



COURT OF APPEAL FOR ONTARIO

CITATION: Solar Power Network Inc. v. ClearFlow Energy

Finance Corp., 2018 ONCA 727

DATE: 20180904

DOCKET: C64864

Sharpe, Brown and Trotter JJ.A.

BETWEEN

Solar Power Network Inc., LDREC SPN LP, SPN LP 10, SPN LP 12,  SPN LP 14, SPN LP 15, SPN LP 16 and SPN LP 17

Respondents/Appellants
    by Cross-Appeal

(Applicants)

and

ClearFlow Energy Finance Corp.

Appellant/Respondent
    by Cross-Appeal

(Respondent)

Barry H. Bresner and Graham Splawski, for the appellant/respondent
    by cross-appeal

Simon Bieber and Nathaniel Read-Ellis, for the
    respondents/appellants by cross-appeal

Patricia D.S. Jackson and David Outerbridge, for the
    intervener, The Canadian Bankers Association

Heard: June 20, 2018

On appeal from the judgment of Justice Thomas McEwen of
    the Superior Court of Justice, dated January 10, 2018, with reasons reported at
    2018 ONSC 7286, 56 C.B.R. (6th) 37.

Sharpe J.A.:

INTRODUCTION

[1]

This appeal concerns complex commercial
    agreements between two sophisticated parties. The appellant, ClearFlow Energy
    Finance Corp. (ClearFlow) made a number of loans to the respondent, Solar
    Power Network Inc. and its affiliate companies (Solar Power). The loans were risky
    given the nature of Solar Powers renewable energy projects that ClearFlow was
    financing. Solar Power defaulted on the loans and disputed the amount of
    interest owing.

[2]

At the core of the dispute is a term in the loan
    agreements requiring Solar Power to pay a discount fee of .003 percent of the
    outstanding loans on the repayment date and for every day thereafter while the loan
    remains outstanding. Solar Power contends that the discount fee fails to comply
    with the
Interest Act
,
    R.S.C. 1985 c. I-15, s. 4, which requires that any written agreement for the
    payment of interest at a rate or percentage per day, week, month or any period
    less than one year contain an express statement of the yearly rate or
    percentage of interest to which the other rate or percentage is equivalent.
    Section 4 provides that where an agreement fails to comply with this
    requirement, no interest exceeding the rate or percentage of five per cent per
    annum shall be chargeable.

[3]

The application judge accepted Solar Powers
    arguments and held that ClearFlow was entitled only to interest at the rate of
    5% per annum in total despite  the fact that the loan agreements provided for
    interest to accrue at 12% per annum before maturity, and 24% thereafter in addition
    to the .003% discount fee.

[4]

ClearFlow appeals to this court, arguing that:

a)

the discount fee is not interest;

b)

in any event, the loan agreements contain an
    annualizing formula that satisfies s. 4;

c)

Solar Power entered forbearance agreements
    acknowledging its indebtedness, and cannot now dispute the interest owing; and

d)

in the alternative, the appropriate remedy is to
    limit the application of s. 4 to the discount fee rather than reduce the
    interest payable on the entire agreement to 5%.

[5]

Solar Power cross-appeals the application
    judges finding that certain administration fees provided for in the loan
    agreements do not constitute interest within the meaning of the
Interest Act
, s. 4.

[6]

For the following reasons, I conclude that the
    application judge did not err as to whether the administrative fees and the
    discount fee are interest. He did, however, err by finding that the discount
    fee contravenes the
Interest Act
, and by holding that all interest payable under the loan agreements
    should be limited to 5%.

FACTS

[7]

Beginning in 2015, ClearFlow, a project-finance
    company, made a series of loans to Solar Power to finance the development and
    construction of renewable energy projects. Renewable energy projects are
    complex, high cost, and difficult to finance. After ClearFlow made two initial
    loans to Solar Power, the parties signed a Loan Agreement that provided for two
    types of loans: Construction Loans for up to 90 days and Warehouse Loans with
    terms of up to 180 days while Solar Power arranged long-term financing. The
    parties also negotiated a number of additional loans by way of Promissory
    Notes.

[8]

All of the loans have three components material
    to this appeal.

[9]

First is a base rate of interest, typically 12%
    per annum compounded and calculated monthly, and 24% per annum in the event of
    default.

[10]

Second is an administrative fee of either 1.81%
    or 3.55%, charged when the loan was advanced and, if not paid off, each time
    the loan is renewed (
i.e.
not paid by the
    expiry of the term).

[11]

Third is the discount fee of 0.003% of the
    principal amount of the loan payable on the due date of the loan and every day
    thereafter until the loan is repaid.

[12]

These three terms are reflected in art. 2.2 of
    the Loan Agreement:

Each Borrower agrees to pay interest in arrears
    on the outstanding principal amount of each Loan advanced to such Borrower at
    the rate of 12% per annum, compounded and calculated monthly, both before and
    after maturity, default and judgementFollowing the occurrence of an Event of
    Default which is continuing, interest shall continue to accrue on the outstanding
    principal amount at the rate of 24% per annum until paid. Each Borrower further
    agrees to pay to the Lender: (i) on the date of advance of each Loan advanced
    to such Borrower under the Construction Loan Facility, an administration fee of
    1.81% of the amount of such Loan; (ii) on the date of advance of each Loan
    advanced to such Borrower under the Warehouse Loan Facility, an administration
    fee of 1.81% of the amount of such Loan; and (iii) on the date of repayment of
    such Loan (as set out in Section 2.4 or 2.5, as applicable), a discount fee of
    0.003% of the outstanding balance of such Loan for every day such Loan remains
    outstanding until such Loan is repaid in full.

