Contractual Interest vs. the Interest Act


Contractual interest can represent a significant component of the value of a contract for the party entitled to interest, a significant part of the costs of a contract to the party paying interest and a significant deterrent to a would be breaching party. Despite this, contracting parties frequently fail to adequately and properly ensure that there has been an agreement about contractual interest or that the agreement has been properly recorded. Such was the case in the recent decision of Peace Country Petroleum Sales Ltd. v. O.T.H. Logging Inc., 2016 BCSC 1574 (CanLII).

The Plaintiff was a fuel and petroleum products vendor and the Defendant was a logging company customer. The Plaintiff alleged that there was a contract created partially orally and partially in writing which had a term that overdue accounts would accrue interest at a rate of 24% per year, compounding monthly, such that the effective annual interest rate was 26.82%. The Plaintiff, in support of its claims, pointed to its month end statements which included a note that the penalty for late payment was interest at 24% per year compounding monthly.

The Plaintiff was unable to locate a credit agreement that it said the Defendant signed which set out the effective annual rate of 26.82%.

The Defendant alleged that no agreement was reached about interest and denied entering into the credit agreement.

The Court found that interest was charged and paid and that circumstances were such that there was an implied agreement to pay interest. Where the Court found difficulty in assessing the interest that could be charged was when it applied the law created by the Interest Act, R.S.C. 1985, c. I-15.

With the exception of mortgages on real property or hypothecs on immovable, s. 4 of the Interest Act prohibits an interest rate above 5% annually unless the contract contains an express statement of the effective annual rate. The purpose of s. 4 is to prevent predatory contractual terms by making the yearly effective annual rate of interest a requirement (para. 31 of Peace Country citing para. 36 of Strother v. Darc, 2016 BCCA 297 (CanLII).

The Court in Peace Country found that the Plaintiff had failed to establish that there was an express statement of the effective yearly rate of interest. As such, the Court held that interest was only payable at a rate of 5% per annum. Although not clearly expressed, the Court was likely applying s. 3 of the Interest Act, which provides that if interest is payable, but no rate is fixed by the agreement or law, the rate will be 5% per annum.

The lesson to be learned is that it is especially important for a person expecting to receive interest payments to commit the agreement about interest to writing and to ensure that the effective annual rate of interest is expressed as the method of calculating interest.