Interest Reduced #178
By Gerry Neely
Anyone paying or expecting to receive interest at a rate of say 1 ½ % per month, should check the contract under which interest is payable to see if it contains a statement of the yearly rate of interest which is equivalent to the 1 ½ % per month. The reason for this is Section 4 of the Interest Act (Canada) which limits interest the lender can collect to 5% per annum if the interest under a written or printed contract (other than a mortgage) is payable at a rate or percentage for any period of less than a year, and the contract does not expressly state the equivalent yearly rate.
There has been a rash of cases over the past few years involving an interpretation of this section. As one judge said while there seems to be no dearth of judicial precedent on the effect of Section 4, "There is an evident lack of consistency." Examples of inconsistencies which may create a problem for a lender or an opportunity for a borrower are found in the reports of the following cases:
1. 24% PER ANNUM PAYABLE MONTHLY
A court in Alberta held in March of 1990 that the Bank of Nova Scotia was only entitled to interest at 5% per annum because its contract, while stating the yearly rate of 24%, (the nominal rate) should have stated the effective rate of 26.8% because the interest payments were made monthly rather than yearly. This case is under appeal. The reasoning in this case was rejected in September, 1990 by an Ontario court which held that Section 4 was satisfied if the nominal yearly interest in a C.I.B.C. contract was stated even though interest payments were made monthly. Another Ontario court, as well as another judge in Alberta, have since rejected the reasoning in the Bank of Nova Scotia case.
2.18% PER ANNUM PRIOR TO DEMAND FOR PAYMENT AND 2% PER MONTH AFTER DEFAULT 2% PER MONTH BOTH BEFORE AND AFTER DEFAULT
A lawyer who prepared separate promissory notes containing these interest terms was found to be negligent because they did not comply with Section 4. It is clear that the omission of the yearly equivalent in the second note was a breach of Section 4. The judge, however, held that a similar breach occurred in the first note when the equivalent yearly rate was not stated for the monthly rate of 2% after default. Contrast this conclusion with an Alberta case where a supplier's invoice contained the following interest clause:
"The buyer shall pay all invoices 30 days from bill of lading date and shall pay to the seller interest of 1.5% per month on all overdue accounts."
The supplier was awarded interest of just under two million dollars and the buyer appealed, arguing a failure to comply with Section 4. The court analyzed this argument by saying that interest can have several different meanings. The most common meaning is money paid for the use of money lent. It can also mean money payable as damages for the non-payment of a debt. The judge held that the first meaning applied to Section 4 because that section contains consumer protection law entitling consumers to know the annual rate of interest they are paying. It is not intended to cover interest paid to a supplier as compensation for the failure of the buyer to pay upon the due date.
However, it appears this question can only be settled at the Supreme Court of Canada level. A Saskatchewan court of appeal case involved a construction contract where money not paid to the contractor within 30 days of the due date, was to bear interest at 1 ½ % per month. The contractor relied upon the preceding Alberta case to argue that a building contract was not a loan agreement and therefore did not need to comply with Section 4. The owner argued that there was nothing in the wording of Section 4 to restrict it to loan agreements only. The court agreed that Section 4 applied to the building contract and the result was that the contractor's recovery was limited to 5% per annum.
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