[13]

Solar Power borrowed over $40 million from
    ClearFlow between 2015 and 2017 pursuant to the loan documents. In 2016, Solar
    Power began to encounter financial difficulties and defaulted on many of the
    loans. The parties entered Forbearance Agreements in July, October, and
    November 2016, as well as April 2017. Solar Power acknowledged its
    indebtedness, and ClearFlow agreed to forbear on Solar Powers default and to
    provide further financing.

[14]

The total amount of accrued interest is
    approximately $10 million. Solar Power has now secured replacement financing,
    and funds sufficient to cover the amount in dispute are being held in trust
    pending resolution of this appeal.

[15]

As I have already indicated, the central issues
    on the application and on this appeal are whether the Loan Agreement complied
    with the
Interest Act
,
    s. 4 and the appropriate remedy if it is non-compliant. Section 4 provides as
    follows:

Except as
    to mortgages on real property or hypothecs on immovables, whenever 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.

REASONS OF THE APPLICATION JUDGE

[16]

Before the application judge, Solar Power took
    the position that the administration fees and the discount fee amounted to
    interest within the meaning of the
Interest Act
, s. 4. As the Loan Agreement and the Promissory Notes did not state
    an equivalent annual percentage or rate of interest, Solar Power argued that the
    interest payable should be capped at 5%.

(a)

Administration fees

[17]

The application judge found that the
    administration fees did not constitute interest within the meaning of s. 4. He
    accepted ClearFlows evidence that the administration fees were compensation
    for administrative work in setting up and administering the loans, rather than
    a return on the money lent. Negotiating the loans involved the preparation of
    thousands of documents. At para. 32, the application judge found that it is
    commercially reasonable to accept the proposition that the administration fee
    was intended to compensate ClearFlow for the work it did in entering into and
    administering the various loan documents. The application judge noted that the
    administration fee did not accrue on a day-to-day basis during the term of each
    loan but was charged on a one-time-only basis and was only charged again if the
    loan was not repaid as specified. He concluded, at para. 39, that the administrative
    fee was not simply compensation for ClearFlow not having the use of the
    money.

(b)

Discount fee

[18]

The application judge found that the discount
    fee was interest. He rejected ClearFlows contention that it simply provided
    additional compensation for daily administration of the loans. The discount fee
    was not linked to the creation of a new loan or a renewal, it was the same for
    all types of loans, and it was calculated on a daily fixed rate. These factors
    suggested interest rather than a fee, as did the concession of ClearFlows
    affiant that the fees incentivized [Solar Power] to make earlier payout of the
    Loans. The discount fee had the three essential elements of interest. First, it
    was compensation for the use or retention of money; second, it related to the
    principal amount owing; third, it accrued over time.

(c)

The Annualizing Formula

[19]

The Loan Agreement (but not the Promissory
    Notes) contains a formula to calculate the annual rate for both the
    administration fee and the discount fee:

1.2 Interest and Fee Calculations, Maximum
    Interest Rate

a.

Unless otherwise stated, in this Agreement if
    reference is made to a rate of interest, discount rate, fee or other amount
    per annum or a similar expression is used, such interest, fee or other amount
    shall be calculated on the basis of a year of 365 or 366 days, as the case may
    be. If the amount of any interest, fee or other amount is determined or
    expressed on the basis of a period of less than one year of 365 or 366 days, as
    the case may be, the equivalent yearly rate is equal to the rate so determined or
    expressed, divided by the number of days in the said period, and multiplied by
    the actual number of days in that calendar year.

[20]

ClearFlows position before the application
    judge and before this court is that the annualizing formula provides a simple
    and adequate method to determine the annualized interest and thereby brings the
    Loan Agreement into compliance with the
Interest
    Act
, s. 4.

[21]

The application judge rejected ClearFlows
    argument for two reasons.

[22]

First, he found, at para. 53, that a formula
    could not satisfy the purpose of the statutory requirement for an express,
    annualized statement of interest, because [f]ormulas can be confusing and even
    misleading. He noted that confusion has arisen in this case about the amount
    of interest owing and suggested that this was the very mischief at which s. 4
    was aimed.

[23]

Second, he found that the annualizing formula did
    not provide the information required by s. 4 because it did not take into
    account compounding of interest. The annualizing formula would produce an
    annualized rate of 1.095% (0.003% x 365 days) but the actual interest rate
    would depend on a number of compound periods of interest as the discount fee
    was compounded each time the loan rolled over.

[24]

The application judge added that, in any event,
    there was no annualizing formula in the Promissory Notes to save them from
    being caught by s. 4.

