The Principle About Interest: The Ontario Superior Court Of Justice On Section 4 Of The Interest Act And The Need To Disclose Interest Rates In Commercial Contracts

Overview

The January 2018 Ontario Superior Court of Justice decision of Solar Power Network Inc. v. ClearFlow Energy Finance Corp.1 is a wakeup call to anyone dealing with a contract under which interest is payable: ignore s.4 of the Interest Act2 at your peril.

In Solar Power, the application judge, Justice McEwen, found charges in loan documents between the parties to be interest as opposed to fees, and in violation of s.4 of the Act.

As a result, His Honour held that all the interest charges in all the loan documents had to be reduced so that the total annual rate of interest was just 5%, even those that didn't offend the Act.

While ClearFlow has obtained leave to appeal Justice McEwen's decision, the effect of this decision could impact almost all non-consumer loan, credit agreements and other documents where interest is payable.

The Dispute

Beginning in 2015, Solar Power Networks Inc. ("SPN") and ClearFlow Energy Finance Corp. ("ClearFlow") entered into series of loan documents that defined the lending relationship between the parties.

Each of the loan documents contained these elements:

a base interest rate of 12%, which would increase to 24% on default; an Administration Fee that was charged when the loan was first advanced. If the Fee was not paid when the term of the loan expired, it would be rolled-over into a new loan and a new Fee would be charged; and, a Discount Fee of 0.003% of the outstanding principal of the applicable loan. If the Fee was not paid when the term of the loan expired, the outstanding balance of the Fee would be rolled-over into a new loan, with the Fee continuing to be calculated on a daily basis.3 SPN claimed that the Administration Fee and the Discount Fee were interest charges, not fees. SPN also claimed that because those fees were not expressed as a per annum rate of interest in the loan documents, they violated s.4 of the Interest Act. That section states:

When per annum rate not stipulated

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...