Tomell Investments Ltd. v. East Marstock Lands Ltd., [1978] 1 SCR 974

Supreme Court of Canada

Tomell Investments Ltd. v. East Marstock Lands Ltd., [1978] 1 S.C.R. 974

Date: 1977-06-24

Tomell Investments Limited (Plaintiff) Appellant;

and

East Marstock Lands Limited (Defendant) Respondent;

and

The Attorney General of Canada et al. Intervenants.

1977: March 29, 30; 1977: June 24.

Present: Laskin C.J. and Martland, Judson, Richie, Spence, Pigeon, Dickson and Beetz JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Constitutional law—Interest—Bonus payable on default of mortgage payments—Stipulation invalid—B.N.A. Act, s. 91(19)—Interest Act, R.S.C. 1970, c. I-18, ss. 2, 6, 8, 10.

On September 3, 1974, the appellant (mortgagee) delivered a notice of sale under a mortgage of land to the respondent East Marstock Lands Limited. The mortgage was substantially in arrears and an action was instituted by East Marstock seeking various types of relief. The parties resolved all differences between them with the exception of the entitlement of the mortgagee to a bonus provided for in the mortgage. This bonus was payable on default of payment of any of the moneys secured, and was equal to three months’ interest in advance at the rate charged on principal. The trial judge held that s. 8 of the Interest Act precluded recovery of the bonus and his judgment was unanimously affirmed by the Court of Appeal without recorded reasons. The appellant contended in this Court that s. 8 was ultra vires.

Held: The appeal should be dismissed.

Per Laskin C.J. and Martland J.: The pith and substance or the focus of s. 8 of the Interest Act indicates that it is valid legislation in relation to interest. Section 8 is an assertion of the interest power simpliciter and it is unnecessary to apply the doctrine of ancillary power.

Per Pigeon, Judson, Ritchie, Spence, Dickson and Beetz JJ.: Section 8 of the Interest Act deals only with interest; its object is to define what interest may be charged on arrears of principal and interest and to prohibit any “charge” beyond the permitted rate of

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interest. To hold that Parliament could not enact s. 8 under its “Interest” head would be to say that Parliament could not prescribe a maximum rate. Any legislation fixing a maximum rate would be futile if it did not prohibit any stipulation which had the effect of increasing the charge beyond the rate of interest allowed. The judgment in Attorney—General for Ontario v. Barfried Enterprises Ltd., [1963] S.C.R. 570, does not dictate a finding that s. 8 is ultra vires; that case decided that federal jurisdiction over interest does not exclude all provincial jurisdiction over contracts involving payment of interest so as to invalidate provincial laws authorizing the courts to grant relief from such contracts as are harsh and unconscionable. That judgment was based on the view that the subject of interest assigned to the Federal Parliament was not to be equated with the cost of money, i.e. with interest in the widest sense, and that s. 6 of the Interest Act deals only with “interest” properly so-called, i.e. a charge for the use of money accruing day by day. In Immeubles Fournier v. Construction St‑Hilaire, [1975] 2 S.C.R. 2, the Court held that interest under s. 8 of the Act is not similarly restricted to a charge accruing day by day but includes any kind of penalty.

Provincial legislatures cannot enact legislation falling within the exclusive legislative authority of the Federal Parliament, i.e. within what may be called the Federal primary power. However with respect to matters not strictly within such primary power, and which can be dealt with ancillarily, provincial jurisdiction over property and civil rights and over matters of a local nature remains unimpaired until excluded by federal legislation. The doctrine of ancillary power and its corollary that of the unoccupied field apply to the present case. Section 8 of the Interest Act is a valid exercise of ancillary power and as such valid federal legislation.

[Immeubles Fournier v. Construction St-Hilaire, [1975] 2 S.C.R. 2, followed; Attorney General for Ontario v. Barfried Enterprises Ltd., [1963] S.C.R. 570, distinguished; London Loan & Savings v. Meagher, [1930] S.C.R. 378, Singer v. Goldhar (1924), 55 O.L.R. 267; Asconi Building Corporation v. Vocisano, [1947] S.C.R. 358; Lynch v. The Canada North‑West Land Co. (1891), 19 S.C.R. 204; Ladore v. Bennett, [1939] A.C. 468; Lethbridge Irrigation District v. Independent Order of Foresters, [1940] A.C. 513; Attorney General

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for Canada v. Attorney General for British Columbia, [1930] A.C. 111; Attorney General for Ontario v. Attorney General for Canada, [1894] A.C. 189; Royal Bank of Canada v. Larue, [1926] S.C.R. 218, aff’d. [1928] A.C. 187; Companies Creditors Arrangement Act Reference, [1934] S.C.R. 659; Farmers’ Creditors Arrangement Act Reference, [1936] S.C.R. 384, aff’d. [1937] A.C. 391; Attorney General of Quebec v. Attorney General of Canada, [1945] S.C.R. 600; Nykorak v. Attorney General of Canada, [1962] S.C.R. 331, referred to.]