(d)

The Forbearance Agreements

[25]

The application judge rejected ClearFlows
    submission that Solar Power was precluded from challenging the amount of
    interest owing by virtue of the Forbearance Agreements. The first Forbearance
    Agreement and the Second Amended and Restated Forbearance Agreement provided
    that the indebtedness, including interest, was unconditionally owing without
    offset, defence or counterclaim of any kind, nature or description whatsoever.
    However, the Third Amended and Restated Forbearance Agreement, which amends and
    replaces the earlier agreements, added to those words except as may otherwise
    be required by applicable laws. The application judge found that the added
    language permitted Solar Power to challenge the rate of interest.

(e)

Remedy

[26]

The application judge found that the appropriate
    remedy was to reduce all interest, including the base rate of interest of 12%
    or 24%, to 5%.

[27]

In his view, this remedy was required by the
    language of s. 4 that states that no interest shall be charged above the rate
    of 5% on any part of the principal money if any interest is not expressed on an
    annual basis. Any other interpretation would allow lenders to obscure the
    interest rate by charging a series of non-annualized rates individually lower
    than 5%. The
Interest Act
, s. 4 is consumer protection legislation and he rejected the
    contention that courts should interpret the provision differently for
    sophisticated borrowers and lenders. While he acknowledged that the result was harsh
    and draconian, he found that meeting the objectives of the legislation
    required it.

ISSUES

[28]

The following issues arise on this appeal and
    cross-appeal.

1.

Did the application judge err in finding that
    the administration fees are not interest?

2.

Did the application judge err in finding that
    the discount fee is interest?

3.

Did the application judge err by concluding that
    the discount fee failed to satisfy the requirements of the
Interest Act
, s. 4?

4.

Did the application judge err by concluding that
    the appropriate remedy is to limit all interest payable to 5%?

5.

Did the application judge err in finding that the forbearance
    agreements do

not preclude Solar Power from challenging
    the interest payable?

ANALYSIS

(1)

Did the application judge err in finding that
    the administration fees are not interest?

[29]

In its cross-appeal, Solar Power argues that the
    application judge erred in finding that the administrative fees are not
    interest within the meaning of the
Interest Act
, s. 4.

[30]

First, Solar Power submits that while the
    primary effect of the administrative fee may be to compensate for
    administrative work, the application judge failed to consider that it had a
    secondary effect of incentivizing repayment. Solar Power maintains that
    incentivizing repayment is a hallmark of compensation for the use of money.

[31]

Second, Solar Power argues that as the
    administrative fee recurs when the loan is renewed, it does accrue over time
    and therefore qualifies as interest.

[32]

I do not find either submission persuasive.

[33]

Solar Power does not challenge the legal test
    used by the application judge, at para. 20:

1. Interest is the return or consideration or
    compensation for the use or retention of money that is owed to another person;

2. interest must relate to a principal amount or
    an obligation to pay money; and,

3. interest must accrue over time:
Saskatchewan
    (Attorney General) v. Canada (Attorney General
),
1947
    CanLII 32 (SCC)
, 1947 S.C.R. 394 at para. 47;
Ontario (Attorney
    General) v. Barfried Enterprises Inc.
,
1963 CanLII 15 (SCC)
,
    [1963] S.C.R. 570, 42 D.L.R. (2d) 137
at para. 5.

[34]

The application judges findings on this issue
    were firmly rooted in the evidence about the nature and purpose of the
    administrative fees and the work that ClearFlow had to perform to set up and
    administer the loans. As mixed findings of fact and law on a point of
    contractual interpretation, they attract deference on appeal:
Sattva
    Capital Corp. v. Creston Moly Corp
., 2014 SCC 53, [2014] 2 S.C.R. 633
.

[35]

While the administrative fees were charged each
    time the loan was renewed, the incentive effect on repayment was negligible. The
    administrative fees were paid at the start of the term of each loan and only
    recurred if the loans were not repaid at term. They did not, therefore, recur
    during the term of the loan. The application judge was entitled to find that
    they did not amount to 
compensation for the use or
    retention of money that is owed to another person.


[36]

As Solar Power has failed to identify any
    extricable error of law or palpable and overriding error of fact, I would not
    interfere with the application judges findings on this issue.

(2)

Did the application judge err in finding that
    the discount fee is interest?

[37]

ClearFlow appeals the application judges
    finding that the discount fee is interest within the meaning of the
Interest Act
, s. 4.

[38]

ClearFlow argues that the application judge
    erred by refusing to accept evidence tending to show that the discount fee was intended
    to provide additional compensation for daily loan administration. It submits
    that the evidence shows that the effect of the discount fee was to discount the
    upfront administrative fee over the term of the loan, making further
    administrative costs payable only so long as the loan remained outstanding.

[39]

I disagree.

[40]

As I have already indicated, the application
    judge applied the correct legal test for interest in the context of the
    contractual language and the evidence of the dealings between the parties.
    Absent an extricable error of law or a palpable and overriding error of fact,
    his findings are entitled to deference.

