Law Times

LAW TIMES COVERING ONTARIO'S LEGAL SCENE | FEBRUARY 25, 2019 11 www.lawtimesnews.com BY JULIUS MELNITZER For Law Times D espite the Ontario Court of Appeal's favourable rul- ing last September in Solar Power Network Inc. v. Clear- Flow Energy Finance Corp., the uncertainty regarding the disclosure requirements under s. 4 of the federal Interest Act continues to hover over the lend- ing community. Just how long that uncertain- ty persists depends on whether or not the Supreme Court of Canada grants leave to appeal from the unanimous decision. The leave application was filed in November. "We expect a decision on the leave application in the spring," says David Outerbridge, a part- ner in Torys LLP's litigation de- partment in Toronto, who with his litigation partner Patricia Jackson represented the Cana- dian Bankers' Association, in- terveners in the case. The importance of the issues in Solar Power — whether an- nualizing formulas, a common mechanism in commercial con- tracts, satisfy s. 4 and whether inadequate disclosure reduces all interest payable to the statu- tory five per cent — is appar- ent from the expedited hearing granted by the OCA as well as the intervention of the CBA. "Aspects of this case could have far-reaching effect into the Canadian lending industry," says Simon Bieber, co-founder and a commercial corporate litiga- tion partner at Adair Goldblatt Bieber LLP in Toronto, who with his commercial litigation partner Nathaniel Read-Ellis represented ClearFlow. "Our banking indus- try doesn't always want to annu- alize interest rates with a precise percentage and has come to rely on formulas and calculations from time to time." The appellate ruling over- turned the first instance deci- sion of Justice Thomas McEwen of the Superior Court of Justice, released in January 2018. McEwen ruled that the "dis- count fee" provided for in the loan agreements between Solar Power Network Inc., the bor- rower and an installer of solar panels, and ClearFlow, the lend- er, was in fact "interest" for the purposes of s. 4; that the annual- ized formula provided for in the lending agreements fell short of statutory requirements; and that the shortcoming limited interest payable under the agreements to five per cent. McEwen reasoned that the "discount fee" in the agreements was in fact interest, because it featured the three essential ele- ments required for that desig- nation: It was compensation for use of money owed, related to a principal amount and accrued over time. The amount of the discount fee, payable in the event of de- fault, was expressed as 0.003 per cent charged daily on the out- standing principal. If a balance remained outstanding after 90 or 180 days, depending on the particular loan, the loan would "roll over" into a new loan and the discount fee would com- pound. Section 4, however, forbids interest charges beyond five per cent unless the contract con- tains an "express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent." The agreement between So- lar and ClearFlow attempted to address this requirement by including a common "conver- sion" provision. This provision consisted of a formula that con- verted any interest rate not ex- pressed as an annual rate, such as the "discount fee" daily rate, into an equivalent nominal an- nual rate. ClearFlow's position was that Solar could easily determine the annual rate to which the dis- count fee was equivalent by us- ing the formula in the conversion provision. Solar disagreed, and it brought an application for a declaration that the total interest payable could not, in accordance with s. 4, exceed five per cent. McEwen sided with Solar. He reasoned that the conver- sion formula was not an "express statement" of the annual rate. In particular, the formula did not take the compounding features of the agreement into express ac- count. "[Section 4] is designed to avoid the exact type of mischief that can occur when rates are not annualized and the borrower, therefore, does not have a clear understanding of its obligation to pay interest," McEwen wrote. "A formula does not necessarily allow for this clear understand- ing to occur. Formulas can be confusing and even misleading." In the Court of Appeal, Jus- tice Robert Sharpe, writing also for justices David Brown and Gary Trotter, agreed that the "discount fee" was in fact inter- est. But he observed that the parties could not know with certainty when the compound- ing would occur because it de- pended on whether and when the parties agreed to have the loans roll over. The upshot was that the documentation could not possibly set out an effective rate of interest. "It cannot be the case that s. 4 is engaged when a lender fails to provide information that it is impossible to provide," Sharpe concluded. Section 4, Sharpe reasoned, "must be interpreted in the light of modern commercial reality." That reality included consider- ing the now common practice of calculating interest on the basis of a 360-day year or 12 months each of 30 days each, with a for- mula used to convert the rate to an annual rate based on a calen- dar year. "By requiring an equivalent 'rate or percentage' (emphasis David Outerbridge says he expects a decision on the leave application in Solar Power Network Inc. v. ClearFlow Energy Finance Corp. this spring. 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