Topic of Interest: Why Section 4 Matters
By Jeffrey Daniels
Reynolds Mirth Richards Farmer LLP
AMSC Casual Legal Service Provider
Section 4 of the Interest Act (Canada) requires all written agreements for payment of interest at a rate or percentage per day, per week, per month, or any period less than one year, to contain an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent. If the agreement fails to meet the above requirement, the amount of interest that is chargeable, payable or recoverable under the agreement is limited to 5% per annum.
For illustration, if a written agreement specifies that interest on a loan is payable at 3% per month but fails to specify the annual rate or equivalent, then section 4 of the Interest Act has been violated and the amount of interest chargeable limited to 5% per annum. If a written agreement specifies that interest is payable at 36% per year, section 4 has been complied with and presumptively, interest is chargeable at the stated rate.
In Ambassador Coffee Inc. v Park Capital Management 2012 Inc., 2019 SKQB 65, the defendant defaulted on its lease from the plaintiff. The plaintiff claimed interest on overdue rent, relying on a provision in the lease which required the Tenant to pay interest at a rate of 2 percent per month on all overdue rent. In his decision, Chief Justice Popescul acknowledged the violation of section 4, stating: “Here, the Lease purports to apply a rate of interest at a monthly rate, without stipulating an annual equivalent. This is clearly contrary to s. 4 of the Interest Act, and as such, cannot be enforced. The interest applicable must then be limited to 5 percent per annum.”
While lenders are generally aware of the requirements of section 4, there are many other written agreements that seek to impose interest on late payments or other breaches and are therefore subject to the Interest Act. Often these contracts can operate for years without either party recognizing that the interest provisions may not actually be (fully) enforceable.
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DISCLAIMER: This article is meant to provide information only and is not intended to provide legal advice. You should seek the advice of legal counsel to address your specific set of circumstances. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this article to be outdated.