[41]

I see no reason to interfere with the
    application judges finding that the discount fee is interest. The application
    judge did not make a processing error, as ClearFlow argued. He considered and
    rejected ClearFlows evidence that the fee was intended to cover administrative
    costs. He found that the discount fee was not linked to the creation or renewal
    of a loan, the amount of the fee did not vary according to the administrative
    work required by the loan as in the case of the administrative fee, and the fee
    was charged at a daily fixed rate unrelated to any ongoing or specific events.
    He characterized ClearFlows submission that the discount fee was additional
    compensation for administrative work as contrived, and concluded that [t]he
    layering of an additional charge, accruing day-to-day without any demonstrable
    link to the actual management of the Loan, cannot reasonably be described as a
    fee.

[42]

It was open to the application judge to conclude
    that the discount fee bore all the hallmarks of the test for interest: it was
    consideration or compensation for the use of money, it related to the principal
    amount, and it accrued over time. I see no reason to interfere with his finding
    on this issue.

(3)

Did the application judge err by concluding that
    the discount fee failed to satisfy the requirements of the
Interest Act
, s. 4?

[43]

There are two aspects to this issue.

[44]

First is the adequacy of the annualizing formula to satisfy the
    requirement in s. 4 that the written loan agreement provide 
an express statement of the yearly rate or percentage of interest to
    which the other rate or percentage is equivalent. The application judge held
    that it was not adequate.

[45]

Second is the question of compound interest. The application judge held
    that as the loans could be rolled-over or renewed after 90 or 180 days, the
    discount fee was compounded and that written agreement failed to disclose the
    actual or effective rate of interest.

(a)

The annualizing formula

[46]

The annualizing formula provides a relatively
    simple arithmetic method to calculate the yearly rate to which the daily rate
    is equivalent:
multiply 0.003% by 365 days to produce a
    yearly rate of 1.095%.

[47]

ClearFlow, supported by the intervener, The
    Canadian Bankers Association, submits that formulas of this nature are
    regularly used in complex commercial loan agreements and that the case law
    supports their validity as a means to provide borrowers with the kind of
    information required by s. 4. Solar Power supports the application judges
    conclusion that unless the agreement explicitly provides the yearly interest,
    s. 4 is not satisfied. Significantly, however, Solar Power does not take the
    position that an annualizing formula can never satisfy the requirements of s.
    4, stating in its factum, [t]hat question is for another day.

[48]

This is an issue of statutory interpretation for
    which a standard of correctness applies:
Mazur v.
    Elias Estate
(2005), 75 O.R. (3d) 299 (C.A.)

[49]

I turn first to the actual language of s. 4. It
    requires an express statement of the yearly
rate
    or percentage

of interest to which the other
    rate or percentage is equivalent (emphasis added). By requiring an equivalent
    rate
or
percentage
    (emphasis added) instead of just employing the word percentage, Parliament
    has used language indicating that the effective annual interest need not be
    expressed as a numerical percentage. This is consistent with the interpretive
    presumption that Parliament does not speak in vain and includes every word in
    a statute for a purpose: see
Canada (Attorney General) v.
    JTI-Macdonald Corp.
, 2007 SCC 30, [2007] 2 S.C.R. 610, at
    para. 87. In my view, the mathematical formula provided in the Loan Agreement
    provides a rate for the purpose of s. 4.

[50]

The application judge referred to the consumer
    protection purpose of s. 4 and found, at para. 51, that [f]ormulas can be
    confusing and even misleading. In my respectful view, that statement is
    difficult to reconcile with the case law accepting the use of formulas, many of
    which are more complex and yield less certain information than the one at issue
    in this case.

[51]

For example, formulas are regularly used to determine variable rates
    of interest based upon some standard external to the agreement such as the
    prime bank rate. Such an agreement makes it impossible for the borrower to
    determine in advance the actual amount of interest the borrower would have to
    pay. Yet there seems to be no question that formulas of this nature comply with
    s. 4: see
e.g.

Continental Bank of Canada v. Poyser
(1983), 45 A.R. 305 at para. 23 (Q.B.);
Bank of Montreal v. Mangold
(1988), 86
    A.R. 215 at para. 35 (Q.B.);
Eastern Power Ltd. v.
    Ontario Electricity Financial Corp.
, 2008 CarswellOnt 5635
(S.C.),
    at paras. 281, 285-286, revd on other grounds, 2010 ONCA 467, 101 O.R. (3d) 81.
    I do not agree with the application judge, at paras. 50-52, that
Eastern
    Power
can be distinguished from this case on the basis that
    part of the formula in
Eastern Power
was
    annualized. The trial judge in
Eastern Power
based
    his ruling on the fact that the rate was easily calculable: para. 286.

[52]

Courts have also held that formulas tied to
    variable rates external to the agreement satisfy provisions similar to s. 4.
    The
Interest Act
, s. 3
    stipulates a maximum of 5% interest if no rate is fixed by the agreement or by
    law. Courts have found that formulas satisfy that provision:
Mangold
;
MacKenzie
    v. First Marathon Securities Ltd
., 2004 ABQB 834, 365
    A.R. 259. The
Bills of Exchange Act
, R.S.C. 1985, c. B-4, s. 176(1) provides that a promissory note must
    specify a sum certain in money, and again, courts have accepted formulas:
Royal Bank v. Stonehocker
(1985), 61 B.C.L.R.
    (2d) 265 (C.A.), at p. 271, leave to appeal refused, [1985] S.C.C.A. No. 65;
MacKenzie
, at para. 152. While these cases do
    not deal with the
Interest Act
, s. 4, I would
    apply the principle of statutory interpretation that presumes a harmony,
    coherence, and consistency between statutes dealing with the same subject
    matter:
R. v. Ulybel Enterprises Ltd.,
2001 SCC 56, [2001] 2 S.C.R. 867, at para. 52.

