In Diamantopoulos v. Construction Dompat
Inc., 2013 QCCA 929, a construction contract
specified a late payment interest rate of 24% per annum and a
legal/collection fees charge of 20% on the amount due. The
Québec Court of Appeal characterized these clauses jointly
as "penal", excessive and abusive, and reduced the
charges to a single, global interest rate of 15%. The court
exercised its discretion under article 1623 C.C.Q. which permits
judicial reduction if the amount in a penalty or liquidated damages
clause is abusive. It is noteworthy that the contract in issue was
expressly held not to be a consumer contract or adhesion contract
which would have given the court other revision powers.
The Court of Appeal stated that an
interest rate of 24% is not necessarily and intrinsically
abusive. In another recent decision cited by way of example,
the Québec Court of Appeal upheld an interest rate of 24% on
a third ranking hypothecary loan. In that case, given the risks
associated with the loan, the court declined to exercise its
discretion under article 2332 C.C.Q to revise the terms of a
loan that are lesionary or exploitative.
The court in Dompat clearly stated that it is the
combined effect of both clauses that is abusive. Its analysis
involved a comparison with the legal interest rate and additional
indemnity available under Québec law at a combined rate of
6%, and with market rates which have been low in recent years. The
court also mentioned that the contract terms seemed particularly
exorbitant given that the claimant inflated its claim under the
The Court relied on its recent decision in 9149-5408
Québec Inc. v. Groupe Ortam Inc., 2012
QCCA 2275, which applied the same analysis to the combined
effect of a similar legal fees clause and a clause which imposed
interest at 24% per annum for payment after 30 days. Nonetheless,
the Ortam decision characterized the 24% interest rate
alone as "punitive", rather than compensatory, given the
interest rate applicable by law.
The Diamantopoulos and Ortam decisions clearly
indicate that Québec courts will carefully scrutinize and
possibly reduce the combined effect of a contractual interest rate
and rates related to legal or collection fees in all types of
contracts. The favoured reduced rate appears to be 15%.
Unfortunately, the decisions do not indicate how the Court of
Appeal justified a global interest rate of 15%.
Many more questions arise. To what extent does the presence of a
legal fees clause, which is a form of penalty or liquidated damages
clause, permit extending the characterization and scrutiny to other
clauses? In this regard, the decisions do not appear to distinguish
late payment clauses from 30- or 60- day net clauses for the
purposes of their characterization as a penalty clause which
presupposes a contractual breach rather than an optional deferred
payment. Are all interest clauses now to be characterized as
penalty or liquidated damages clauses and subject to potential
reduction? Or, is this line of cases restricted to contracts
specifying both interest and collection fee clauses or interest and
another form of penalty clause? To what extent should the
court consider market interest rates and how profound must the
analysis be? Finally, would it be possible to apply a notion of
severance to the clauses so as to reduce only the rate specified
legal fees clause?
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
J.J. v. C.C., is an interesting case in which the court held that an automotive garage owes a duty to minor children to secure the vehicles on the premises by locking the cars and safely storing the car keys...
In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
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