Damage Allegations and Punitive Charges are not Debt

Collection Agencies (Ontario) Legal Guide (01 July 2019 edition)

As with Ontario's rent review regime (under the Residential Tenancies Act) - where what is and is not "rent" has to be clearly defined for the system to work - no system of regulating 'extra' collection charges can operate without a clear idea of just what is and isn't included in a 'debt'.

Drawing this line in each case requires some consideration. For instance, most consumer financing and future performance (ie. pay-later) contracts provide that in the event of default the creditor may add onto the principal debt a variety of additional (and sometimes quite specious) charges (ie. cancellation fees, administrative charges, service fees, etc). Nominally, such charges come under the main rule defining debt: if the charges (including interest) arise from the original contract between the parties, then it is debt.

Damage Allegations and Punitive Charges are not Debt

A second point that must be made on this issue is that an allegation of damage, even if made within the context and existence of a contract - and even if based on a right purporting to arise under a contract (it could also be under a tort claim) - is not a 'debt'. Creditors must go to court to 'convert' a damage allegation into a 'debt', which is what it becomes once a court issues a judgment declaring it owing. Without such a court ruling no collection agency may include the value of such damage allegations within the amounts that they attempt to collect.

Debtors may see this issue arise in a collateral fashion if their contract claims that charges can be added to the debt in the event of certain instances of default (eg. late payments, service charges, cancellation fees, etc). The common law calls these 'penalty clauses' and will not enforce them unless they are reasonable pre-estimates of the quantum of damages that can be expected to arise from the defaults that are alleged. In other words, unreasonable or extortionate penalty clauses will not be honoured by a court. This principle can also be applied against the nebulous 'administrative charges' and 'default fee'-type of charges made against debtors in contracts.

Of course, the oppourtunity to have such charges adjudicated or declared to be punitive only arises if the matter gets into a court, which most debts sent for collection do not.

So an alleged debtor may be well-advised to exercise their rights under (s.3 above) to challenge, by way of registered letter, the creditor to take them to court over the issue. This procedure comes with the added bonus it bars the collection agency from any further collection attempts until the court finally rules on the issues.