[53]

I also agree with the submission that s. 4 must be interpreted in the
    light of modern commercial reality. It has become common commercial practice
    for some commercial loans to specify that interest is to be calculated on the
    basis of 12 months of thirty days or 360 days and to provide an annualizing
    formula stating that the yearly rate is to be calculated on the basis of the
    specified rate of interest, multiplied by the number of days in the year,
    divided by 360: Alison R. Manzer & Peter Sullivan,
Canada-U.S.
    Commercial Law Guide
(Toronto: Thomson Reuters, 2017) loose-leaf,
    at para. 6.14; Bradley Crawford,
The Law of Banking and Payment in

Canada
(Toronto: Thomson Reuters, 2018) loose-leaf, at para.
    22:70.20(9). An annualizing formula may not be required for such an agreement
    to comply with s. 4 (see
V.K. Mason Construction Ltd.
    v. Bank of Nova Scotia
, [1985] 1 S.C.R. 271, at p.
    287) but if it is, the type of formula detailed above appears to comply with s.
    4: see Crawford, at para. 22:70.20(9);
Cadinha v. Chemar
    Corp
., 1995 CarswellBC 1767(S.C., in Chambers), at
    para. 19. To hold otherwise could cause significant mischief in international
    commercial arrangements.

[54]

I do not accept Solar Powers submission that this argument is not
    available on appeal because ClearFlow did not advance it before the application
    judge. Both the case law and authoritative legal texts reflect the commercial
    practice that ClearFlow and The Canadian Bankers Association rely upon. This
    is not an issue requiring evidence not led at trial or for which there is not a
    proper record before this court:
Cusson v. Quan
, 2009 SCC 62, [2009] 3 S.C.R. 712, at para. 37.

(b)

Compound interest

[55]

The application judge concluded that the formula
    fails to provide an equivalent rate or percentage of interest because it fails
    to take into account the fact that the discount fee would be compounded if the
    loan was not paid at term and subsequently renewed. In his view, the annualizing
    formula would only provide a nominal rate of yearly interest (one that does
    not take compounding into account), and not an effective equivalent rate of
    yearly interest (one that does take compounding into account).

[56]

The application judge relied upon the decision of this court in
Elcano Acceptance Ltd. v. Richmond, Richmond, Stambler & Mills
(1991
), 3 O.R. (3d) 123. That case involved a
    promissory note that
called for interest at 2% per month,
    calculated monthly but which the parties treated as payable on the due date of
    the note. The trial judge felt compelled to hold that the note did not comply with
    s. 4. However, he wrote that this result was absurd and a miscarriage of
    justice as it was a simple matter to multiply 2% by 12 months to arrive at an
    equivalent annual interest rate of 24%. This court agreed with the trial judge
    that the promissory note did not comply with s. 4 but disagreed that this
    result was unjust, stating, at p. 126:

To simply multiply the 2 per cent by 12 months and
    show 24 per cent as an annual rate would not correctly describe the true annual
    rate intended. The annual rate of interest when compounded monthly would be
    26.8 per cent per annum. The very object of the provisions of s. 4 of the
Interest
    Act
is to make the per annum rate clear to the borrower and, in the case
    of promissory notes, to any holder in due course.

[57]

In my view, there are two significant features that distinguish
Elanco
from this case. First,
the note in
Elanco
contained no annualizing formula or other method to determine the equivalent
    annual rate. Second, as the interest was calculated monthly, interest would
    compound on a monthly basis during the term of the loan and it was possible to
    calculate an equivalent annual rate that compounding took into account when the
    borrower agreed to the terms of the loan.

[58]

The case at bar involves short term loans for which
    the discount fee does not compound during the term of the loan. The discount
    fee is added to the principal on the due date and compounding only starts if
    the loan is not paid. When the Loan Agreement and Promissory Notes were made,
    the parties could not know whether the loan would be paid on the due date. It
    was therefore impossible for them to know whether interest would ever compound.
    In these circumstances,
it was sufficient for the
    purposes of s. 4 to provide, through the annualizing formula, an equivalent
    nominal rate.

[59]

The application judge noted, at para. 62, that
    the Loan Agreement specifically contemplated loan extensions, but he failed
    to take into account that the right to renew a loan, pursuant to art. 2.1 of
    the Loan Agreement, exists only if the loan is not in default. Articles 2.4 and
    2.5 make clear that Solar Power has no right to extend the repayment date for
    the loans. The parties can only know the existence and extent of compounding of
    the discount fee after the due date. The compounding depends upon both whether
    Solar Power decides to repay or to ask ClearFlow that the due date of the loan be
    extended, and whether ClearFlow decides in its absolute and sole
    discretion...to extend the 90 or 180 day term.

