



COURT OF APPEAL FOR ONTARIO

CITATION: P.A.R.C.E.L. Inc. v. Acquaviva,
    2015 ONCA 331

DATE: 20150512

DOCKET: C58689

Cronk, Gillese and Rouleau JJ.A.

BETWEEN

P.A.R.C.E.L.
    Inc., Bijan Pardis and

P.A.C.I.F.I.C.
    Inc.

Defendants (Appellants)

and

Sam Acquaviva and Premier Homes Realty Ltd.

Plaintiffs (Respondents)

Howard Crosner, for the appellants

Domenic Saverino, for the respondents

Heard: November 12, 2014

On appeal from the judgment of Justice Peter A. Douglas of
    the Superior Court of Justice, dated January 31, 2014.

Cronk J.A.:

[1]

This is an appeal from summary judgment on a promissory note and
    mortgage.  The main issue is whether certain of the amounts claimed by the
    secured creditor based on the terms of the promissory note and the mortgage
    offend s. 8 of the
Interest Act
, R.S.C. 1985, c. I-15.

Background

(1)

The Parties

[2]

The appellant Bijan Pardis (Pardis) is a doctor and land developer.  He
    is also the sole officer and director of two real estate holding companies, the
    corporate appellants, P.A.R.C.E.L. Inc. (Parcel) and P.A.C.I.F.I.C. Inc.
    (Pacific).  From time to time, Pardis entered into mortgage-financing
    arrangements concerning his various real estate holdings, including those held
    through Parcel and Pacific.

[3]

The respondent, Sam Acquaviva, is a licensed real estate and mortgage
    broker, as well as a licensed paralegal.  He is the sole officer, director and
    broker of record of the corporate respondent, Premier Homes Realty Ltd.
    (Premier), a real estate brokerage.

(2)

Relevant Security Documents

[4]

On June 6, 2011, the appellants executed a promissory note (the Note)
    and a mortgage (the Mortgage) in favour of the respondents, both in the
    principal amount of $458,488.07.  The documents were executed in relation to a
    single loan.  The stated consideration for the loan is the discharge by the
    respondents of a mortgage registered as Instrument AT2558219 on an unspecified
    property.

[5]

All three appellants signed the Note as the Borrower.  Pardis signed
    the Note in his personal capacity and as president of Parcel and Pacific.  The
    respondents are described in the Note, collectively, as the Lender.

[6]

The Note states that it is secured by the Mortgage, which charges lands
    owned by Parcel and situated at 28 Langstaff Road East, in the City of Markham,
    Ontario (the Property).  Clause 9 of the Note reads in material part:

This Note is secured by a charge/mortgage of the Borrower in
    favour of the Lender, dated as of June 6, 2011, constituting a charge
    registered on title to the lands municipally known as 28 Langstaff Road East,
    Markham, Ontario.

[7]

The mortgage referenced in Clause 9 was granted by Parcel, as Chargor,
    in favour of the respondents, as Chargees, in respect of the Property in
    consideration for the sum of $458,488.07.  As mentioned, this is the same
    principal amount as the debt stated in the Note.

[8]

Both the Note and the Mortgage stipulate the same repayment terms, at
    least while there is no default.  The Note requires that the principal amount
    together with interest thereon outstanding from time to time be paid in 80
    equal monthly instalments of $6,000 on the 15th day of each and every month
    until maturity of the Note on August 15, 2017.  The interest rate, before
    default, is 0.75% per annum.  Similarly, the Mortgage provides for the same
    monthly payments of $6,000 on the 15th day of each month until the Last
    Payment Date (also August 15, 2017) at the same interest rate of 0.75% per
    annum.

[9]

However, certain provisions in the Note and the Mortgage differ.  Clause
    2 of the Note is one such provision and is the focus of this appeal.  It provides
    for the escalation of the applicable interest rate from 0.75% to 10% per annum
    after demand, default, and pre and post judgment (the Interest Escalation
    Provision).  Clause 2 reads:

The Principal Amount outstanding at any time, and from time to
    time, when not in default, shall bear interest at 0.75% per annum.
In the
    event of default mentioned herein by the Borrowers, [sic] then the interest
    rate applicable shall be calculated at the rate of 10% per annum after demand,
    default and pre and post judgment
.  [Emphasis added.]

[10]

Unlike
    the Note, the Mortgage contains no Interest Escalation Provision.

[11]

The
    Mortgage also contains several terms pertaining to additional fees and charges
    that are not found in the Note, including the following:

N.S.F. FEE

PROVIDED the Mortgagee shall be entitled to an administrative
    fee of $300.00 cumulatively in the event any payment hereunder shall be
    returned unpaid by the Mortgagors bank for any reason or payments [are] not received
    on payments due date(s)[.]

LATE PAYMENT CHARGE

PROVIDED that the Mortgagee shall be entitled to a late charge
    of $10.00 per day in the event that the mortgage payments are received by the
    Mortgagee later than the regularly scheduled payment date.

[12]

The
    Mortgage further states:

ADDITIONAL PROVISIONS

Our current schedule of administration and servicing fees includes
    the following charges:

$300.00 Missed [P]ayment Fee: Payable for each missed or late
    instalment and for processing each NSF cheque or other returned payment.

[13]

Pardis
    and Pacific guaranteed Parcels obligations under the Mortgage.

[14]

The
    Note and the Mortgage were apparently intended to secure the payment of monies owed
    by the appellants to the respondents under a series of professional services or
    consulting agreements.  The parties disagree as to the enforceability and terms
    of those agreements.

[15]

It
    is undisputed that, for the period January 15, 2011 to December 15, 2011, the appellants
    made payments to the respondents in the amount of about $4,000 each month,
    totalling approximately $48,000.  Each monthly payment of $4,000 was credited
    in full against both the Note and the Mortgage  the respondents do not contest
    that payment of the Note constitutes payment of the Mortgage, and
vice
    versa
.  The respondents appear to have accepted these payments without
    complaint, even though both the Note and the Mortgage call for monthly payments
    in the amount of $6,000.

