Interest on Contracts

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Date Retrieved:	2024-04-19
CLNP Page ID:	2166
Page Categories:	[Contract Law]
Citation:	Interest on Contracts, CLNP 2166, <>, retrieved on 2024-04-19
Editor:	Sharvey
Last Updated:	2023/11/03

Interest Act R.S.C., 1985, c. I-15

2 Except as otherwise provided by this Act or any other Act of Parliament, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.

3 Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

4 Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

5 If any sum is paid on account of any interest not chargeable, payable or recoverable under section 4, the sum may be recovered back or deducted from any principal or interest payable under the contract.

Courts of Justice Act, R.S.O. 1990, c. C.43

128 (1) A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order. R.S.O. 1990, c. C.43, s. 128 (1).

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(4) Interest shall not be awarded under subsection (1),

(a) on exemplary or punitive damages;

(b) on interest accruing under this section;

(c) on an award of costs in the proceeding;

(d) on that part of the order that represents pecuniary loss arising after the date of the order and that is identified by a finding of the court;

(e) with respect to the amount of any advance payment that has been made towards settlement of the claim, for the period after the advance payment has been made;

(f) where the order is made on consent, except by consent of the debtor; or

(g) where interest is payable by a right other than under this section. R.S.O. 1990, c. C.43, s. 128 (3, 4).

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129 (1) Money owing under an order, including costs to be assessed or costs fixed by the court, bears interest at the postjudgment interest rate, calculated from the date of the order.

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130 (1) The court may, where it considers it just to do so, in respect of the whole or any part of the amount on which interest is payable under section 128 or 129,

(a) disallow interest under either section;

(b) allow interest at a rate higher or lower than that provided in either section;

(c) allow interest for a period other than that provided in either section.

(2) For the purpose of subsection (1), the court shall take into account,

(a) changes in market interest rates;

(b) the circumstances of the case;

(c) the fact that an advance payment was made;

(d) the circumstances of medical disclosure by the plaintiff;

(e) the amount claimed and the amount recovered in the proceeding;

(f) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; and

(g) any other relevant consideration. R.S.O. 1990, c. C.43, s. 130.

King Road Paving and Landscaping Inc. v. Plati 2017 ONSC 557

Interest Rate

79 The contract did not include any payment terms or any interest rate for late payments. The first invoice in relation to the original contract does not include any claim for interest. The second invoice in relation to the extras claims payment within 30 days and late payment charges of 3% per month thereafter.

80 The plaintiffs acknowledge that the written contract did not provide payment terms or interest for late payment, but claim that 3% per month is "reasonable in the circumstances as it is comparable to the rates charged by suppliers, which was 2% per month on average." Alaimo testified that he told Nesci that he was going to charge him 3% interest around November 2012 and that Nesci "was fine with that". No such oral agreement was alleged in the Amended Amended Statement of Claim.

81 The defendant argues that at no time was an interest rate of 3% per month agreed to. In fact, no payment terms or interest rate were ever agreed to by the parties and the court should not be filling in blanks where the parties have not included any such terms in their agreement.

82 Interest rates cannot be imposed unilaterally by including a claim for interest in an invoice; see Gilbert Steel, supra, where the Court of Appeal states: "I attach no significance to the notation '1% per month interest on overdue accounts' on the invoices received by the defendant at the increased prices on the basis that interest cannot be imposed unilaterally in this manner."

83 In addition the interest rate claimed by the plaintiffs violates sections 3 and 4 of the Interest Act, R.S.C., 1985, c. c.I-15. Section 3 provides:

Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

84 Section 4 provides:

[W]henever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

85 The contract includes no reference to an interest rate. Even if the second invoice reflected the terms of a contract it purports to impose interest at the rate of 3% per month but does not indicate an annual rate as required by s. 4 of the Interest Act.

86 I reject the contention that Nesci agreed orally to pay interest at the rate of 3% per month. In the first place, I find Alaimo's statements in this regard to be not credible, especially when no such agreement was pleaded in any of the iterations of the Statement of Claim. Second, there is no evidence that any such agreement, if there actually was one, fully disclosed the annual cost of borrowing as required by the Interest Act. Alaimo's evidence in this regard struck me as a belated effort to fill a gap in his claim.

87 Finally, it makes no sense that Alaimo and Nesci discussed and agreed to 3% interest per month in November 2012, but Alaimo did not send out any invoices until May 28, 2013. If there was such an agreement Alaimo (who claims that he was desperate for payment) would have sent out his invoices (which he claims he prepared as each extra was completed) immediately.

88 The plaintiffs are, however, entitled to prejudgment interest in accordance with s. 128(1) of the Courts of Justice Act.