[60]

It follows that whether the discount fee would
    ever compound was entirely contingent on Solar Power requesting and ClearFlow
    granting an extension of the loan at the end of its term. It was therefore
    impossible for the Loan Agreement to state an equivalent rate or percentage of
    interest that took into account compounding of the discount fee.

[61]

It cannot be the case that s. 4 is engaged when
    a lender fails to provide information that it is impossible to provide. In
Tower Paint & Laboratories Ltd. v. 126019 Enterprises Ltd.
    (Stainco Edmonton)
(1983), 27 Alta. L.R. (2d) 154 (Q.B.),
    Master Funduk stated, at p. 158:

In many instances it is not mathematically
    possible to determine the effective annual rate in advance. I do not believe
    that Parliament intended that which might be mathematically impossible to still
    be done. The laws of mathematics bow to no one.

Like Winkler J. in
Smith v.
    Canadian Tire
(1994), 19 O.R. (3d) 610 (Gen. Div.), at p.
    625, affd (1995), 26 O.R. (3d) 95 (C.A.), I agree with this statement.

[62]

To interpret s. 4 otherwise would be contrary to
    common sense, commercial reality and established principles of statutory
    interpretation. In
Potash v. Royal Trust Co.,
[1986] 2 S.C.R. 351, at p. 368, the Supreme Court held that the
Interest Act
should, where the language
    of the Act permits, prefer an interpretation that is more in keeping with
    common commercial practice. See also
NAV Canada v.
    Wilmington Trust Co
., 2006 SCC 24, [2006] 1 S.C.R.
    865, at para. 60;
Saulnier v. Royal Bank of Canada
, 2008 SCC 58, [2008] 3 S.C.R. 166, at para 42;
V.K. Mason
.

[63]

Solar Powers counsel recognized the problem of
    impossibility and, in his oral argument, maintained that to comply with s. 4,
    the Loan Agreement had to state that the discount fee would be compounded and
    payable every 90 days or compounded and payable every 180 days. There are three
    problems with that submission. First, that formulation would not provide an
    equivalent yearly rate. If it is impossible to provide an equivalent yearly
    effective rate, the only possible conclusion is that a yearly effective rate is
    not required, not that an alternative formulation will suffice. Second, if an
    alternative formulation would suffice, the Loan Agreement already provides one.
    In this sophisticated arrangement, the borrower would know from the terms of
    the agreement that if the loan is not paid at term but renewed, the discount
    fee will be added to the amount owing under the loan and will attract interest
    thereafter. Third, as interest would be calculated by reference to a period
    that is variable, depending upon the extension date, specifying one period
    would not accurately reflect the compounding.

[64]

In my view, the decision in
Smith v.
    Canadian Tire
,
distinguished by the application judge, is applicable to this case.
Smith
dealt with credit card agreements providing for interest at the rate
    of 2.4% per month calculated on the previous months balance. The agreement
    stated that the equivalent yearly rate was 28.8%, a rate that did not take into
    account the effect of compounding if the balance was not repaid each month.

[65]

Winkler J. distinguished
Elanco,
for two reasons, both of which are pertinent to this appeal.

[66]

First, in
Elanco
the
    promissory note did not disclose an equivalent annual rate. Second, the
    interest on the promissory note at issue in
Elanco
was calculated monthly. The parties did not treat the interest as
    payable monthly and it accumulated and was only payable on the due date of the
    loan. These features also distinguish
Elanco
from
    the facts of this case. The discount fee is payable at the term date of the
    loan just as the amounts owing on the credit cards in
Smith
were payable monthly. As Winkler J. observed at p. 623: in
Elanco
the effective rate could be determined
    with specificity while in the present case it clearly could not, again, a
    feature also found in the case at bar.

[67]

The application judge found
Smith
was distinguishable because the credit card agreement did provide an
    annual rate and because there was no expectation that the credit card holder
    would default in paying the monthly balance. In my respectful view, neither
    reason is convincing. The Loan Agreement does provide, through the annualizing
    formula, an equivalent annual rate and the issue, as in
Smith
, is whether that annualized rate is deficient because it fails to take
    into account the effect of compounding. As for the expectation of payment at
    term, I see no meaningful difference between this case and
Smith
. The Loan Agreement requires payment at
    term and only provides for renewal at the request of the borrower to be granted
    in the sole and absolute discretion of the lender.

[68]

My conclusion that the reasoning in
Smith
applies and that
Elanco
is distinguishable is fortified by consideration of several other
    cases dealing with s. 4 that stand for the proposition that stating an
    equivalent nominal rate may be sufficient.

[69]

Nanaimo Shipyard Ltd. v. Keith
, 2008 BCSC
    1150 dealt with an agreement providing for interest on overdue accounts at the
    rate of 2% per month (24% per annum compounded monthly). The court rejected
    the debtors argument that the rate was confusing and that the agreement did
    not comply with s. 4. The court stated, at para. 76:

[T]he cases are not concerned for the purposes of
    s. 4 with confusion of terms as long as there is a nominal interest rate
    stated. The evidence in this case does not show there would be any compounding
    except in the case of default. What is required is to have the nominal interest
    rate, which is stated in this case. A nominal interest rate is an equivalent
    rate within the meaning of s. 4

[70]

Tower Paint & Laboratories
is to the same effect
.
The Uniform Law Conference of Canada has also
    endorsed this view: see Uniform Law Conference of Canada, Civil Section,
    Working Groups
Interest Act  2008 Report
, (Quebec: ULCC Civil Section, 2008), at para. 46.