[16]

In
    early January 2012, well before the maturity date of either instrument, the
    appellants ceased all payments under the Note and the Mortgage.  Litigation
    followed.

(3)

Litigation History in Brief

[17]

On
    March 21, 2012, the respondents sued Parcel under the Mortgage for i) the
    amount of $410,795.10; ii) interest at the rate of 0.75% per annum; iii) three
    months interest under s. 17 of the
Mortgages Act
, R.S.O. 1990, c. M.
    40 (
Mortgages Act
Interest); and iv) possession of the Property. 
    They also sued Pacific and Pardis for the same amounts, pursuant to their
    guarantee.  Notably, the respondents made no claim under the Note as against
    any of the appellants in their original pleading.

[18]

The
    appellants defended the action.  They disputed the amount of fees owed to the
    respondents for consulting services and the amount outstanding under the
    Mortgage.  They also counterclaimed against the respondents for orders
    directing the deletion of the registration of the Mortgage from the land
    registry system and requiring the respondents to repay all overpayments made
    on account of principal, interest or costs under the Mortgage.

[19]

On
    July 26, 2012, the respondents obtained default judgment on the Mortgage from Lauwers
    J. of the Superior Court of Justice (as he then was) as against all the
    appellants for the sum of $410,795.10, plus possession of the Property, leave
    to issue a writ of possession in respect of the Property, and pre- and postjudgment
    interest at the rate of 0.75% per annum, as well as costs.

[20]

On
    November 1, 2012, the parties agreed to a consent court order that i) directed the
    appellants to pay the sum of $45,000 to the respondents on account of the debt
    at issue; and ii) stayed enforcement of the writ of possession obtained by the
    respondents under the default judgment, subject to the respondents receipt of
    the $45,000 payment, until January 2, 2013.  The appellants complied with this
    court order and paid the agreed sum of $45,000 to the respondents.

[21]

The
    appellants challenged the default judgment on the basis that service of the
    respondents statement of claim was defective.  In light of the parties
    dispute about proper service, by order dated December 17, 2012, Lauwers J. set
    aside the default judgment and stayed the writ of possession obtained by the
    respondents.

[22]

Shortly
    thereafter, on January 31, 2013, the respondents amended their pleading to
    include a claim against all the appellants for payment of the sum of $469,360.47
    under the Note as well as the Mortgage.

[23]

In
    their amended pleading, the respondents also claimed:

a)

interest
    at the rate of 10% per annum on the amount owing, in accordance with the
    Interest Escalation Provision;

b)

the
    sum of $300, under the Note and the Mortgage, to cover the Mortgagees
    administration costs for each late payment from the appellants;

c)

possession
    of the Property;

d)

three
    months
Mortgages Act
Interest and costs on a solicitor and client
    basis; and

e)

payment
    by Pardis and Parcel of all amounts owing under the Mortgage, pursuant to their
    guarantee.

[24]

By
    court order dated March 19, 2013, the appellants were restrained from dealing
    with any of their real estate, except an unrelated property, prior to the determination
    of a pending motion for summary judgment brought by the respondents.

(4)

Summary Judgment

[25]

The
    respondents motion for summary judgment against the appellants pursuant to the
    Note and the Mortgage was ultimately heard in late January 2014.  The respondents
    sought summary judgment for the amount of $541,512.98, consisting of the
    following:



a)

Outstanding
          principal, as at December 15, 2012:

$455,794.59



b)

Interest
          from December 16, 2012 to January 31, 2014:

$  57,442.51



c)

Charges
          for late payments by the appellants during the period January 15, 2012 to
          January 15, 2014 (the Late Payment Charges):

$    7,200.00



d)

Three
          months
Mortgages Act
Interest:

$    9,965.88



e)

$10.00 per
          day default fees (the Default Fees):

$  11,110.00





Total:

$541,512.98



[26]

Before
    the motion judge, the appellants did not deny that they had owed the principal
    amount of $458,488.07 to the respondents when the Note and the Mortgage were
    executed.  Nor did they deny that default had occurred under both instruments. 
    However, the appellants resisted payment of any amount on various grounds,
    including alleged misrepresentation, duress, undue influence and
non est
    factum
.  Notably, it does not appear that the appellants opposed the
    summary judgment motion on the basis that any of the items claimed violated s.
    8 of the
Interest Act
.

[27]

The
    motion judge concluded that the appellants were indebted to the respondents
    under the Note and the Mortgage.  He also accepted the respondents calculation
    of the amounts due.  He granted summary judgment as follows:

a)

as
    against Parcel
, under the Mortgage and the Note, for i) the amount of
    $541,512.98, plus additional sums accruing thereunder to [the] date of this
    judgment; and ii) possession of the Property; and

b)

as
    against Pacific and Pardis
, under the Note alone, for i) the same amount
    ($541,512.98), plus additional sums accruing thereunder to [the] date of this
    judgment; and ii) postjudgment interest at the rate of 10% per annum.

[28]

The
    motion judge did not expressly indicate what amounts or charges constituted the
    additional sums accruing thereunder, to which he referred.  However, based on
    his reasons as a whole, it seems clear that these sums correspond to the
    charges claimed by the respondents and accepted by the motion judge, described
    above, updated to the date of judgment (January 31, 2014).

[29]

The
    motion judge also awarded the respondents their costs of the summary judgment
    motion in the net amount of $43,872.89 ($55,614.78, less amounts owed to the
    appellants by the respondents on account of outstanding costs orders and
    interest thereon).

Issues

[30]

In
    framing the issues on appeal, it is useful to begin with those matters that the
    appellants do not contest.

[31]

First,
    the appellants do not attack the summary judgment
per se
.  In particular,
    they do not contend on appeal that there is a genuine issue requiring trial and
    that summary judgment should have been denied on that basis.  Instead, the
    appellants challenge the respondents entitlement to certain of the charges allowed
    under the judgment and, in other instances, the quantum of amounts awarded by
    the motion judge.

