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Claiming Compound Interest: Rights to Contractual Terms Without Historic Concerns for Usury
Question: Can courts award compound interest instead of simple interest on breaches of contract?
Answer: Yes, the Supreme Court has recognized that in cases where parties have agreed to compound interest in their contracts, courts may award compound interest to ensure fairness and align with contemporary economic realities. Mole Legal Services can guide you through these legal complexities, ensuring your contractual rights are upheld.
Compound Interest Awards by Courts Deemed Appropriate
The question of whether courts should award compound interest instead of statutory simple interest in cases where the parties to a contract had agreed to compound interest was a long held legal debate that was ultimately resolved with the recognition that an award of compound interest is appropriate in certain circumstances.
The Law
In the case of Bank of America Canada v. Mutual Trust Co., [2002] 2 S.C.R. 601, the Supreme Court addressed the issue of whether the law should clearly recognize that an award of compound interest in accordance with a contractual agreement should supercede the statutory provisions for pre-judgment and post-judgment interest that, generally, apply to court awards following Judgment in a litigative proceeding. In resolving the question, the Supreme Court stated:
(5) Sections 128 to 130 of the Courts of Justice Act
39 Sections 128 to 130 CJA entitle a person with an award for damages to interest on the damages for the period between the date that the cause of action arose and the judgment (“pre-judgment interest”) as well as for the period between the judgment and the time when payment is made in full (“post-judgment interest”). The legislation recognizes the unfairness of awarding a plaintiff damages, at trial, in the amount to which he or she was entitled as of the date that the cause of action arose, and no more for the period in between which is frequently years. Sections 128 and 129 CJA, therefore, contain interest rates and methods of calculation to serve for pre-judgment and post-judgment interest, respectively, in those cases for which there is no evidence of a more appropriate interest rate and/or method of calculation.
40 Sections 128(4)(g), 129(5) and 130 CJA, each of which allows the judge to award interest other than as specifically set out in ss. 128 and 129, clearly indicate that the rates and calculation methods of interest provided in ss. 128 and 129 are applicable in the absence of more appropriate rates and methods of calculation. Section 130 allows a court, where it considers it just, to vary the interest rate or the time for which interest may be awarded. Sections 128(4)(g) and 129(5) allow a court to award pre-judgment and post-judgment interest, respectively, where interest is payable by another right.
(6) Interest Payable by Another Right
41 Equity has been recognized as one right by which interest may be awarded other than as specifically stated in ss. 128 and 129 CJA, including an award of compound interest. (See Brock v. Cole (1983), 1983 CanLII 1952 (ON CA), 142 D.L.R. (3d) 461 (Ont. C.A.); Claiborne Industries Ltd. v. National Bank of Canada (1989), 1989 CanLII 183 (ON CA), 59 D.L.R. (4th) 533 (Ont. C.A.); Confederation Life Insurance Co. v. Shepherd (1996), 1996 CanLII 3206 (ON CA), 88 O.A.C. 398 (C.A.); Oceanic Exploration Co. v. Denison Mines Ltd., Ont. Ct. (Gen. Div.), May 8, 1998.) It is of some interest that in Air Canada v. Ontario (Liquor Control Board), 1997 CanLII 361 (SCC), [1997] 2 S.C.R. 581, at para. 85, approving Brock, supra, Iacobucci J. emphasized that in equity the awarding of compound interest is a discretionary matter. Simple breach of contract does not require moral sanction and is usually governed by common law, not equity.
42 In this case, the Court of Appeal recognized that the court has the jurisdiction to award compound interest under the court’s general equitable jurisdiction and that an award of compound interest grounded in equity is, in the language of ss. 128(4)(g) and 129(5) “payable by a right other than under this section”. The Court of Appeal found that equity did not apply and therefore the court had no jurisdiction to award compound interest. Implicit in their holding was that the only “right other than under this section” was the right to receive compound interest in equity. This is not so, as a common law right of interest can be an “other right”.
43 The common law right in contract law to be awarded expectation damages is another such other right. As noted in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council, [1996] 2 All E.R. 961 (H.L.), at p. 969, the power to award compound interest was not traditionally available at common law, although it is now. This is so because, as our jurisprudence demonstrates, the common law has been able to grow and adapt to changing conditions. In Friedmann Equity Developments Inc. v. Final Note Ltd., [2000] 1 S.C.R. 842, 2000 SCC 34, at para. 42, this Court outlined the following conditions where the rules of common law may be changed if necessary:
(1) to keep the common law in step with the evolution of society,
(2) to clarify a legal principle, or
(3) to resolve an inconsistency.
It warned that the changes should be incremental, and their consequences capable of assessment.
44 Compound interest is no longer commonly thought to be, in the language quoted in Costello, supra, at pp. 492-93, usurious or to involve prohibitively complex calculations. Compound interest is now commonplace. Mortgages are calculated using compound interest, as are most other loans, including such worthy endeavours as student loans. The growth of a company or a country’s gross domestic product over a period of years is often stated in terms of an annually compounded rate. The bank rate, which garners much attention as an indicator of the health and direction of the economy, is a compound interest rate. It is for reasons such as these that the common law now incorporates the economic reality of compound interest. The restrictions of the past should not be used today to separate the legal system from the world at large.
45 If the court was unable to award compound interest on the breach of a loan which itself bore compound interest, it would be unable to adequately award the plaintiff the value he or she would have received had the contract been performed. To keep the common law current with the evolution of society and to resolve the inconsistency between awarding expectation damages and the courts’ past unwillingness to award compound interest, that unwillingness should be discarded in cases requiring that remedy for the plaintiff to realize the benefit of his or her contract.
46 A contrary rule would lead to inequity and provide incentives to breach contracts. If courts were restricted to simple interest in assessing damages for breach of contract, an apparent abuse could occur in the following way. Money lent at compound interest would accrue compound interest until there was a breach of contract by the borrower. The lender would then sue and only be entitled to simple interest on the judgment. This would encourage borrowers not to repay loans. Contract law is not the enemy of parties to an agreement but, rather, their servant. It should not frustrate their mutually agreed intentions but, instead, absent overriding policy concerns, should permit those parties to obtain the benefit of their intended agreement.
Precedent Decision Implications
As per the Bank of America Canada case above, the Supreme Court confirmed recognition for the viewpoint that a contrary rule, being a rule that limited Judgment interest to simple interest, could lead to unfair incentives whereas borrowers might strategically default on contracts bearing compound interest, knowing that litigation would reduce the applicable liability to a simple interest calculation. Such an approach would be counterproductive to the fundamental principles of contract law, which seek to uphold the mutual intentions of contracting parties; and accordingly, lower courts are now subjected to applying this precedent decision to relevant cases.
Conclusion
The recognition of the appropriateness of compound interest awards aligns with fundamental contractual principles and contemporary economic realities. The Bank of America Canada ruling affirms that courts have jurisdiction to award compound interest both in equity and common law, particularly where such interest was stipulated contractually. This recognition ensures that contract law remains a faithful servant to the intentions of the parties rather than an artificial barrier to the enforcement of the terms agreed upon by the parties. Going forward, courts should continue to embrace compound interest as a necessary tool for ensuring full compensation and preventing strategic defaults on financial obligations.