[71]

In my respectful opinion, the application judge erred in law in
    concluding that the provision for the discount fee in the Loan Agreement failed
    to satisfy the requirements of the
Interest Act
, s. 4. However, as the Promissory Notes do not contain an annualizing
    formula, they do engage s. 4.

(4)

Did the application judge err by concluding that
    the appropriate remedy is to limit all interest payable to 5%?

[72]

ClearFlow argues that even if the discount fee
    runs afoul of s. 4, the appropriate remedy is not to limit all interest payable
    under the loan documents to 5% but rather to limit the amount of interest
    payable on account of the offending provision - the discount fee - to 5%. As
    the discount fee is less that 5%, s. 4 would have no impact on the amount of
    interest payable.

[73]

As I have found that the Loan Agreement did not
    violate s. 4, it is not strictly necessary for me to deal with the issue of
    remedy in relation to the Loan Agreement. However, the issue of remedy does arise
    in relation to the Promissory Notes. Because the discount fee provision in
    those agreements does not contain an annualizing formula, the Promissory Notes
    fail to satisfy the requirements of s. 4. The issue is whether the appropriate
    remedy is to hold that as the discount fee contravenes s. 4, all interest
    payable under the Promissory Notes must be limited to 5%.

[74]

The application judge acknowledged that limiting all interest
    payable to 5% produced a draconian and harsh result. He concluded that the
    language and purpose of s. 4 compelled this result. I respectfully disagree
    with the application judges interpretation.
I agree that it is
    possible, on a strictly literal interpretation, to read s. 4 as requiring the
    draconian result reached by the application judge. However, consideration of
    all relevant principles of statutory interpretation indicates that a different
    interpretation, more in line with modern commercial reality and the
    expectations of the parties, is appropriate.

[75]

The
    Supreme Court has repeatedly held that it is necessary to consider the entire
    context before settling on what appears, at first blush, to be the plain
    meaning of a legislative provision: see
Bell ExpressVu Limited Partnership
    v. Rex
, 2002 SCC 42, [2002] 2 S.C.R. 559, at paras. 29-30,
Bristol-Myers
    Squibb Co. v. Canada (Attorney General)
, 2005 SCC 26, [2005] 1 S.C.R. 533,
    at paras. 43-44. As Iacobucci J. stated in
Rizzo & Rizzo Shoes Ltd.
    (Re)
, [1998] 1 S.C.R. 27, at para. 21, statutory interpretation cannot be
    founded on the wording of the legislation alone. An isolated plain meaning
    approach can lead courts to interpret statutes in a manner that produces absurd
    results. It is a fundamental principle of statutory interpretation that the
    legislature does not intend to produce such results:
Rizzo & Rizzo
    Shoes
, at para. 27.

[76]

Courts
    have repeatedly departed from plain meaning when interpreting legislation to
    avoid absurd results. For instance, in
NAV Canada
, the Supreme Court
    had to consider whether the legal titleholders to passenger aircraft were
    owners of those aircraft under s. 55 of the
Civil Air Navigation Services
    Commercialization Act
, S.C. 1996, c. 20. The court accepted that the plain
    meaning of owner would include the legal titleholder if s. 55 was read in
    isolation. However, the court held that the plain meaning in isolation is not
    determinative and that the provision must be considered in context, including
    the commercial context indicating that a plain language interpretation would
    cause severe disruption to the airline industry: at paras. 44-45, 60. Likewise,
    in
Bristol-Myers Squibb
, the Supreme Court rejected a plain meaning
    interpretation of s. 5(1.1) of the
Patented Medicines (Notice of
    Compliance) Regulations
, SOR/93-133, as this interpretation would lead to
    commercially absurd results that would inhibit competition in the
    pharmaceutical industry: paras. 66-68. Similarly, in
Stonehocker,
at
    p. 271, the British Columbia Court of Appeal rejected a literal interpretation
    of s. 176(1) of the
Bills of Exchange Act
that disregarded commercial
    reality.

[77]

The
    application judge emphasized the consumer protection purpose of s. 4,
    expressing the concern at para. 82 that if the 5% limit was only applied to
    the offending interest rateslenders could easily obscure the total annual
    interest rate by using a series of non-annualized loans that are individually
    less than 5%. While that may be theoretically possible, it is certainly not
    what happened in the case at bar.

[78]

In my respectful view, avoiding the possibility envisioned
    by the application judge does not require imposing a harsh and draconian result
    in the circumstances of this case where there plainly was no attempt to subvert
    the law. This case involved a commercial transaction between parties of equal
    bargaining power who inadvertently and only marginally ran afoul of s. 4. There
    was no evidence of intention to break the law, of any unfairness in the
    agreement, or of one party taking advantage of another.
To
    secure the funds it required, Solar Power knew that it had to pay a high rate
    of interest.
The discount fee represents a tiny
    fraction of the interest that is otherwise payable and falls well below the 5%
    maximum interest allowed by s. 4. To limit all interest payable to 5% would, as
    the application judge recognized, result in a substantial windfall to Solar
    Power.