[32]

In
    addition, during oral argument before this court, the appellants acknowledged that
    the principal sum of $374,294.65 is due and owing under the Note and the
    Mortgage.  The appellants were unable to offer any explanation for their
    failure, to date, to pay any of this amount, save for the sum of $45,000 paid
    to the respondents in November 2012, as described above.

[33]

The
    appellants also accept that interest is owed on the outstanding principal amount
    due under the Note and the Mortgage and, further, that three months
Mortgages
    Act
Interest is also due to the respondents.  However, they dispute the
    rate of interest employed by the motion judge.

[34]

The
    appellants raise four grounds of appeal.

[35]

First,
    they argue the motion judge erred by awarding interest under the Note and the
    Mortgage,
Mortgages Act
Interest and postjudgment interest at the rate
    of 10%, rather than 0.75%, per annum.  The appellants submit that the Interest Escalation
    Provision offends s. 8 of the
Interest Act
and that the
    appropriate interest rate is thus 0.75% per annum.

[36]

Second,
    the appellants challenge the respondents entitlement to the Late Payment
    Charges and the Default Fees.  They submit that the terms of the Mortgage
    allowing for recovery of these charges also violate s. 8 of the
Interest
    Act
.

[37]

Third,
    the appellants maintain the judgment under appeal is inconsistent in several
    respects with the default judgment that Lauwers J. granted in July 2012.

[38]

Finally,
    the appellants contend the motion judge erred by awarding the respondents their
    costs of the summary judgment motion on a substantial, rather than a partial,
    indemnity scale.

Analysis

(1)

Do Specific Amounts Included in the Judgment Violate s. 8 of
    the
Interest Act
?

[39]

As
    I have indicated, the appellants maintain that various components of the
    judgment must be set aside because they represent charges that are prohibited
    under s. 8 of the
Interest Act
.  I again emphasize that, before the
    motion judge, the appellants do not appear to have challenged the respondents
    summary judgment motion on the basis of s. 8 of the
Interest Act
.  As
    a result, this court does not have the benefit of the motion judges reasoning
    on this central issue.

[40]

Section
    8 of the
Interest Act
provides:

(1)

No
    fine, penalty or rate of interest shall be stipulated for
, taken, reserved
    or exacted
on any arrears of principal or interest secured by mortgage on
    real property
or hypothec on immovables
that has the effect of
    increasing the charge on the arrears beyond the rate of interest payable on
    principal money not in arrears
.

(2)

Nothing in this
    section has the effect of prohibiting a contract for the payment of interest on
    arrears of interest or principal at any rate not greater than the rate payable
    on principal money not in arrears.

[Emphasis added.]

[41]

Relying
    on s. 8, the appellants attack the motion judges awards of i) contractual interest
    (interest under the Note and the Mortgage); ii)
Mortgages Act
Interest; iii) postjudgment interest; iv) the Late Payment Charges; and v) the Default
    Fees.  I will consider these items in turn.

(a)

Contractual Interest

[42]

For
    convenience, I again set out Clause 2 of the Note, including the Interest
    Escalation Provision:

The Principal Amount outstanding at any time, and from time to
    time, when not in default, shall bear interest at 0.75% per annum.
In the
    event of default mentioned herein by the Borrowers, [sic] then the interest
    rate applicable shall be calculated at the rate of 10% per annum after demand,
    default and pre and post judgment
.  [Emphasis added.]

[43]

The
    appellants argue that the Interest Escalation Provision in Clause 2 offends s.
    8 of the
Interest Act
because it has the effect of increasing the rate
    of interest on arrears beyond the rate of interest payable on principal money
    not in arrears for a loan that is secured by a mortgage.  In other words, the
    appellants submit that the Interest Escalation Provision is void and
    unenforceable as a matter of law because it imposes a prohibited interest rate
    on default even though the impugned provision is contained in the Note, rather
    than in the Mortgage itself.  Thus, the appellants say, the only enforceable
    contractual interest rate is 0.75% per annum.

[44]

The
    respondents disagree.  They submit that s. 8 only applies to a fine, penalty
    or rate of interest imposed directly under the terms of a mortgage on real
    property.  The respondents accept that, had they maintained their suit based
    solely on the Mortgage, s. 8 would preclude the recovery of interest in excess
    of 0.75% per annum on the amounts outstanding under the Mortgage.  However, because
    they amended their pleading to include a claim for the principal amount and interest
    outstanding under the Note, and because default occurred under the Note as well
    as the Mortgage, the respondents maintain that they are entitled to invoke the Interest
    Escalation Provision in Clause 2 of the Note to recover interest at the higher annual
    rate of 10% as against all the appellants, each of whom is a signatory to the
    Note.  In these circumstances, they say, s. 8 of the
Interest Act
does
    not apply.

[45]

As
    the respondents acknowledge, on this view of the operation of s. 8 of the
Interest
    Act
, the amounts owing under the Note and the Mortgage may differ, since different
    interest rates would apply on default under each instrument.  But the
    respondents argue that this is immaterial; they submit that s. 8 of the
Interest
    Act
does not apply to the Note and that they are entitled to recover the
    full amount of principal and interest owing, as against all appellants,
    pursuant to the Note.

[46]

The
    respondents also say that they are entitled to recover the remaining amounts in
    dispute (the
Mortgages Act
Interest, the Late Payment Charges and the
    Default Fees) as against Parcel under the Mortgage and as against Pardis and
    Pacific on their guarantee of Parcels obligations under the Mortgage.

[47]

The
    crux of the dispute between the parties, therefore, concerns the application of
    s. 8 of the
Interest Act
to the Note.  The critical question is
    whether s. 8 applies to the single loan secured by both the Note and the
    Mortgage, where the terms of the Note provide for escalated interest on default
    but where the Mortgage, which admittedly secures the Note, contains no such
    provision.

