November 3, 2022

By Mark Mikulasik

Not being paid for your goods or services costs you money. Either you are paying interest to borrow money as a result, you are losing the profit you could make off depositing or investing the money, or you are losing the enjoyment that you could gain spending the money.

So of course, if you have to sue to collect account, or other debts, you want to collect interest which represents the cost of that money overtime.

THE ISSUE

The big question today is “how much interest”?

SOME LAW

If you have no agreement with your debtor setting out how much interest they will pay, you are left with an entitlement to interest under Ontario’s Courts of Justice Act. Currently at this writing, that rate has risen to 1.8 per cent. Chances are you are paying more than that if you were borrowing money from a bank or other lender. Some deposit accounts in Canada will pay you more than that if you put the money in the bank.

An easy solution would seem to be to establish a contractual rate of interest, since under the Act, a contractual rate of interest takes priority over the rate allowed in the Act. That works fine if you have a written contract and the interest rates in that contract are enforceable.

The first thing that can go wrong is if your written contract does not accurately calculate your interest charges on an annual basis. For instance, 2% per month does not equal 24% per year; it equals about 26.8% annually if compounded and 24.03% if not compounded. If your contract does not make the compounding and calculation methods clear, then the Interest Act, a federal statute, applies and restricts you to 5% interest annually. Better than the Courts of Justice Act rate, but not great.

What if you do not have a written contract? For instance, what if you simply issue individual invoices with each delivery or account for services? Can you claim 2% per month interest in court?

The good news is that if you can convince the court that you are entitled to a different interest rate because of a verbal contract, you do not have to settle for the Courts of Justice Act rate.

ANOTHER ISSUE

So how do you prove that?

THE CASE

The Ontario Court of Appeal recently considered interest in Paul’s Transport Inc. v. Immediate Logistics Limited. This case involved a verbal freight brokerage agreement under which Immediate Logistics was the freight broker and would dispatch Paul’s Transport to transport the goods. Paul’s Transport would invoice Immediate Logistics for the services it had provided. When Immediate Logistics received payment from the shippers, it would remit payment to Paul’s Transport.

Immediate Logistics stopped paying Paul’s Transport. When Paul’s Transport attempted to collect for its services directly from the shippers, it learned that Immediate Logistics had already been paid and had not shared those proceeds with Paul’s Transport. As you might suspect, Paul’s Transport sued for the balance owing and Immediate Logistics did not defend. The statement of claim stated that it was an implied term of the contract that amounts payable to Paul’s Transport were subject to an interest rate of 2% per month as explicitly stated on each invoice. Paul’s Transport obtained default judgment which included the interest at 2% per month, but when it took steps to enforce the judgment, the principals of Immediate Logistics sought to set aside the default judgments. A motion for judgment was required. The motions judge was satisfied that there was a verbal agreement and a course of conduct that established that interest would be charged at 2% per month.

At the Court of Appeal, it was key that Paul’s Transport had filed affidavit evidence showing that Immediate Logistics had been advised that interest would be charged at 2% per month, and they had cross-examined the owner of Immediate Logistics whose evidence confirmed that fact. This differs from previous cases, where plaintiffs had relied on an allegation of a “deemed admission” based upon the failure of the debtor to defend. What is notable about this Court of Appeal decision is that it does the very unusual thing of saying that an earlier Court of Appeal decision is no longer to be considered “good law”. The reason that Paul’s Transport was able to prove its contract for the interest rate was that it had actual evidence to support that claim. Therefore, it was not a “deemed admission”.

What the Court of Appeal now says is that determining the contractual rate of interest is a mixed question of fact and law. A defendant cannot make a quote “deemed admission” of a mixed question of fact and law, they can only make a deemed admission of facts. It is the job of the motions judge to apply the law to those facts and determine the outcome. If Paul’s had not filed the affidavit in cross-examination evidence, they would not have succeeded on their claim for interest.

TAKEAWAYS

  • This is an important procedural note for parties attempting to act for themselves on a collection matter, or for their lawyers.
  • It has become slightly more difficult to obtain an increased rate of prejudgment interest on a default judgment.
  • Evidence must be provided to prove a verbal agreement.
  • This can be avoided by having a proper written contract to establish the rate of interest in the first place.
  • Since the drafting of contracts is a tricky business, if you want to be sure that they reflect current law, it is always good practice to have them either reviewed or drafted by a lawyer with experience and knowledge about the issues.

WHAT WEILERS LAW CAN DO TO HELP YOU

The corporate commercial team at Weilers Law has that experience and will take the time to learn enough about your business to draft a contract that protects your interests as best as possible. Our litigation team can also provide assistance with your collections. If you are regularly granting credit to your customers, whether for goods or services, and want to protect your right to interest, you might be interested in finding out if Weilers Law are the right lawyers for you.