Lougheed Block Inc. ("Lougheed") was the owner of an
office building over which it had granted a mortgage to Equitable
Trust Company ("Equitable Trust"). After a series of
instances where Lougheed was unable to make the required payments,
the terms of the mortgage were amended by way of a second renewal
agreement which specified a per annum interest rate of 25 per cent.
However, Lougheed would only be required to make monthly interest
payments at a "discounted rate" of 7.5 per cent or at the
prime rate plus 5.25 per cent, whichever was greater. The
difference between the "discounted rate" and the 25 per
cent rate would accrue to the loan and be forgiven so long as
Lougheed did not default. Lougheed eventually defaulted and
Equitable Trust sought repayment at the 25 per cent interest
The issue on appeal was whether the loss of the "discounted
rate" upon default was in contravention of section 8 of the Interest Act.
Section 8(1) of the Interest Act states that "[n]o fine,
penalty or rate of interest shall be stipulated for, taken,
reserved or exacted on any arrears of principal or interest secured
by mortgage on real property or hypothec on immovables that has the
effect of increasing the charge on the arrears beyond the rate of
interest payable on principal money not in arrears."
The majority of the Alberta Court of Appeal had upheld the
chambers judge, holding that the interest terms of the second
renewal agreement complied with section 8 of the Interest Act, as
the section was aimed at penalties for non-performance rather than
incentives for performance. However, a strong dissent by Berger
J.A. argued that non-penal and penal provisions imposing a higher
interest rate upon default were both in contravention of section
The SCC began its analysis with a consideration of statutory
interpretation, and in particular the correct interpretation of
section 8 of the Interest Act in light of section 2, which states,
"[e]xcept as otherwise provided by this Act [...] any person
may stipulate for, allow and exact, on any contract or agreement
whatever, any rate of interest or discount that is agreed
on" (emphasis added).
Brown J., writing for the majority of the SCC, determined that,
had Parliament intended section 8 be limited in application to
penalties, it would not have included the terms "fine"
and "rate of interest" in section 8 as a type of item
that might be prohibited. Furthermore, the inclusion of the phrase
"has the effect" indicated Parliament's intention
that items guised as non-penal discounts be included in the purview
of section 8. The omission of the term "discount" in
section 8, as included in section 2 of the Interest Act, did not
mean that section 8 did not apply to discounts.
Accordingly, the majority of the SCC held that section 8 of the
Interest Act prohibits both discounts to incentivise performance as
well as penalties for non-performance whenever their effect is to
increase the charge on the arrears beyond the rate of interest
payable on principal money not in arrears. The terms of the second
renewal agreement with respect to the loss of the discounted
interest rate upon default was, consequently, found to be in
contravention of section 8 of the Interest Act.
Côté J., writing for the three judge dissent, found
that section 8 of the Interest Act was not engaged by the second
renewal agreement because section 8 does not apply to provisions
that give the borrower relief from an interest rate under an
agreement. This conclusion was based on an interpretation that
section 8 only provides a narrow exception to the foundational rule
of freedom of contract contained in section 2 of the Interest
The case has important consequences for lenders taking security
by way of real property. According to the decision, secured parties
who grant a borrower a discount on interest payments may not be
able to later claim the full interest rate on any arrears of
principal or interest secured by a mortgage.
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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