Back to 'Commercial Reality'? Borrower appeals to the Supreme Court regarding decision on interest disclosure under Section 4 of the Interest Act

In our last issue of Fully Secured,^[1] we wrote about the Ontario Court of Appeal's decision in Solar Power Network Inc. v. ClearFlow Energy Finance Corp.^[2] That decision, much to the relief of lenders, overturned the decision of the Ontario Superior Court of Justice^[3] and held that annualizing interest rate formulas can satisfy the requirements of section 4 of the Interest Act (Canada).^[4] On Nov. 5, 2018, the borrower, Solar Power Network Inc. ("SPN") filed an application to seek leave to appeal to the Supreme Court of Canada (the "SCC Application").^[5] The proposed appeal raises two key issues:

1. Does an annualizing formula satisfy the requirements in section 4 of the Interest Act for a lender to provide "an express statement" of an "equivalent" annual interest rate?
2. What is the remedy mandated by section 4 of the Interest Act if a loan agreement contains multiple interest rates, some of which are not expressed on an annual basis?

A key concern raised by SPN in the SCC Application^[6] is that the Court of Appeal's decision was not "based on the ordinary and grammatical meaning of section 4," ^[7] which provides that:

"[w]henever any interest is [expressed on a non-annual basis], no interest exceeding the rate of five percent shall be chargeable…on any part of the principal […]." [emphasis added]^[8]

The SCC Application argues that the language of section 4 is drafted broadly to mean that if a contract provides for "any" non-compliant interest rate, the section 4 remedy should be applied to limit both compliant and non-compliant interest rates (e.g. the aggregate interest rate) to five percent per annum. However, the Court of Appeal applied this remedy only to the non-compliant interest provisions but allowed the compliant interest rates to remain as stated in the loan agreement.

SPN submits that the decision to refrain from limiting the aggregate interest rate was made on the basis that there was no evidence to suggest that it was the lender's intention to circumvent the Act.^[9] Accordingly, SPN contends that the language of the Act does not require intent, and by "reading in a requirement of intent, the Court of Appeal has severely limited the utility of section 4 of the Interest Act. Moreover, it places an onus on a borrower that is inconsistent with the consumer protection purpose of the legislation."^[10]

Until the Supreme Court of Canada announces whether it will grant leave to appeal, lenders should continue to exercise caution by ensuring that the formulas used to express annual interest rates are clearly set out in the underlying loan agreements and furthermore, that the borrower has a clear understanding of the interest payable under those agreements.