[48]

In
    my view, on the facts of this case, the answer to this question is yes.  I
    conclude that the arrears of principal and interest in question are secured by
    [a] mortgage on real property and that s. 8 of the
Interest Act
therefore
    applies to the debt instruments entered into by the parties, including the Note. 
    It follows that, because the Interest Escalation Provision applies to arrears
    that are secured by a mortgage within the meaning of s. 8, and because it has
    the effect of increasing the rate of interest charged on the arrears beyond the
    pre-default interest rate payable on the principal amount of the Note, the Interest
    Escalation Provision violates the statutory prohibition in s. 8 of the
Interest
    Act
and is ineffective.  I reach this conclusion for the following reasons.

[49]

I
    turn, first, to the purpose of s. 8 of the
Interest Act
.

[50]

In
Reliant Capital Ltd. v. Silverdale Development Corp.
, 2006 BCCA 226,
    52 B.C.L.R. (4th) 13, leave to appeal to S.C.C. refused, [2006] S.C.C.A. No. 265,
    the British Columbia Court of Appeal conducted a detailed review of the
Interest
    Act
and its judicial interpretation and considered the purpose of the
    prohibition contained in s. 8.  The court emphasized, at para. 36, that ss. 6 
    10 of the
Interest Act
relate exclusively to interest charges on
    loans secured by mortgages on real property.  In that context, the court
    explained that s. 8 is intended to protect property owners against abusive
    lending practises, while recognizing that generally speaking parties are
    entitled to freedom of contract: at para. 56.

[51]

Thus,
    s. 8 creates an exception to the general rule that lenders and borrowers are
    free to negotiate and agree on any rate of interest on a loan.  Section 8
    prohibits lenders from levying fine[s], penalt[ies] or rate[s] of interest on
    any arrears of principal or interest that are secured by mortgage on real
    property.  The
Reliant Capital
court elaborated, at paras. 51  53:

It is not uncommon now in the commercial world for loan
    contracts, other than mortgage loans, to require a substantially higher
    interest rate if the loan becomes in arrears. Common sense suggests that this
    is recognized as a legitimate and effective way to ensure the prompt or timely
    repayment of the loan.

The prohibition against extra charges on arrears remains in
    place for loans secured by a mortgage.  Moreover, the additional charge on
    arrears is prohibited in mortgage loans whether that charge is expressed as
    such, or whether the interest provision simply has the effect of increasing
    the charge in respect of arrears
.

Parliament has singled out mortgages on real estate for
    special treatment, or at least treatment that differs from loans that are not
    secured on real property
.  I infer that at least one legislative purpose
    was to protect the owners of real estate from interest or other charges that
    would make it impossible for owners to redeem, or to protect their equity.  If
    an owner were already in default of payment under the interest rate charged on
    monies not in arrears, a still higher rate, or greater charge on the arrears
    would render foreclosure all but inevitable.  [Emphasis added.]

[52]

I
    agree with this description of the purpose and scope of s. 8 of the
Interest
    Act
.

[53]

Given
    the protective purpose of s. 8 of the
Interest Act
, in what
    circumstances is the section triggered?  There are several prerequisites to the
    application of s. 8 of the
Interest Act
.  First, as this court
    explained in
Mastercraft Properties Ltd. v. EL EF Investments Inc.
(1993), 14 O.R. (3d) 519, 64 O.A.C. 308, at pp. 521  22, s. 8 requires a
    finding that the covenant in question imposes a fine, penalty or rate of
    interest.  If it does not, then s. 8 is not engaged.

[54]

Second,
    the fine, penalty or rate of interest must relate to any
arrears
of principal or interest secured by mortgage on real property (emphasis
    added).  The arrears may arise on default occurring before or after maturity of
    the relevant debt instrument:
Beauchamp v. Timberland Investments Ltd.
(1983), 44 O.R. (2d) 512, 1 O.A.C. 73 (C.A.), at p. 516.

[55]

Third,
    assuming that the covenant stipulates for a fine, penalty or rate of
    interest, the covenant must also have the prohibited effect of increasing the
    charge on the arrears beyond the rate of interest payable on principal money
    not in arrears.  In other words, the covenant must
both
stipulate
    for a fine, penalty or rate of interest
and
have the prohibited
    effect:
Mastercraft
, at p. 522 (emphasis in original).

[56]

Finally,
    the arrears of principal or interest must be secured by mortgage on real
    property.

[57]

In
    this case, there is no dispute that the first three prerequisites for the
    application of s. 8 of the
Interest Act
are satisfied.  The Interest
    Escalation Provision concerns a rate of interest relating to arrears of
    principal or interest under the Note arising on default, before and after the
    date of maturity (August 15, 2017).  It is also apparent that the Interest
    Escalation Provision is intended to extract a higher rate of interest in the
    event of default under the Note.  It therefore has the prohibited effect of
    increasing the charge on the arrears beyond the rate of interest payable on
    principal money not in arrears.  The controversial point is whether s. 8
    applies to the Note at all.  In other words, does the elevated rate of interest
    agreed on by the parties apply to arrears secured by mortgage on real
    property, thereby satisfying the fourth prerequisite for invocation of s. 8?

[58]

There
    is no doubt that, as in
Reliant Capital
, the covenant said to trigger
    s. 8 is often incorporated in a mortgage instrument itself, thereby clearly
    meeting the secured by mortgage on real property requirement of s. 8.  As this
    court observed in
Headway Property Investments 78-1 Inc. v. Edgecombe
    Properties Ltd.
, 1998 CanLII 3546, at para. 14: [t]he
Interest Act
governs contractual relations between parties and has application where a claim
    is made under the terms of a mortgage.  The question is whether, as the
    respondents argue, the covenant must always be set out in the terms of a
    mortgage instrument.

[59]

For
    several reasons, I would reject this proposition.