Bank of Nova Scotia v. Dunphy Leasing Enterprises Ltd., 1991 ABCA 351 (CanLII)

[144] Dunphy argues that the Ontario and British Columbia cases are not good law and advances two reasons for rejecting them. First, it contends the decisions do not treat interest payable monthly as interest payable at a "rate per month". This is an accurate assessment of these decisions. But I see no flaw in this conclusion or in the reasoning underlying it. The mere fact that interest is payable monthly does not of itself attract s. 4 for the reasons canvassed above. Second, Dunphy argues that those decisions fail to demonstrate any understanding of the basics of the principles of the mathematics of finance. This criticism appears to be directed primarily at the manner in which the courts have interpreted the requirement that a lender disclose an equivalent annual rate if and when s. 4 does apply to a contract. Dunphy contends that "equivalent" in the context of s. 4 can only mean "effective annual interest rate". And, in Dunphy's view, those cases holding otherwise reflect a lack of understanding of the fundamental principles of the mathematics of finance.

[145] However, what one must keep in mind is that the issue of what interest rate should be disclosed does not even arise if s. 4 does not apply. Deciding whether the necessary conditions exist to trigger the application of s. 4 has nothing to do with the principles of the mathematics of finance. The court's mandate is to interpret the words "payable at a rate or percentage for any period less than a year". This task involves the application of principles of statutory interpretation. Simply because interest payments are to be calculated and paid more frequently than yearly and this results in higher yields to the lender and greater costs to the borrower does not engage the section. This may appear to be an unduly simplistic approach which narrows significantly the categories of cases to which s. 4 applies. I do not deny that this is so. But it is an approach dictated in my opinion by the express and unambiguous terms of the Act. Given the conclusions I have reached, it is unnecessary to determine in what circumstances the disclosure standard prescribed by s. 4 mandates disclosure of the effective annual interest rate as opposed to the nominal annual interest rate. And I therefore decline to do so.

Bank of Nova Scotia v. Dunphy Leasing Enterprises Ltd., 1994 CanLII 124 (SCC), [1994] 1 SCR 552

The judgment of the Court was delivered orally by LAMER C.J. ‑‑ Mr. Willis, you gave the very difficult case you had the best possible day in Court a barrister can. Unfortunately we cannot accede to your arguments. Essentially this case rests upon the interpretation of a contract and the statutory interpretation of s. 4 of the Interest Act, R.S.C., 1985, c. I‑15. Both matters were carefully considered by the Court of Appeal and we feel that we cannot usefully add to the reasons below, with which we are in substantial agreement.

The appeal is accordingly dismissed with costs in this Court only.

Solar Power Network Inc. v. ClearFlow Energy, 2018 ONCA 727 (CanLII)

[29] In its cross-appeal, Solar Power argues that the application judge erred in finding that the administrative fees are not interest within the meaning of the Interest Act, s. 4.

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[34] The application judge’s findings on this issue were firmly rooted in the evidence about the nature and purpose of the administrative fees and the work that ClearFlow had to perform to set up and administer the loans. As mixed findings of fact and law on a point of contractual interpretation, they attract deference on appeal: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633.

[35] While the administrative fees were charged each time the loan was renewed, the incentive effect on repayment was negligible. The administrative fees were paid at the start of the term of each loan and only recurred if the loans were not repaid at term. They did not, therefore, recur during the term of the loan. The application judge was entitled to find that they did not amount to “compensation for the use or retention of money that is owed to another person”.

[36] As Solar Power has failed to identify any extricable error of law or palpable and overriding error of fact, I would not interfere with the application judge’s findings on this issue.

[37] ClearFlow appeals the application judge’s finding that the discount fee is interest within the meaning of the Interest Act, s. 4.

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[42] It was open to the application judge to conclude that the discount fee bore all the hallmarks of the test for interest: it was consideration or compensation for the use of money, it related to the principal amount, and it accrued over time. I see no reason to interfere with his finding on this issue.

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[49] I turn first to the actual language of s. 4. It requires “an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent” (emphasis added). By requiring an equivalent “rate or percentage” (emphasis added) instead of just employing the word “percentage”, Parliament has used language indicating that the effective annual interest need not be expressed as a numerical percentage. This is consistent with the interpretive presumption that Parliament “does not speak in vain” and includes every word in a statute for a purpose: see Canada (Attorney General) v. JTI-Macdonald Corp., 2007 SCC 30, [2007] 2 S.C.R. 610, at para. 87. In my view, the mathematical formula provided in the Loan Agreement provides a “rate” for the purpose of s. 4.