[79]

The
    application judge inappropriately privileged the consumer protection purpose of
    s. 4 over the countervailing interpretative principles of fairness to the
    lender and the need to accommodate contemporary commercial practices. In
V.K.
    Mason,
Wilson J. accepted the consumer protection purpose of s. 4 but also
    found that the sophisticated commercial borrower in that case was in scant need
    of protection and that when construing s. 4, an interpretation that took into
    account the lenders legitimate interests was appropriate. Using the consumer
    protection purpose as an interpretive tool to favour a sophisticated commercial
    borrower that does not need the protection would not advance the policy of the
    law:
V.K. Mason
, at p. 287. Similarly, in
Potash
, at p. 368,
    the Supreme Court held

that provisions of the
Interest Act,
drafted
    in the 1890s, should be interpreted in keeping with common commercial
    practice and to-days commercial reality when their language so permits.

[80]

Absent
    any evidence of an attempt to circumvent the protection of s. 4, I would
    interpret the phrase any interest in s. 4 to refer only to interest that is
    not stated as a yearly rate or percentage. In the circumstances of this case,
    that would mean that the only rate of interest to which s. 4 applies is the
    discount fee. As the discount fee is less than 5% per annum, the statutory
    limit is not exceeded and the discount fee remains payable.

[81]

Reducing
    only the non-compliant rate to 5% takes into account, rather than defeats, the
    lenders legitimate expectations. As Wilson J. stated in
V.K. Mason
at
    p. 287, courts must consider these legitimate expectations in interpreting s.
    4. Reducing only the non-compliant rate to 5% appropriately interprets the
    dated text of s. 4 in accordance with contemporary commercial realities. The
    Hansard evidence indicates that Parliaments concern when it enacted the
    predecessor provision of s. 4 in 1897 was that promissory notes were stating a
    daily or weekly interest rate but not a nominal annual interest rate: see
    Canada, Parliament,
House of Commons Debates
, 8th Parl., 2nd Sess.,
    Vol. 2 (16 June 1897), at pp. 4252-4258. There is no evidence that Parliament
    turned its mind to contracts that contained multiple interest rates and
    intended the draconian result that the application judge felt compelled to
    reach. In fact, the Hansard evidence suggests that Parliament was concerned to
    achieve its consumer protection objective in a manner that avoided commercially
    absurd results: see Canada, Parliament,
Debates of the Senate
, 8th
    Parl., 2nd Sess., Vol. 1 (3 June 1897), at pp. 460-461 (Hon. Oliver Mowat).

[82]

This
    is analogous to the Supreme Courts interpretation of s. 10 of the
Interest
    Act
in
Potash
, where Wilson J. stated at p. 368 that changing
    commercial practices had resulted in a situation that Parliament had not
    envisaged in the 1890s. In that case, the Court interpreted s. 10 in a way
    consistent with contemporary commercial realities. Likewise, in
NAV Canada
,
    the Supreme Court construed narrowly a word with a broad plain meaning in part
    because simply applying the broad meaning would have disregarded commercial
    realities.

[83]

This
    interpretation means that s. 4 has no effect on the Promissory Notes. Section 4
    only prohibits charging interest
exceeding
the
    rate or percentage of five per cent per annum (emphasis added). In other
    words, s. 4 imposes a 5% annual cap on non-annualized interest but does not
    affect an interest rate that is already less than 5% when annualized. The
    discount fees yearly rate of 1.095% is significantly less than the 5% cap.
    This interpretation would also prevent lenders from employing s. 4 to increase
    a non-compliant interest rate that is less than 5% to 5% and would correspond
    with s. 3 of the Act, which fixes the rate of interest at 5% per annum only
    when no rate is fixed by the agreement.

[84]

Accordingly, I would give effect to ClearFlows
    submission that s. 4 does not limit all interest payable under the loan
    documents to 5%.

(5)

Did the application judge err in finding that
    the forbearance agreements do not preclude Solar Power from challenging the
    interest payable?

[85]

As I have found that the Loan Agreement complies
    with s. 4 and that s. 4 has no impact of the rate of interest charged under the
    Promissory Notes, it is not necessary for me to consider this issue.

DISPOSITION

[86]

For these reasons, I would allow the appeal,
    dismiss the cross-appeal and vary the application judges order by striking out
    paras. 4 and 7 (costs) and in place of para. 4, substitute a paragraph
    providing t
hat all of the interest payable under the Loan
    Agreement, the Promissory Notes and the Forbearance Agreement dated April 30,
    2017 is due and owing.

[87]

I would award costs of this appeal to ClearFlow fixed in the amount of
    $40,000 inclusive of disbursements and taxes. If the parties are unable to
    agree as to the costs of the application, they may file brief written
    submissions within 30 days of the release of these reasons.

Released: September 04, 2018

RJS

Robert J. Sharpe
    J.A.

I agree David Brown
    J.A.

I agree G.T. Trotter
    J.A.