[60]

First,
    as held in
Reliant Capital
, at para. 52, the s. 8 prohibition against
    extra charges on arrears applies to arrears of principal or interest secured
    by [a] mortgage on real property.  I do not read the decision in
Reliant
    Capital
as limited to cases in which the prohibited charges are provided
    for in a mortgage that secures the loan in question.  Rather, in my view, s. 8
    of the
Interest Act
can also apply in cases in which the prohibited
    charges are provided for in a debt instrument that evidences and secures a loan
    and that is secured by a mortgage on real property.  Where, as here, the debt
    instrument and the mortgage that secures it are for the same principal amount
    and provide for the same payment terms, and where payment of one is payment of
    the other, the mortgage is not a true collateral or accessory security; the two
    instruments secure repayment of the original or principal liability  here, the
    single loan  and s. 8 applies to both.

[61]

Second,
    the language of s. 8 itself supports this conclusion.  Section 8 does not
    specify that the prohibited fine, penalty or rate of interest must be imposed
    under the terms of a mortgage instrument in order to engage the s. 8 prohibition. 
    Section 8 simply refers to a fine, penalty or rate of interest  on any
    arrears of principal or interest that are secured by mortgage on real
    property, provided that the fine, penalty or rate of interest has the effect
    of increasing the charge on the arrears beyond the rate of interest payable on
    principal money not in arrears.

[62]

Third,
    the decision of this court in
Pizzey v. Crestwood Lake Ltd.
(2004), 69
    O.R. (3d) 306, leave to appeal to S.C.C. refused, [2004] S.C.C.A. No. 459, is instructive
    in this regard.

[63]

In
Pizzey
, this court was required to determine the post-maturity
    interest rate that applied to a loan secured by a promissory note and a
    collateral mortgage that contained inconsistent terms regarding post-maturity
    interest.  The personal defendants in
Pizzey
had signed a promissory
    note for part of the purchase price for shares acquired by them from the
    plaintiffs.  A corporation of which the personal defendants were the sole
    shareholders had guaranteed payments under the note and had secured its
    guarantee obligation by providing a collateral mortgage on land.  The note made
    no mention of interest after maturity but did provide for interest at the rate
    of 10% per annum to the date of maturity.  In contrast, the standard charge
    terms of the collateral mortgage provided for interest at 10% annually as well
    after as before maturity.

[64]

When
    the defendants fell into default under the note and the mortgage, the
    plaintiffs sued on the mortgage for the balance due.  The trial judge found that
    the note was the sole debt instrument and, therefore, that it established the
    terms of the loan between the parties.  He also found that interest on the note
    after maturity was payable by law under s. 133(b) of the
Bills of Exchange
    Act
, R.S.C. 1985, c. B-4.
[1]
However, because s. 133(b) did not stipulate a rate of interest, s. 3 of the
Interest
    Act
[2]
applied and established a rate of 5% per annum.

[65]

On
    appeal to this court, the plaintiffs argued that the trial judge erred in
    characterizing the promissory note as the sole debt instrument.  They maintained
    that the collateral mortgage created a distinct debt obligation that was
    complementary, not subordinate to the note.

[66]

This
    court disagreed.  Justice Laskin, writing for the majority, indicated, at para.
    15, that [f]aced with the two inconsistent interest obligations in the note
    and the mortgage, the trial judge had to determine which obligation the
    [debtors] were required to meet.  That determination turned on how he
    characterized the nature of the transaction.

[67]

Further,
    the trial judges characterization of the transaction  as a share purchase,
    paid for by cash and a promissory note, with the note guaranteed and the
    guarantee secured by a collateral mortgage on the property  attracted
    deference on appeal and, in any event, was supported by the loan documentation. 
    Justice Laskin explained, at para. 17:

First, the agreement of purchase and sale stipulates that the
    purchase price consists of the down payment and take back financing in the
    form of the promissory note secured by [the defendant corporations] mortgage. The
    [personal defendants] are not parties to the mortgage and, thus, the
    [plaintiffs] have no claim against them under the mortgage.  Second, the
    mortgage provides that [p]ayment of the note is payment of the mortgage and
    payment of the mortgage is payment of the note.  Therefore, once the [personal
    defendants] (or [the defendant corporation]) have paid off the promissory note,
    [the defendant corporation] is entitled to a discharge of the mortgage.  For
    these reasons I would not interfere with the trial judges finding that the
    promissory note alone governs the [personal defendants] debt obligation.

[68]

In
    this case, the substance of the transaction between the parties is relatively
    straightforward.  The respondents loaned $458,488.07 to the appellants.  The
    loan proceeds were applied to discharge an existing mortgage.  The repayment of
    the loan was secured by a promise to pay set out in a promissory note.  That
    note was secured, in turn, by a mortgage on real property in the same amount. 
    The Note and the Mortgage pertain to one loan between the parties, the
    repayment of which is secured equally by the Note and the Mortgage.

[69]

It
    is true that, unlike in
Pizzey
, no term in the Mortgage provides that
    payment of the Note constitutes payment of the Mortgage.  Nor does the Note
    provide that payment of the Mortgage constitutes payment of the Note.  However,
    as I have said, there is no dispute that, in this case, both propositions are
    true.

[70]

Further,
    in
Pizzey
, as in this case, there was no commonality between the
    parties to the promissory note and the parties to the mortgage.  Here, all the
    appellants are signatories to the Note, while Parcel alone is the named mortgagor
    under the Mortgage.  Nonetheless, the debt owed under the Note is the same debt
    owed under the Mortgage and the parties to both instruments are associated.  And,
    it is clear that, as in
Pizzey
, if the appellants had paid off the
    Note, Parcel would have been entitled to a discharge of the Mortgage and Pardis
    and Pacific would have been freed of the obligations under their guarantee. 
    Conversely, if Parcel had paid off the Mortgage, the debt owed under the Note
    would have been satisfied.

