Can Interest Be Charged Without Prior Agreement?

Interest Clauses Must Be Agreed to When Making a Contract. A Business is Unable to 'Sneak' Interest Charges Onto an Invoice Without Prior Agreement. Interest Must Be Shown as an Annual Rate and Be Under Sixty (60%) Percent.

Understanding When An Interest Charge Is Legal and Enforceable Versus Unenforceable and Unlawful

Binding Interest Clauses Require Advance Agreement Regarding Lawful Interest Rate Charges Sometimes a business will add an interest charge onto an invoice without previously discussing the potential interest charge with the customer. This unilateral, meaning single-sided, decision to charge interest without a prior understanding and mutual agreement is improper and unenforceable. Simply said, a business is unable to charge interest unless the right to charge interest was agreed to when the deal was made and attempts to add an interest charge after the deal was made, such as providing first notice of an applicable interest onto an invoice, is without binding effect. This was stated in the case of King Road Paving and Landscaping Inc. v. Plati, 2017 ONSC 557:

[79]  The contract did not include any payment terms or any interest rate for late payments. The first invoice in relation to the original contract does not include any claim for interest. The second invoice in relation to the extras claims payment within 30 days and late payment charges of 3% per month thereafter.

[80]  The plaintiffs acknowledge that the written contract did not provide payment terms or interest for late payment, but claim that 3% per month is “reasonable in the circumstances as it is comparable to the rates charged by suppliers, which was 2% per month on average.” Alaimo testified that he told Nesci that he was going to charge him 3% interest around November 2012 and that Nesci “was fine with that”. No such oral agreement was alleged in the Amended Amended Statement of Claim.

[81]  The defendant argues that at no time was an interest rate of 3% per month agreed to. In fact, no payment terms or interest rate were ever agreed to by the parties and the court should not be filling in blanks where the parties have not included any such terms in their agreement.

[82]  Interest rates cannot be imposed unilaterally by including a claim for interest in an invoice; see Gilbert Steel, supra, where the Court of Appeal states: “I attach no significance to the notation ‘1% per month interest on overdue accounts’ on the invoices received by the defendant at the increased prices on the basis that interest cannot be imposed unilaterally in this manner.

[83]  In addition the interest rate claimed by the plaintiffs violates sections 3 and 4 of the Interest Act, R.S.C., 1985, c. c.I-15Section 3 provides:

Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

[84]  Section 4 provides:

[W]henever 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.

[85]  The contract includes no reference to an interest rate. Even if the second invoice reflected the terms of a contract it purports to impose interest at the rate of 3% per month but does not indicate an annual rate as required by s. 4 of the Interest Act.

[86]  I reject the contention that Nesci agreed orally to pay interest at the rate of 3% per month. In the first place, I find Alaimo’s statements in this regard to be not credible, especially when no such agreement was pleaded in any of the iterations of the Statement of Claim. Second, there is no evidence that any such agreement, if there actually was one, fully disclosed the annual cost of borrowing as required by the Interest Act. Alaimo’s evidence in this regard struck me as a belated effort to fill a gap in his claim.

[87]  Finally, it makes no sense that Alaimo and Nesci discussed and agreed to 3% interest per month in November 2012, but Alaimo did not send out any invoices until May 28, 2013. If there was such an agreement Alaimo (who claims that he was desperate for payment) would have sent out his invoices (which he claims he prepared as each extra was completed) immediately.

What Happens If An Interest Rate Is Shown Only As a Monthly Rate Rather Than Annualized Rate?

Contracts for the sale of goods and services, therefore contracts other than for loans or mortgages) wherein an interest charge is stated as applicable upon late payment or manner of overdue account must show an the interest rate as an annual interest rate.  The requirement to show the interest rate as an annual interest rate is prescribed within section 4 of the Interest Act, R.S.C. 1985, c. I-15.  For contracts that fail to show the interest rate as an annual rate, such as contracts that simply state that "a two (2%) percent monthly interest charge applies",  without also showing the annual interest rate, such is unlawful and interest charges become unenforceable.

The Interest Act also addresses the applicable interest rate if a contract states that interest applies and yet the interest rate details are omitted. In such a circumstance, the Interest Act prescribes that a five (5%) percent annual rate applies.  Counter-intuitively, many perceive that where a lesser rate is stated without the annualized rate such as the example of two (2%) percent mentioned above, this unenforceable rate should be substituted with the statutory five (5%) percent rate; however, the law will not operate in such a manner as to amend or adjust the defective rate of interest stated in the contract.  The law within the Interest Act only establishes the rate at five (5%) percent when interest was agreed to but the rate unstated.  Accordingly, in a situation where a rate is stated without the annualized interest rate, any interest becomes disallowed.

How Much Interest Is Too Much Interest?

Additionally, even if stated as an annualized interest rate, any interest rate charged beyond sixty (60%) percent annual runs contrary to section 347 of the Criminal Code of Canada, R.S.C.  1985, c. C-46 and may be punishable by five (5) years imprisonment as an indictable offence or two (2) years less a day imprisonment and/or twenty five thousand ($25,000) dollar fine as a summary conviction offence. 

Much news has also come from concerns involving the fees and other charges as charged by pay day loan businesses and whether such fees are merely interest charges in disguise and if such are interest charges in disguise whether such amounts to criminal activity when calculation of such interest charges in disguise establishes a rate beyond sixty (60%) percent.  These payday or short-term loan businesses are regulated per the Payday Loans Act, 2008S.O.  2008, Chapter 9.  The decision in the case of The Director v. The Cash Store, 2014 ONSC 980 has helped define some of the parameters established by this law.

Summary Comment

Attempts to add an interest charge onto an invoice without first having first arranged an agreement to charge interest is improper and unenforceable.  Furthermore, an interest clause must show the agreed upon interest rate as an annual rate, or include an annualized rate if a monthly rate is shown, and the annualized rate must be less than sixty (60%) percent.

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