The typical loan agreement for a loan (a “Loan”) by the respondent (“ClearFlow”) to the applicant (“SPN”) provided for a base interest rate of 12% p.a. compounded and calculated monthly, an administration fee (the “Administration Fee”) that was charged when the Loan was initially advanced, and if it was not paid off, again each time it renewed (either 1.81% or 3.55% of the balance, depending on the terms of the specific Loan Documents), and a “discount fee” of 0.003% of the outstanding principal of the Loan which was calculated on a daily basis for every day that the Loan was outstanding (the “Discount Fee”). After having defaulted, SPN submitted that the Administrative Fee and the Discount Fee were in fact interest charges and, since these fees were not annualized, they violated s. 4 of the Interest Act.
In finding that the Administration Fee was not interest, McEwen J stated (at paras 35 36 and 39):
…[T]he higher rates [higher Administration Fee charged for Promissory Notes (3.55%) as opposed to under the Loan Agreement (1.81%)] were directly linked to the greater amount of administrative work that was required for the riskier Loans.
… [T]he Administration Fee was charged on a one-time only basis and would only be charged if a Loan was not repaid within the specific time frame. It therefore did not necessarily accrue over time, since there would be no accrual if the Loan was repaid in the designated time frame.
… I find that the Administration Fee was compensation for the considerable costs incurred to negotiate, conduct due diligence, set-up, and administer the Loans, and was not simply compensation for ClearFlow not having the use of the money.
However, after stating (at para. 22) that he accepted the conclusion in Sherway Centre that “an amount paid as compensation for the use of money for a stipulated period can be said to accrue day-to-day,” McEwen J found that the Discount Fee constituted interest, stating (at para. 45):
… [I]t is my view … the Discount Fee meets the three … elements of interest: it is consideration or compensation for the use or retention of money owed to ClearFlow; it related to the principal amount; and, it accrued over time (literally day-to-day). ClearFlow viewed the Discount Fee as providing an incentive for SPN to pay down the Loans as quickly as possible. Unlike the Administration Fee, the Discount Fee meets all of the criteria of interest without any reasonable commercial explanation to the contrary.
On this basis, the Loan Documents did not comply with s. 4 (so that all interest was capped at 5% p.a.). First, the Discount Fee was not expressed as an annual interest rate. A clause that effectively provided a verbal formula indicating that the stipulated rate was to be multiplied by 365 (or 366, as applicable) did not suffice. In this regard, he stated (at para. 53):
Formulas can be confusing and even misleading. … The requirement of an express statement does away with this type of dispute and uncertainty, particularly where in this case there are multiple loans, which may roll-over.
Second, the formula was defective in that it excluded the effect of compounding.