[71]

In
    these circumstances, in my view, as in
Pizzey
, the terms of the Note determine
    the post-default rate of interest payable on the one debt between the parties. 
    And the Note is secured by a mortgage on real property.  Consequently, given
    the agreed-upon structure of this loan transaction, both instruments fall
    within the ambit of s. 8 of the
Interest Act
on the facts of this
    case.

[72]

This
    conclusion is buttressed by the decision in
NBY Enterprises Inc. v. Duffin
,
    2006 CanLII 7519 (Ont. S.C.).
NBY Enterprises
concerned the question
    whether provisions for the escalation of interest on default, contained in
    promissory notes and mortgages that secured those notes, offended s. 8 of the
Interest
    Act
.  Citing
Pizzey
, the court concluded, at para. 21, that the
    terms of the promissory notes, as secured by the mortgages, determined the
    terms of the loan.  The court went on to hold, at paras. 23 and 24, that [t]here
    can only be one term of interest on one loan and that, s. 8 of the
Interest
    Act
was breached by the increased interest rate after default, which
    clearly had the effect of increasing the charge on the arrears beyond the rate
    of interest payable on principal money not in arrears.  See also
Paragon
    Capital Corp. v. 395342 Alberta Ltd.
, 2004 ABQB 25, 350 A.R. 370.

[73]

Based
    on these authorities, I therefore do not accept the respondents submission that
    the enforceable post-default interest rates applicable under the Note and the
    Mortgage may differ in respect of the same loan.  In my view, this proposition
    is contrary to common sense and, if accepted, would result in commercial
    uncertainty, as well as fundamental unfairness to the appellants.

[74]

Consider,
    for example, that Parcel is a signatory to both the Note and the Mortgage.  To hold,
    as the respondents suggest, that Parcel may be liable for one interest rate
    under the Mortgage (0.75% per annum) and a different and higher interest rate
    under the Note (10% per annum) on default under the same loan in respect of the
    same debt would result in uncertainty as to which obligation Parcel  and the
    remaining appellants  were required to meet.  This result is avoided where the
    same loan transaction is viewed as subject to the same rate of interest on
    default under both instruments.

[75]

Since
    there are conflicting rates of interest on default with respect to the same
    loan under these instruments, it must be determined which rate of interest applies. 
    I find the approach and reasoning of this court in
Pizzey
apposite in
    this case.  Where, as here, the debt between the parties is secured by a
    promissory note that is itself secured by a mortgage, each for the same
    principal amount, and where payment of one is payment of the other, but where
    each contains different terms regarding post-default interest, the terms of the
    promissory note determine the applicable post-default interest rate.  And, in
    this case, the Note contains an Interest Escalation Provision that runs afoul
    of s. 8 of the
Interest Act
.

[76]

I
    therefore conclude that the Interest Escalation Provision conflicts with s. 8
    of the
Interest Act
and cannot be given effect.  It follows that the
    only enforceable contractual interest rate agreed on by the parties is 0.75%
    per annum.

[77]

In
    the result, akin to
Pizzey
, the appropriate post-default interest rate
    is the same as the agreed 0.75% pre-default rate stipulated under the Note.  That
    this interest rate may have been below the prevailing market rate of interest
    at the time the Note and the Mortgage were executed is a consequence of the
    bargain struck by knowledgeable and sophisticated business parties.

(b)

Mortgages Act
Interest

[78]

Before
    this court, the appellants acknowledge the respondents entitlement to three
    months interest under s. 17 of the
Mortgages Act
on the principal
    amount outstanding under the Mortgage.  The full text of s. 17 is set out in
    Schedule A to these reasons.

[79]

On
    the record before this court, the basis for this concession and, hence, the
    rationale for invocation of s. 17 of the
Mortgages Act
, is unclear.
[3]
Nonetheless, I emphasize that the appellants do not attack the respondents
    claim to
Mortgages Act
Interest.  Instead, they argue the motion judge
    erred by allowing
Mortgages Act
Interest calculated at the rate of
    10%, rather than 0.75%, per annum.  The respondents entitlement to
Mortgages
    Act
Interest having been conceded, I will address only the question of the
    applicable rate of interest.

[80]

In
    a Notice of Sale Under Mortgage, dated April 13, 2012 and delivered by the
    respondents prior to their 2013 amendments to their statement of claim, the
    respondents claimed
Mortgages Act
Interest in the amount of $774.13,
    that is, at the rate of 0.75% per annum as stipulated in the Mortgage.  By the
    time of the May 2013 summary judgment motion, the respondents
Mortgages
    Act
Interest claim had increased to the amount of $9,965.88, based on
    application of a 10% per annum interest rate.  In contrast, on the appellants
    calculations, three months interest at the rate of 0.75% per annum on the
    principal outstanding as of January 31, 2014  the date of judgment  would yield
    $921.21 on account of
Mortgages Act
Interest.

[81]

The
    motion judge accepted the respondents claim for
Mortgages Act
Interest in the amount of $9,965.88.  However, his reasons offer no explanation
    for the calculation of
Mortgages Act
Interest at an annual interest
    rate of 10%, or any discussion whether the relevant rate was 0.75% per annum.

[82]

Nor
    did the respondents advance a justification on the appeal hearing for the
    calculation of
Mortgages Act
Interest at a 10% annual interest rate.   Presumably,
    the respondents claim for interest at this rate also rests on the higher rate
    of annual interest contemplated under the Interest Escalation Provision in Clause
    2 of the Note.

[83]

In
    my view, neither the Mortgage nor the Note provide any tenable basis for the
    calculation of
Mortgages Act
Interest at the rate of 10% per annum. 
    The Mortgage itself provides for interest only at the rate of 0.75% per annum. 
    Clause 2 of the Note provides for pre-default interest at the same annual
    rate.  I have already concluded that no effect may be given to the Interest Escalation
    Provision in Clause 2 of the Note.

[84]

No
    viable contractual or other footing for the calculation of
Mortgages Act
Interest at the rate of 10% per annum having been advanced, I agree with the
    appellants that the motion judges
Mortgages Act
Interest award, which
    was calculated on the basis of a 10% annual interest rate, cannot stand.  In
    light of the appellants concession that the respondents are entitled to
Mortgages
    Act
Interest, the applicable rate is therefore the 0.75% annual rate stipulated
    in the Mortgage.

