A creditor may know exactly how much they are owed by a debtor in principal. However, determining how much interest can be added to that debt is often a much less straightforward process.

An unpaid loan, invoice, account balance, or other obligation that is fixed or readily calculable may give rise to a liquidated debt claim. Although the principal amount pursuant to a liquidated debt claim may be clear, there is no universal way to calculate the relevant interest rate applicable to every liquidated debt claim.

In Ontario, the recoverable rate may arise from the parties’ contract, the federal Interest Act, or the statutory pre-judgment and post-judgment interest regime under the Courts of Justice Act. For that reason, a creditor should not readily assume an interest rate applicable to this calculation.

This article examines how those sources interact and what creditors should consider in determining claimable interest on a liquidated debt in Ontario.

Starting Point: The Contractual Rate

The first logical step in determining the rate of interest for liquidated debt claims is to review the agreement between the creditor and the debtor. Section 2 of the Interest Act generally permits parties to agree on a rate of interest, subject to any restrictions in the Act and other applicable legislation. For example, one restriction would be under Section 347 of the Criminal Code. Pursuant to Section 347 of the Criminal Code, it is a criminal offence to enter into an agreement or arrange to receive interest at an annual percentage rate that meets or exceeds 35%.

Regardless, the existence of an interest provision does not necessarily resolve the calculation. A creditor must consider other factors contained within the agreement, including whether the interest is simple or compounded, the applicable annual rate, when interest begins to accrue, whether the rate applies following maturity or default, whether it continues after judgment, and how partial payments are to be credited.

Caution should be exercised where the interest rate appears only on an invoice. Printing an interest term on an invoice does not necessarily make it enforceable. The creditor must still establish that the debtor agreed to the term or that it otherwise became part of the parties’ contractual relationship, including through an established course of dealing. However, invoiced interest rates have been enforced. In Comco Canada Ltd. v. Sam Peters Investments Limited, the Court enforced an invoiced interest rate because the debtor had repeatedly received invoices containing the same term throughout a long-standing relationship with a creditor.

General Rules under the Interest Act

The Interest Act generally may affect the rate recoverable:

• Section 3 of the Interest Act establishes that the applicable rate of interest is 5% per annum when neither the relevant contract nor law specifies a particular rate; and
• Section 4 of the Interest Act applies when a written or printed contract makes interest payable at a daily, weekly, monthly, or other rate covering less than one year.

Therefore, except for mortgages on real property, a written contract should also expressly state an equivalent annual rate. Otherwise, Section 4 generally prevents recovery of interest above 5% per annum.

This was seen in Elcano Acceptance Ltd. v. Richmond, Richmond, Stambler & Mills, where promissory notes provided for interest at 2% per month without stating a yearly equivalent. The Court in this case ruled that Section 4 applied to the notes, stipulating that a monthly rate was not recoverable above the statutory annual limit.

No Contractual Right? Think Statutory Prejudgment Interest

Sections 127 and 128 of Ontario’s Courts of Justice Act (“COJA”) will generally provide the applicable prejudgment interest regime where a creditor has no contractual or other legal right to interest. Moreover, s. 128(4)(g) of the COJA specifically provides that statutory prejudgment interest is not awarded where interest is payable by another right. A creditor cannot therefore recover contractual interest and statutory prejudgment interest on the same principal for the same period in ordinary circumstances.

The “prejudgment interest rate” defined by the COJA refers to the bank rate and the quarter in which the proceeding was commenced. A table of applicable rates for each calendar quarter is published by the province. Therefore, it is important to recognize that the relevant interest rate will not necessarily be the rate in effect when the debt first became due.

The COJA establishes that a person entitled to an order for the payment of money may claim the relevant prejudgment interest rate calculated from the date the cause of action arose until the date of an order made by the court.

In a straightforward proceeding for an unpaid invoice or loan payment, the cause of action may typically arise when the debtor failed to make a payment as it became due. However, closer examination may be required where the obligation is payable only upon demand, divided into installments, or is subject to the satisfaction of any other contractual condition.

Judgment Obtained? Think Post-Judgment Interest

The applicable interest analysis expands if a judgment is obtained. The COJA provides that money owing under an order bears post-judgment interest from that date forward.

Prejudgment and post-judgment interest rates are determined in different fashions. The applicable prejudgment interest rate is based on the bank rate for the quarter in which the proceeding was commenced, whereas the applicable post-judgment interest rate is based on the bank rate for the quarter in which the date of the order falls.

Again, an important caveat to note is that under section 129(5) of the COJA, statutory post-judgment interest is not awarded where interest is payable under another right. Therefore, a creditor should not assume that every contractual interest provision automatically continues after judgment.

Exceptions to General Assumptions: The Court’s Discretion to Adjust

Although the statutory rates applied may seem mechanically clear, the Court has full discretion to change the general interest calculation. Section 130 of the COJA provides Courts with the discretion to disallow prejudgment and post-judgment interest, apply a higher or lower rate, or alter the formal period to which interest accrues over time.

However, for most routine liquidated-debt claims, Section 130 operates as an adjustment mechanism rather than a base starting point for interest determination. Courts will consider the factors including the conduct of the parties throughout the proceedings and changing market interest rates, among many others prescribed in subsection (2).

The Importance of Pleading Interest

It is important that a creditor properly plead interest pursuant to a liquidated debt claim. The assistance of a legal professional is paramount in this process. The circumstances of any case may render a different interest estimation.

Even in the case of a defendant being noted in default, the registrar may decline to sign judgment if uncertain about the amount or rate of interest properly recoverable. Therefore, it is important that an initial statement of claim or a requisition for default judgment properly explain how interest should be calculated in any scenario.

Moreover, whereas the Rules of Civil Procedure apply to proceedings in the Superior Court of Justice, separate rules govern Small Claims Court proceedings, although Rule 11.02 similarly permits default judgment for a debt or liquidated demand, including interest if claimed.

If you are a creditor seeking to recover a liquidated debt, contact David Cooper at david.cooper@devrylaw.ca to discuss the applicable interest rate, calculation requirements, and how interest should be pleaded in your claim.

This blog was co-authored by summer law student Erik Mayer.