Canada: Is Interest In Solar Power Over-Heated?

An Ontario court's reliance on section 4 of the Interest Act (Canada) to dramatically reduce the interest rate on a series of loans from the over 25% contracted for to just 5% has raised alarm bells for lenders and their counsel. One of the reasons for the concern is the doubt expressed by the court as to the efficacy of a formula converting a rate that is not expressed as an annual rate to an annual rate. Is all that concern justified, particularly when it comes to its application to LIBOR based rates that are expressed on a 360 day basis? Maybe not. While the court definitely found that the formula was ineffective in the circumstances of the case, it is not clear that the court decided that such formulas are generally ineffective or ineffective where they do not convert to an "effective" versus a nominal rate. We do agree, however, that the case is an excellent reminder to use caution when expressing interest rates (or fees that may be construed as interest) on the basis of a period that is substantially less than a year.


Solar Power Network Inc. v. ClearFlow Energy Finance Corp., 2018 ONSC 7286 considered a series of numerous loans (and numerous is a vast understatement) from ClearFlow Energy Finance Corp. to Solar Power Network Inc. and its affiliates. The documents contemplated that the loans would be short-term (initially up to 90 days and, if unpaid, they would roll into new loans with terms of up to 180 days). The loan charges were (usually):

  • a stated base interest rate of 12% per annum and 24% per annum in the event of a default, compounded and calculated monthly;
  • an administration fee of 1.81% or 3.55% of the loan, charged when the loan was advanced or renewed, and rolled over into a new loan, if unpaid, and
  • a discount fee of 0.003% of the loan, calculated on a daily basis for every day the loan was outstanding, which rolled over into the new loans. 

Solar Power did not challenge the base interest rate. Rather, it took the position that each of the administration fee and the discount fee constituted interest rather than fees, and that the expression of those fees did not comply with Section 4 since they were not expressed as annual rates. On that basis, Solar Power argued, a maximum of 5% interest was payable on the loans, as stipulated by Section 4.

Section 4 requires that a contract that provides for the payment of "interest ... made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year" contain "an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent". If it does not, interest charges are restricted to 5% per annum.[i]

The ClearFlow loan documents contained the following formula that ClearFlow claimed enabled Solar Power to calculate the equivalent annual rate for each of the administration fee and the discount fee (in the event they were found to constitute interest and to be subject to Section 4):

Unless otherwise stated, in this Agreement if reference is made to a rate of interest, discount rate, fee or other amount "per annum" or a similar expression is used, such interest, fee or other amount shall be calculated on the basis of a year of 365 or 366 days, as the case may be. If the amount of any interest, fee or other amount is determined or expressed on the basis of a period of less than one year of 365 or 366 days, as the case may be, the equivalent yearly rate is equal to the rate so determined or expressed, divided by the number of days in the said period, and multiplied by the actual number of days in that calendar year.

The Decision

The Court found that the administration fee was not interest. We'll leave a discussion of this aspect of the decision for another day.

The Court did find that the discount fee was interest.

The Court also held that the formula that ClearFlow had relied on in order to comply with Section 4 with respect to the discount fee was not sufficient to save it from the consequences of Section 4. Commenting generally on the formula, Justice McEwen said that he did not accept ClearFlow's submission that the formula saves it "in this case" (para. 52). But he also went on to express the view that Section 4 requires an express statement of the annual rate in order to do away with the type of dispute and uncertainty that formulas can raise.

He didn't really decide the case on the basis that formulas are ineffective though. He went on to find that the annual rate produced using the formula in the ClearFlow loan documents (0.003% x 365 = 1.095%) was not, in fact equivalent in the circumstances. Given the loan documents expressly provided that the discount fee would be compounded when the applicable loan rolled over, the Court found that the equivalent annual rate required by Section 4 would be the effective annual rate, which takes into consideration the effects of compounding (as opposed to the nominal annual rate resulting from the formula). The formula did not work for that purpose. The Court held that, as a result, Section 4 required that the aggregate interest on the loans be limited to a rate of 5% per annum.

What appear to have been significant driving factors in the Court's conclusion that the equivalent annual rate required was the effective annual rate were that the discount fee was expressed using a daily rate and that the loan documents expressly provided that the discount fee would be compounded.