[85]

Accordingly,
    I would set aside the motion judges $9,965.88 award of
Mortgages Act
Interest and substitute in its stead an award of three months interest
    calculated at the rate of 0.75% per annum on the outstanding balance under the
    Mortgage as of January 31, 2014.

(c)

Postjudgment Interest

[86]

I
    reach a similar conclusion regarding the motion judges award of post- judgment
    interest.

[87]

The
    motion judge, again without elaboration, awarded post- judgment interest at the
    rate of 10% per annum as against Pacific and Pardis on the outstanding amounts
    owed under the Note.  He made no mention of post- judgment interest in respect
    of Parcels indebtedness to the respondents, under either the Mortgage or the
    Note.  The formal judgment as issued and entered, dated January 31, 2014,
    stipulates that the judgment BEARS INTEREST at the rate of 10 percent per
    year, commencing February 1, 2014.

[88]

The
    only rationale advanced by the respondents for postjudgment interest calculated
    at this rate is the Interest Escalation Provision under the Note.  There is no
    suggestion that the Mortgage provides for interest at the rate of 10% per
    annum, before or after default.  Since, in my view, the Interest Escalation Provision
    is unenforceable by reason of s. 8 of the
Interest Act
, it follows
    that a 10% per annum postjudgment interest rate based on that provision is unsustainable.

[89]

In
    these circumstances, what rate of postjudgment interest ought to apply?  None
    of the parties relied on or made any submissions on appeal regarding the
    postjudgment interest provisions of the
Courts of Justice Act
, R.S.O.
    1990, c. C.43.
[4]
Nor did they seek to invoke the
Bills of Exchange Act
or any provision
    of the
Interest Act
to supply the postjudgment rate of interest.

[90]

In
    my opinion, in these somewhat unusual circumstances,
Pizzey
affords
    guidance as to the appropriate approach for determining the rate of postjudgment
    interest.  In
Pizzey
, the court held, at paras. 38  39:

The last question that needs to be determined is what prejudgment
    interest rate should be awarded after maturity of the note.  The statutory
    prejudgment interest rate under s. 128(1) of the
Courts of Justice Act
is 4.8 per cent.

However, s. 130 gives the court discretion to vary the
    prejudgment interest rate where the circumstances of the case so require.
Here,
    the appropriate post-maturity rate is the same as the pre-maturity rate on the
    note, 10 per cent
.  This is consistent with the reasoning of Major J. in
Bank
    of America Canada
[
v. Mutual Trust Co.
,

2002 SCC 43,
    [2002] 2 S.C.R. 601], at paras. 4950:

Absent exceptional circumstances, the interest rate which
    had governed the loan prior to breach would be the appropriate rate to govern
    the post-breach loan.  The application of a lower interest rate would be unjust
    to the lender.

This analysis applies equally to pre-judgment interest and
    post-judgment interest.

I would therefore award prejudgment interest on the note at 10
    per cent per annum. [Emphasis added.]

[91]

In
    this case, the 0.75% per annum interest rate governed the appellants debt
    prior to default under the Note, and under the Mortgage both before and after
    default.  In my view, it is the appropriate rate to govern the post-default
    debt and, hence, postjudgment interest.

(d)

and
    (e)  Late Payment Charges and Default Fees

[92]

The
    appellants contend that the Late Payment Charges ($11,110) and the Default Fees
    ($7,200) allowed by the motion judge also offend s. 8 of the
Interest Act
.

[93]

The
    Mortgage provides that the respondents are entitled to a late charge of $10 per
    day in the event of their late receipt of monthly payments due under the
    Mortgage.  It also provides for the payment of a $300 Missed [P]ayment Fee if
    payments under the Mortgage are missed or late or returned for payment.  The
    appellants submit that the Late Payment Charges and the Default Fees awarded by
    the motion judge, which are based on these provisions of the Mortgage,
    constitute fine[s] or penalt[ies] prohibited under s. 8 of the
Interest
    Act
.

[94]

I
    agree.

[95]

The
    respondents point to no evidence on the record before this court demonstrating
    that they incurred any actual losses as a result of late or missed payments
    under the Mortgage, apart from the amount of the non-payment itself.  This is
    not a case where it is alleged that payments made by or on behalf of Parcel
    under the Mortgage were returned NSF or otherwise rejected for payment, giving
    rise to administrative costs for the respondents.

[96]

In
    the absence of evidence that the charges in question reflect real costs
    legitimately incurred by the respondents for the recovery of the debt, in the
    form of actual administrative costs or otherwise, the only reason for the
    charges was to impose an additional penalty or fine, apart from the interest
    otherwise payable under the Mortgage, thereby increasing the burden on the
    appellants beyond the rate of interest agreed upon in the Mortgage.  The courts
    have not hesitated to disallow similar charges on the basis that they offend s.
    8 of the
Interest Act
: see for example,
Chong v. Kaur
, 2013
    ONSC 6252, at paras. 54  56;
Bhanwadia v. Clarity Financial Corp.
, 2012
    ONSC 6393, at paras. 43  46;
NBY Enterprises Inc.
, at para. 29;
2088300
    Ontario Ltd. v. 2184592
, 2011 ONSC 2986, at paras.
22 
    23 (Mast.);
Nesci v. Ramrattan
, 2009 CanLII 5153 (Ont. S.C.), at para.
28.

[97]

Accordingly,
    I would set aside the impugned Late Payment Charges and Default Fees.

(2)     Suggested Inconsistency with Prior Default Judgment

[98]

During
    oral argument, the appellants did not press their claim that the judgment under
    appeal is inconsistent with the July 26, 2012 default judgment granted by
    Lauwers J.  I understood this complaint to be based on the fact that, unlike
    the judgment under appeal, the earlier default judgment contemplated the
    payment of interest (including postjudgment interest) at the rate of 0.75% per
    annum, rather than 10% per annum.  Further, no Late Payment Charges or Default
    Fees were awarded under the default judgment.

