18 September 2018By Brendan Monahan
What is the appropriate remedy when a loan agreement fails to contain an “express statement of the yearly rate or percentage of interest” within the meaning of s. 4 of the Interest Act (the “Act”)? That was one of the questions before the Ontario Court of Appeal in Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONCA 727.1 In that case, the Court allowed the appeal of an application judge’s decision and held that where an agreement contains multiple rates of interest, the Act only imposes an interest “cap” of 5% on the rate that runs afoul of s. 4.
Background: The dispute arose after Solar Power Network Inc. (“Solar Power”), a rooftop solar panel installation company, ran into financial difficulties and was unable to pay back a series of short-term loans it had obtained from ClearFlow Energy Finance Corp. (“ClearFlow”). Between 2015 and 2017, ClearFlow made thousands of advances to Solar Power pursuant to a series of agreements (collectively, the “Loan Documents”) which included, among other things, a primary lending agreement and a number of promissory notes (the “Promissory Notes”).
Most of the Loan Documents provided for a base rate of interest of 12% or 24% in the event of a default. They also provided for a “discount fee” of 0.003% per day on the outstanding principal, charged each day the loan remained outstanding. The discount fee was intended to provide an incentive for Solar Power to pay off the loan early. If the balance remained outstanding after either 90 or 180 days (depending on the loan), the loan would “roll over”. The discount fee would compound each time the loan rolled over.
Solar Power commenced an application in the Ontario Superior Court of Justice alleging that certain provisions of the Loan Documents violated s. 4 of the Act and seeking, among other things, a declaration that the total interest payable could not exceed 5% per year in accordance with s. 4. That provision provides that whenever “any interest” is expressed as a daily, weekly or monthly rate or for any period less than a year, an equivalent “yearly or annual rate or percentage” must be expressly stated. If no equivalent yearly or annual rate or percentage is stated, s. 4 provides that “no interest exceeding the rate or percentage of five per cent per annum shall be chargeable … on any part of the principal money.”
One of the central questions in the case was whether the discount fee violated s. 4 and, if so, whether it was appropriate to reduce all of the interest payable to 5% per year.
The Application Judge’s Decision: McEwen J. granted most of the relief sought by Solar Power and reduced the total interest payable to 5% per year. As a threshold matter, he found that the discount fee qualified as “interest” under the Act because it (i) was consideration or compensation for the use or retention of money owed to ClearFlow; (ii) related to the principal amount; and (iii) accrued over time.2 He then considered whether the discount fee was stated as an equivalent yearly or annual rate or percentage, finding that, although most of the Loan Documents contained an annualizing formula, the formula did not constitute an “express statement” of the annual percentage because the actual percentage would “depend on the number of compound periods” which, in turn, depended on the number of times the loan rolled over.3 He also pointed out that the Promissory Notes did not contain any annualizing formula at all.4 As such, the discount fee violated s. 4.
Finally, McEwen J. acknowledged that it might seem “draconian” to limit all of the interest to 5% “where the offending Discount Fee is only a small portion of the overall interest obligation”. However, in his view the plain language of s. 4 required such a result as it “stipulates that if there is any interest that is not expressed on an annual basis no interest shall be charged above the rate of 5% per annum on any part of the principal money” (emphasis in original).6 ClearFlow appealed to the Court of Appeal.
The Court of Appeal Allowed the Appeal: The Court of Appeal allowed the appeal, in part, and found that the application judge erred in finding that all interest payable should be limited to 5%. The Court disagreed with the application judge’s interpretation of s. 4, finding that it is necessary to “consider the ‘entire context’ before settling on what appears, at first blush, to be the plain meaning of a legislative provision.”7 The Court determined that the “modern commercial realities” required that section 4 be construed to reduce only the non-compliant rate (i.e. the discount fee) to 5%:
This case involved a commercial transaction between parties of equal bargaining power who inadvertently and only marginally ran afoul of s. 4 … To secure the funds it required, Solar Power knew that it had to pay a high rate of interest. The discount fee represents a tiny fraction of the interest that is otherwise payable and falls well below the 5% maximum interest allowed by s. 4. To limit all interest payable to 5% would, as the application judge recognized, result in a substantial windfall to Solar Power.8
Of note, the Court also overturned the application judge’s finding that the annualizing formula failed to satisfy the requirements of s. 4, in part because the number of compound periods could not be determined in advance.9 However, as the Promissory Notes did not contain any annualizing formula, they were found to engage s. 4.10 The Court also upheld the application judge’s findings regarding whether the discount fee and another fee called an “administration fee” constituted interest (the administration fee did not).
The Takeaway: There is no doubt that the result in ClearFlow accords with reasonable commercial expectations. However, in fleshing out the “entire context” of s. 4 of the Act, the Court seems to have departed from the plain meaning of the provision. The Act provides that where “any interest” is not expressed as an annualized rate, “no interest exceeding the rate of five percent per annum shall be chargeable … on any part of the principal money” (emphasis added). It could certainly be argued that the role of the Court is merely to apply the statute as drafted, even if it results in an outcome that does not accord with commercial realities. It is then up to Parliament to enact the appropriate amendments if necessary. That said, the Court’s narrow interpretation of the Act provides assurance to lenders that their reasonable expectations will be upheld.
1 Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONCA 727 [“ONCA Reasons”].
2. Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONSC 7286 at para. 45 [“SCJ Reasons”].
3. SCJ Reasons at para. 62.
4. SCJ Reasons at para. 64.
5. SCJ Reasons at para. 93.
6. SCJ Reasons at para. 80.
7. ONCA Reasons at para. 75.
8. ONCA Reasons at para. 78.
9. ONCA Reasons at para. 61.
10. ONCA Reasons at para. 71.