L'effet de la Unconscionable Transactions Act sur les prêts en Alberta (article en anglais)

Parties to loan transactions in Alberta should be aware of the Unconscionable Transactions Act¹ (the "Act"), which gives the Courts broad powers to affect loans deemed to be unconscionable.

Although the Act itself does not provide a cause of action, borrowers often plead it in conjunction with the equitable doctrine of unconscionability or in actions based on the Interest Act² or Criminal Code³ provisions that deal with criminal interest rates. The Act only applies to money lent, and provides that if the Court finds that the cost of the loan is excessive and the transaction is "harsh and unconscionable", the Court may:

• despite any agreement proposing to settle the loan, reopen the transaction and relieve the debtor from the obligation to pay what is deemed to be unfair;
• order the creditor to repay any deemed unfair amount already collected; and
• set aside or alter any security or loan documentation given for the loan or, if assigned by the creditor, order the creditor to indemnify the debtor.

While there is not a lot of case law that considers the Act, Lydian Property Inc. v Chambers⁴ provides structure and guidance with respect to the otherwise general provisions of the Act. This Court of Queen's Bench decision, which was ultimately affirmed by the Alberta Court of Appeal, sets out four identifying features of an unconscionable transaction to be considered when determining whether the Act applies:

• the grossly unfair and improvident nature of a loan transaction;
• the lack of independent legal or other appropriate professional advice to the weaker party;
• an overwhelming imbalance of bargaining power between the parties caused by the weaker party's lack of sophistication, business literacy, or a physical or mental disability; and
• the knowing exploitation by the stronger party of the weaker party's vulnerabilities.

The case law shows the tendency of the Courts to honour the deal and related agreement between the parties to the fullest extent possible, while softening the negative impact of the loan transaction on the affected party.⁵ Reflecting this, the Courts often use the "blue pencil" approach to strike out offensive provisions of the agreement while keeping most of the agreement intact.⁶ Provisions specifying unconscionably high interest rates, penalties or fees may be amended or struck completely in an effort to achieve a more balanced transaction.

The Cash Store (Advance Finance Co) v Barb J LaJoie⁷ is an example of the kind of transaction to which the Courts would apply the Act. The debtor agreed to a loan of $400.00 with interest at 59% per year. The creditor also extracted a number of fees which, independent of the principal and interest, amounted to $500.00. Eventually the debtor was no longer able to pay the loan and the creditor started proceedings to recover the amounts owing. The Court stated that the loan was so "sufficiently divergent from community standards of commercial morality that [the interest charges] should not be enforced"^.8 The Court reopened the loan and relieved the debtor of further payment, deeming her payment of $691.81 on a $400.00 loan in the course of 8 months to be sufficient in the circumstances.

The flexibility of the legislation and its remedies gives the Courts a number of options to find a fair solution to relieve from the effects of otherwise unconscionable lending transactions. However, the Court's discretion is checked by the need to preserve commercial certainty in contract as well as to prevent claimant windfalls from a transaction that had been agreed to by the parties. While lenders should be aware of the legislation, for their protection and that of borrowers, the Act has been used sparingly by the Courts. The legislation does, however, highlight a general public policy concern with protecting parties who have entered into onerous loan transactions without proper professional advice.

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^{[1]RSA 2000, c U-2.}

^{[2]RSC 1985, c I-15.}

^{[3] RSC 1985, c C-46.}

^{[4] Lydian Property Inc v Chambers, 2007 ABQB 541, as affirmed by 2009 ABCA 21.}

^{[5]Paragon Capital Corp v 395342 Alberta Ltd., 2004 ABQB 25 at para 13.}

^{[6]Lydian Property Inc v Chambers, 2007 ABQB 541 at para 102; Johnson v 957942 Alberta Ltd., 2010 ABQB 62 (Master) at para 18; EasyFinancial Services Ltd. v Rivard, 2008 ABPC 350 at para 21.}

^{[7]The Cash Store (Advance Finance Co) v Barb J LaJoie, 2002 ABPC 96.}

^{[8] The Cash Store (Advance Finance Co) v Barb J LaJoie, 2002 ABPC 96 at para 27.}