[99]

Any
    inconsistency between the default judgment and the judgment under appeal
    grounds no relief for the appellants.  The default judgment was set aside by
    court order dated December 17, 2012.  The appellants appeal from parts of that
    order was subsequently withdrawn.  In these circumstances, the prior default
    judgment is essentially irrelevant to the matters at issue on this appeal.

[100]

In any event, the
    claims at issue before Lauwers J. were solely claims under the Mortgage.  And
    the Mortgage provides for interest at the annual rate of 0.75%.  The respondents
    amended their statement of claim in January 2013, after the date of the default
    judgment, to include claims based on the Note.  As a result, the matters at issue
    and the record before the motion judge were materially different than those
    before Lauwers J. when he granted default judgment.

[101]

Accordingly, I
    would reject this ground of appeal.

(3)     Motion Judges Costs Award

[102]

The appellants
    argue the motion judge erred by awarding the respondents their costs of the
    summary judgment motion on a substantial, rather than a partial, indemnity
    scale.

[103]

I disagree.

[104]

The motion
    judges costs award attracts considerable deference from this court.  Unless
    the award is plainly wrong or based on an error of principle, appellate
    interference with the award is precluded:
Hamilton v. Open Window Bakery
    Ltd.
, 2004 SCC 9, [2004] 1 S.C.R. 303.

[105]

The standard
    charge terms that form part of the Mortgage provide for recovery by the mortgagee
    of its legal fees incurred in enforcing the Mortgage on a solicitor and client
    scale, together with associated expenses.  The respondents sought costs of the
    summary judgment motion in the total amount of $97,809.34, calculated on a substantial
    indemnity scale and based on a $425 hourly billing rate for counsel.  However,
    the motion judge rejected this hourly rate and calculated costs utilizing a $375
    per hour counsel rate.  Thus, it is inaccurate to suggest that the motion judge
    awarded costs on a substantial indemnity scale.

[106]

In addition, the
    motion judge made various other deductions from the quantum of costs the
    respondents claimed.  His reasons reveal that he considered carefully the
    respondents costs claim, the appellants objections to that claim, and the
    applicable principles governing an award of costs.  Having done so, he awarded
    costs to the respondents in the reduced amount of $55,614.78, less various
    credits to the appellants for amounts owed to them by the respondents.

[107]

In these
    circumstances, I see no basis for interference with the motion judges
    discretionary costs ruling.  In my view, his costs award is neither plainly
    wrong nor infected by an error of principle.

[108]

In reaching this
    conclusion, I recognize that the costs awarded to the respondents took account
    of their full success before the motion judge.  On the disposition of this
    appeal that I propose, I would allow the appeal in part, and set aside certain
    of the awards made by the motion judge.  Nonetheless, the respondents remain
    successful in obtaining summary judgment for the core relief that they sought
    against the appellants.  No variation in the motion judges costs award is
    therefore warranted.

Disposition

[109]

For the reasons
    given, I would allow the appeal, in part, by setting aside i) the awards of
    interest under the Note and the Mortgage, the
Mortgages Act
Interest
    and postjudgment interest at the rate of 10% per annum, substituting in their
    stead awards of interest at the rate of 0.75% per annum; and ii) the awards for
    Late Payment Charges and Default Fees.  In all other respects, I would dismiss
    the appeal.

[110]

The appellants shall
    deliver their brief written submissions concerning the costs of this appeal to
    the Registrar of this court within 10 days from the date of these reasons.  The
    respondents shall deliver their brief responding costs submissions to the
    Registrar within 10 days thereafter.

Released:

MAY 12 2015                                   E.A.
    Cronk J.A.

EAC                                                I
    agree E.E. Gillese J.A.

I
    agree Paul Rouleau J.A.


Schedule
    A

Mortgages Act
, R.S.O. 1990, c. M.40, s. 17

17(1) Payment of principal upon default

Despite any agreement to the contrary, where default has
    been made in the payment of any principal money secured by a mortgage of
    freehold or leasehold property, the mortgagor or person entitled to make such
    payment may at any time, upon payment of three months interest on the principal
    money so in arrear, pay the same, or the mortgagor or person entitled to make
    such payment may give the mortgagee at least three months notice, in writing,
    of the intention to make such payment at a time named in the notice, and in the
    event of making such payment on the day so named is entitled to make the same
    without any further payment of interest except to the date of payment.

17(2) Exception

If the mortgagor or person entitled to make such payment
    fails to make the same at the time mentioned in the notice, the mortgagor or
    person is thereafter entitled to make such payment only on paying the principal
    money so in arrear and interest thereon to the date of payment together with
    three months interest in advance.

17(3) Saving

Nothing in this section affects or limits the right of the
    mortgagee to recover by action or otherwise the principal money so in arrear
    after default has been made.





[1]
Under s. 186(1) of the
Bills of Exchange Act
, the provisions of that
    Act relating to bills apply to promissory notes.  Section 133(b) states that
    when a bill is dishonoured, the measure of damages includes interest after
    maturity.



[2]
Section 3 of the
Interest Act
provides that [w]henever 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. 
    In
Pizzey
, this court ultimately concluded that the trial judge erred
    in applying the 5% interest rate from s. 3 of the
Interest Act
. 
    Rather, the appropriate post-maturity interest rate was the same as the
    pre-maturity rate on the note, that is, 10% per annum.



[3]
For example, the record does not indicate whether the appellants have sought to
    exercise any prepayment privilege or to redeem the Property, and whether they
    have provided the respondents with three months written notice of their
    intention to do so.



[4]
I note that the postjudgment interest rate provisions of s. 129 of the
Courts
    of Justice Act
do not apply where interest is payable by a right other
    than under [s. 129]: s. 129(5).


