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Supreme Court is Not Interested in the Interest Act

The Supreme Court of Canada recently dismissed the application for leave to appeal the Ontario Court of Appeal's decision in Solar Power Network Inc. v. ClearFlow Energy, which restored certainty to credit markets after a lower court decision that could have had the effect of rendering all loans denominated on less than a 365-day year (e.g. most LIBOR denominated loans) off-side of the Interest Act, R.S.C. 1985, c. I-15. BLG acted for the lender in this case (the successful appellant before the Court of Appeal, which was also successful in resisting the application for leave to appeal to the Supreme Court).

In this case, a borrower (Solar Power) entered into a significant number of short term loans with a lender (ClearFlow) to finance the construction of solar panel projects. The intention behind the loans was to provide higher-cost financing during construction, which would then be taken out by longer-term, lower-cost financing from other sources. However, the borrower did not find take out financing, so the loans continued to roll over into new loans for years. In 2017, the borrower began to default on the loans, doubling the base interest rate.

All the loans had similar terms, and in relevant part featured three major charges:

  1. Base interest of 12% per annum or 24% per annum after default
  2. An up-front administration fee of 1.81% of the principal paid at the time of advance
  3. A "discount" fee of 0.003% per day of the outstanding principal

The loan documents also contained a standard "annualizing" formula, that provided that any charges that were not stated at an annual rate could be converted to an annual rate by dividing by the number of days in the period and multiplying by 365.

When the borrower was near realization on the assets, it brought an application claiming that the loans did not comply with the Interest Act and all the interest should therefore be reduced to 5% simple interest. The borrower claimed the administration and discount fees were in fact interest (not fees) and were not stated at an annual rate, so contravened section 4 of the interest act which provides:

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.

The application judge held that the administration fee was not interest because it was consideration for actual administration work, but he held that the discount fee was interest, was not stated at an annual rate, and therefore contravened section 4. He notably held that:

  1. the annualizing formula did not make the discount fee an "equivalent" to an annual rate, and
  2. as a result of one minor charge contravening the Interest Act, all the interest owing under the contracts was reduced to 5%.

The Court of Appeal overturned the application judge in respect of these key holdings. The Court agreed with the application judge that the administration fee was not interest, and that the discount fee was not interest. However, in respect of the other findings, the Court held that:

  1. the annualizing formula was sufficient to render the discount fee "equivalent" to an annual rate, such that it was compliant with the Interest Act, and
  2. in any case, because the parties were sophisticated commercial parties with no fraudulent intention, even if the minor discount fee did not comply with the Interest Act, the statute did not operate to reduce the total interest owing under the loan documents to 5%.

The Court of Appeal's decision restored commercial certainty to the credit markets that the application judge's decision introduced, and by dismissing the leave application the Supreme Court has ensured this certainty will remain. Many loans, notably loans denominated on the LIBOR benchmark, are denominated on a 360-day year, and rely on annualizing formulas similar to the formula in the ClearFlow loans to maintain compliance with the Interest Act. The Court of Appeal's decision also indicates that Courts will prioritize sophisticated commercial parties' bargains rather than a strict application of a nineteenth century statute that, some have suggested, may have outlived its usefulness.

* Barry Bresner and Graham Splawski acted for Clear Flow Energy.