Nathan Clarke, Associate Lawyer
In the commercial context, a contractual interest rate on overdue payments offers encouragement to those in arrears to settle their bills promptly. If the matter goes into litigation, over the course of years, accumulated interest can amount to a substantial sum.
In the litigation context, it is not uncommon for businesses attempt to impose interest rates on payments by unilaterally including a claim for interest in an invoice. However, despite what an invoice may say or claim, you cannot decide to charge interest after the fact. The mere inclusion of an interest rate provision in an invoice will not obligate a delinquent client to pay interest at that stated rate.1 A contractual interest rate must be agreed to beforehand and comply with certain statutory requirements.
Complying Section 4 of the Interest Act
Pursuant to section 4 of the Interest Act, R.S.C. 1985, c. I-15, any person may stipulate a rate of interest by way of contract or agreement.2 For an interest rate to be enforceable in court, there must be some agreement to pay interest, whether oral, in writing, or implied by conduct or the nature of the parties’ business relationship.3
Section 3 of the Interest Act, R.S.C. 1985, c. I-15 stipulates that where the contract prescribes an interest rate but, it is not in compliance with section 4 (or does not otherwise set out a specific rate), the rate will be set at 5% percent. This rate is still higher than the interest applied to most court judgments set out by Courts of Justice Act (which are paltry in comparison, typically around 0.5-3% per annum).4
The simplest and most reliable way to establish a contractual interest rate is by express agreement. This is why, when drafting a contract, it’s crucial to spell out the interest rate clearly and ensure that it conforms to statutory requirements set out by the Interest Act. For example, section 4 of the Interest Act prescribes that the contract must show the interest rate as an annualize interest rate. Interest provisions in contracts that fail to show the interest rate as an annual rate, such as only referring to monthly rate of interest, are likely unenforceable. Failing to conform with the Interest Act is a common mistake made by businesses.
Will an Implied Agreement Comply with Section 4 of the Interest Act?
In rare circumstances, where there was no evidence of an express agreement, a Court may infer from the circumstances from an unequivocal agreement to pay interest. This doesn’t happen often, and it is a high bar to clear in court. However, courts have held that where the parties have an established business relationship, the circumstances of that relationship may establish that the parties agreed, at least impliedly, to be bound by the interest rates expressly provided on a series of invoices.5
This was the case in Mackin Mailey Advertising Ltd. v. Budget Brake & Muffler Distributors Ltd.,  B.C.J. No. 2268 (B.C.C.A.), where the Court inferred an implied agreement from its unique (and rare) facts. In that case, interest was charged on each invoice by showing the amount charged each month on overdue amounts. For over a year, the parties both clearly treated the interest levied as a valid charge.
However, even in the rare circumstances where a court finds an implied agreement to pay interest, the failure to comply with section 4 of the Interest Act means that the rate of interest will default to 5% percent per annum. This is what occurred in the case Peace Country Petroleum Sales Ltd. v. O.T.H. Logging Inc., 2016 BCSC 1574 where the Court found that there was insufficient evidence of an agreement to charge 24% per annum compounded monthly on arrears, and imposed an interest rate of 5% in accordance with section 3 of the Interest Act.
The aforementioned cases serve to highlight the courts’ general reluctance to compel a party to pay interest exceeding the default rate. This underscores the significance of reaching an agreement on an interest rate for payment arrears.
If you would like more information or assistance with this type of issue, please reach out to Nathan Clarke or contact Lister Beaupré LLP directly by phone at 613-234-2500 or by email at firstname.lastname@example.org.
1 Gilbert Steel Ltd. v. University Construction Ltd., 1976 CanLII 672 (ON CA).
2 It should be noted, however, that Section 347 of the Criminal Code of Canada establishes a ‘criminal rate of interest,’ currently at 60 per cent per annum.
3 Royal Group Inc v Core Precision Technologies Ltd, 2011 ONSC 5019 at paras 40-45.
4 Note that there is a different default interest rate that applies with respect to non-pecuniary loss, see: s. 128(2) of the Courts of Justice Act
5 Royal Group Inc v Core Precision Technologies Ltd, 2011 ONSC 5019 at paras 40-45.