Loan agreements governed by Ontario law commonly include a
provision that is intended to address the maximum effective annual
rate of interest that is chargeable thereunder without contravening
the usury provisions of the Criminal Code
(Canada). For purposes of the Criminal Code (Canada),
"interest" is defined as including ordinary commercial
interest, fees (other than those required to be paid to
governmental authorities in connection with perfecting security)
and expenses (such as legal expenses, including a lender's
legal expenses if the borrower has agreed to pay them) and,
therefore, is not limited to what most bankers think of when they
refer to "interest".
In U.S. law governed loan agreements, the provision limiting
interest is usually framed that if interest at the stated rates
would result in unlawful rates, then the interest rates shall be
reduced to the maximum lawful rates. Canadian courts have refused
to enforce such a provision on the basis that they would be
required to rewrite the contract by determining which, and in what
sequence, element(s) of "interest" should be reduced in
order to attain an effective annual interest rate that does not
exceed the lawful rate. The result of the Canadian courts'
refusal to enforce such provisions has been, in some cases, that
lenders have been denied all "interest".
Accordingly, to be enforceable, provisions limiting interest
should specify the order in which the elements of
"interest" shall be reduced so that the effective annual
rate of interest provided for in the loan agreement will not be in
contravention of the Criminal Code (Canada) (for example,
the interest rate on the loan shall be reduced first, then fees
shall be reduced etc. until the lawful effective annual rate of
interest is attained).
Scott Horner's practice is focussed on
acting for domestic and U.S. financial institutions and issuers on
asset-based lending, acquisition financings and DIP finance
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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