Utilization and Other Fee Disclosure. This decision is a reminder that interest (and fees that may be characterized as interest) should be expressed using an annual rate. For instance, utilization fees (applicable when, for instance, loans greater than a specified percentage of the aggregate loan commitments are outstanding) are sometimes expressed as a fee that is calculated daily based on a percentage of the loans outstanding on such day. Given the potential for such fees to be characterized as interest, it would be advisable to reformulate this as an annual rate, calculated daily and payable quarterly (for instance). If, instead of expressing the discount fee as 0.003% each day, the ClearFlow loan documents had provided that the discount fee was 1.095% per annum, calculated daily and compounded on maturity of the applicable loan, Section 4 likely would not have applied. At the very least, Solar Power would have had a more difficult case to make under Section 4. Solar Power did not challenge the base interest rate of 12% per annum or 24% per annum in the event of default, which was compounded and calculated monthly, and which was presumably a nominal rate, and the Court did not comment on it.

LIBOR Rate. The Court's finding that the formula in the ClearFlow documents did not satisfy the requirements of Section 4 is potentially of significant concern to lenders' counsel, who routinely employ a formula along the lines of the formula in the ClearFlow loan documents. Such a formula may be included in agreements that provide for interest rates based on LIBOR, for instance, since such rates of interest are calculated based on a period of 360 days. Although, in principle, the Court's reasoning in the Solar Power decision could extend to any rate of interest payable for any period of less than 365 days, we believe there are compelling reasons why the decision should not be read as impacting the validity of the formula when used in the context of LIBOR.

  • As we note above, while the judge expressed doubt about the use of formulas generally to comply with Section 4, he didn't actually decide the case on that basis. He decided that the application of the formula did not result in adequate disclosure in this case. There is no reason to believe that he considered LIBOR based rates as being affected by his comments on the formula. We should not be too ready to throw our much loved formula under the bus based on two short judicial paragraphs.
  • Section 4 was enacted over 100 years ago, long before LIBOR came into being. LIBOR is calculated according to market convention – a borrower that had bargained for a LIBOR-based interest rate could reasonably be expected to understand and expect that the rate was based on a 360-day year. Given that LIBOR is a screen rate and, therefore, potentially transparent to the borrower, if a lender were to recalculate and restate LIBOR based on a 365/366-day year, the borrower might reasonably be expected to be confused and to object. This could also make comparing LIBOR-based rates difficult for a borrower.
  • Interpreting section 4 in the context of modern commercial lending practices, we'd vigorously argue that a 360 day rate is an expression of an annual rate, particularly in the context of LIBOR. Section 4 refers to interest based on a week, day or month or other period less than a year, but 360 days is close enough to a year to allow an interpretation that includes it as the expression of a yearly rate given that expression of an interest rate on such a basis is a widely understood, commercially sound global practice. The difference in such a rate if it were expressed as an effective rate based on a 365 day period would be minimal and would be affected more by the compounding feature than the number of days. Any benefit conceivably derived by the borrower from such disclosure would likely be outweighed by the detriment represented by its difficulty in comparing rates and the loss of transparency of a screen-based rate.
  • It would be virtually impossible for the lender to state an equivalent effective annual rate that takes into account the effects of compounding, particularly given the unknown variable of the borrower's choice of interest period for any particular loan. A formula is the most reasonable and meaningful way for a lender to express an equivalent annual rate for LIBOR to the extent it is required to do so under Section 4. Taking Solar Power's holding on formulas to its logical conclusion, LIBOR would not be available to Canadian borrowers as a result of a lender's inability to comply with section 4. That can't be the case: interest based on LIBOR must be distinguished from the particular circumstances in Solar Power, where the interest rate was expressed as a daily rate, and the annual interest rate resulting from the formula was not representative of the interest rate expected by the parties to apply (given that compounded interest was expressly provided for in the documents).

Therefore, while it is not free from doubt given how the judge addressed the efficacy of formulas to address section 4, we believe the ClearFlow decision should not be taken as requiring 360 day based rates to be expressed as effective rates or as finding that the formula is not meaningful disclosure of an annual rate.

What's Next

We understand that ClearFlow has appealed the decision. Until that appeal is resolved, there is likely to be lively discussion about the impact of this trial-level decision on typical loan documentation. Hopefully, regardless of how the Court of Appeal decides the merits of the case, the court clearly restricts any findings regarding the formula to the particular circumstances of these fees. In the meantime, this decision highlights the questionable nature of the value of section 4. If one accepts that ClearFlow could have avoided the application of section 4 by expressing the discount fee as a nominal annual rate (which would not be a particularly meaningful statement of the applicable annual interest rate in the given circumstances), then section 4 does not appear to provide substantive borrower protection. Meaningful rate and fee disclosure has been extensively addressed with respect to consumers by federal legislation in the case of bank lenders and provincial-level consumer protection legislation, and the disclosure required looks nothing like what section 4 requires. Section 4 has outlived its usefulness: it's time to repeal it.


[i] The exact wording is: Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions