret commission and punitive damages of $2,500.

One conclusion to draw from this decision is that a REALTOR's fiduciary duty may increase in proportion to, or to the extent of, the inexperience of the other party in the subject matter of the contract being negotiated.³

	1.	Barrie v. 687844 Ontario Ltd., 43 R.P.R. (2) 267.
	2.	Innovest Development Corp. v. Chow, 43 R.P.R. 23 7.
	3.	Ho V. Yip, R.S.C., S.C.B.C., New Westminster Registry #SOIOOI6, Reasons for judgment, June 6, 1995.

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