Canada: Lender Disclosure Obligations Confirmed

On March 28, the Supreme Court of Canada dismissed the application for leave to appeal in Solar Power Network Inc., et al. v. ClearFlow Energy Finance Corp. The Ontario Court of Appeal's 2018 decision stands. This is welcome news for lenders. It confirms that longstanding and widely used interest rate disclosure practices satisfy the requirements of section 4 of the federal Interest Act.

What you need to know

  • Formulas can satisfy the requirement to disclose an equivalent yearly interest rate. Where a contract specifies that interest is payable at a rate for "any period less than a year," section 4 of the Interest Act requires disclosure of an equivalent annual rate. The application judge's decision in Solar Power cast doubt on whether annualizing formulas—widely used in the lending industry—could satisfy this requirement. The Court of Appeal has confirmed that a formula which converts a daily interest rate to an equivalent annual rate can satisfy section 4.1
  • Section 4 does not require disclosure of the annual effective interest rate where that rate cannot be calculated in advance. Under many commercial agreements, interest is compounded only in the event that payments are not made when due. In such circumstances, it is mathematically impossible to state a numeric effective annual rate—one that takes into account compounding—in advance. The Court of Appeal has confirmed that "the laws of mathematics bow to no one" and disclosure of a nominal rate, by way of an annualizing formula, can satisfy section 4.
  • The remedy in section 4 applies only to non-compliant interest rates. The application judge in Solar Power had held that all interest payable under a contract should be reduced to the statutory maximum of 5% per annum, even if all but one of the interest rates in the contract satisfied section 4. The Court of Appeal overturned this "draconian" result and held that only non-compliant interest rates are reduced by section 4.

The implications of Solar Power for lenders

The Court of Appeal's decision in Solar Power confirmed that old statutes like the Interest Act should be interpreted in light of modern commercial realities. Lenders should take comfort in the Court's approval of industry-wide interest rate disclosure practices, particularly in agreements under which interest is calculated by reference to the London Interbank Offered Rate (LIBOR).

LIBOR-based lending agreements can comply with section 4

It is common for USD-denominated lending agreements to specify that interest is calculated by reference to LIBOR. This is a benchmark rate for international short-term interest rates that is referenced to a 360-day period, based on twelve 30-day "months," rather than a calendar year. LIBOR-based lending agreements typically include an annualizing formula that permits calculation of an equivalent annual interest rate.

The application judge's decision in Solar Power cast doubt on whether such formulas—used in Canada for over two decades—were sufficient to satisfy the disclosure requirements of section 4 of the Interest Act. The Court of Appeal confirmed that section 4, though drafted in 1897, "must be interpreted in the light of modern commercial reality." Referencing obiter statements in earlier cases,2 the Court of Appeal questioned whether section 4 even requires annualizing formulas for LIBOR-based agreements—but confirmed that if it does, a properly drafted formula is sufficient to comply with the provision.

No requirement to disclose an effective annual interest rate if it cannot be calculated in advance

There are various types of commercial agreements under which it may be mathematically impossible to calculate an effective annual interest rate. These include agreements:

  • where interest is calculated by reference to a rate for a period of less than a year that varies over time;
  • that provide for "running credit," where the borrower's draws and repayments each month are unknown in advance; and
  • under which interest is compounded only in the event that payments are not made when due.

The latter type of agreement was at issue in Solar Power. The borrower failed to make payments at term and the "discount fee" at issue was compounded each time the loan rolled over. The application judge nonetheless held that an "equivalent" annual interest rate, for the purposes of section 4, must be an effective rate that takes into account the effects of compounding of interest.

The Court of Appeal, recognizing that Parliament could not have "intended that which might be mathematically impossible to still be done" overturned this decision. It confirmed that section 4 does not require disclosure of an effective annual interest rate where it is mathematically impossible to calculate that rate in advance.

In sum, the Court of Appeal's decision in Solar Power represents a very positive outcome for the lending industry. The court has confirmed that industry-wide interest rate disclosure practices in common types of commercial agreements satisfy section 4 of the Interest Act, and that old legislation should be interpreted in light of modern commercial realities.

Footnotes

1 It is important to note that federal and provincial consumer protection legislation may contain more specific requirements about the calculation and disclosure of interest for loans to consumers and others to whom that legislation applies.

2 V.K. Mason Construction Ltd. v. Bank of Nova Scotia, [1985] 1 S.C.R. 271 at p. 287, 1985 CanLII 608 (SCC).

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 Mondaq.com.

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

Authors
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
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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