APPEAL from a judgment of the Court of Appeal for Ontario affirming without recorded reasons a judgment of Galligan J.[1] holding that s. 8(1) of the Interest Act prevented recovery of a bonus of three months’ interest stipulated to be payable on default of payment in a mortgage deed. Appeal dismissed.

B.G. Freesman, for the appellant.

John Hahn, for the respondent.

G.W. Ainslie, Q.C., and Martin Low, for the Attorney General of Canada.

D.W. Mundell, Q.C., and J.T. McCabe, for the Attorney General of Ontario.

Olivier Prat, for the Attorney General of Quebec.

William Henkel, Q.C., for the Attorney General of Alberta.

The judgment of Laskin C.J. and Martland J. was delivered by

THE CHIEF JUSTICE—The central question raised by the constitutional attack on s. 8 of the Interest Act, R.S.C. 1970, c. I-18, is ascertainment of its pith and substance or, for convenience of expression, its focus. I agree with my brother Pigeon that it focuses on the maximum charge that can be exacted from a debtor on arrears of principal or interest under a land mortgage by limiting it to the rate of interest payable on principal not in arrears. A charge, whether called or found to be a fine or penalty or rate of interest, which exceeds

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this limit is precluded. In my opinion, s. 8 is valid legislation in relation to interest.

Parliament’s undoubted power to fix or limit rates of interest under any types of contracts or transactions extends to interest on arrears as well as to interest on principal payments as they fall due. Parliament is, in my view, entitled to require creditors to abstain from making or exacting a charge on arrears that goes beyond the rate of interest fixed for principal not in arrears and, in that respect, to prevent them from escaping the stricture through a designation of the charge as a fine or a penalty. This is an assertion of the interest power simpliciter, and, as in Nykorak v. Attorney General of Canada[2], it is unnecessary to invoke any doctrine of ancillary power.

I would dispose of the appeal as proposed by my brother Pigeon.

The judgment of Judson, Ritchie, Spence, Pigeon, Dickson and Beetz JJ. was delivered by

PIGEON J.—This appeal is from a judgment of the Ontario Court of Appeal affirming the judgment of Galligan J. holding that s. 8.(1) of the Interest Act prevents Tomell Investments Limited from recovering a bonus of three months’ interest stipulated to be payable on default of payment in a mortgage deed. The constitutional validity of the enactment was challenged on the appeal to this Court and the Attorneys General for Ontario, Quebec, British Columbia and Alberta intervened to support this attack. The Attorney General of Canada intervened to support the validity of the Act. In his judgment dated March 24, 1975 Galligan J. said:

By mortgage dated May 27, 1974, one Schrag mortgaged certain real property in Bracebridge to Tomell Investments Limited for $450,000.00. The mortgage provides for interest at the rate of 16% per annum. It is an interest only mortgage with interest payable monthly. The principal is due and payable on June 6, 1975. East

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Marstock Lands Limited purchased the lands in question from Schrag on September 24, 1974. By that time the mortgage was substantially in arrears. On September 3, 1974, Tomell Investments Limited delivered a Notice of Sale under the mortgage.

This action was instituted by East Marstock Lands Limited seeking various types of relief. The main purpose of the action was to delay the proceedings under the Notice of Sale to give it time to refinance. This purpose is reflected in the motion which is before me for an injunction restraining the sale. Subsequent to the launching of that motion, the Plaintiff brought a motion for relief from forfeiture under Section 21 of The Mortgages Act, (R.S.O. 1970, c. 279). During the course of argument the parties were able to resolve by way of settlement all of the differences between them, but asked me to make a ruling on the entitlement of the mortgagee to a bonus.

The parties asked me to decide, assuming that the Notice of Sale dated September 3, 1974 was a valid Notice of Sale under the provisions of the mortgage, and that there has now been payment in full of principal, accrued interest and costs (other than the costs of this action and the pending motions), if the mortgagee is entitled to a bonus as provided for in a paragraph in the mortgage. That paragraph reads as follows:

PROVIDED also that on default of payment of any of the moneys hereby secured or payable or on any proceedings being taken by the Mortgagee under this Mortgage, he shall be entitled to require payment, in addition to all other moneys hereby secured or payable hereunder, of a bonus equal to three months’ interest in advance at the rate aforesaid upon the principal money hereby secured, and the Mortgagor shall not be entitled to require a discharge of this Mortgage without such payment.

Mr. Hahn submitted that that clause requiring payment of a bonus equal to three months’ interest cannot be given effect to because in the circumstances of this case it contravenes Section 8 of the Interest Act (R.S.C. 1970, c. I-18), which reads as follows:

8. (1) No fine or penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage of real estate, that has the effect of increasing the charge on any such arrears beyond the rate of interest payable on principal money not in arrears.

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

In my opinion, if East Marstock Lands Limited is required to pay a bonus equal to three months’ interest, such payment would have the effect of increasing the charge on the arrears beyond the rate of interest payable on the principal.

In this case, the interest payments are approximately six months in arrears. For the sake of illustration, I propose to assume that the interest payments are in arrears for six months. The arrears of interest therefore amount to $36,000.00. A bonus equal to three months’ interest on the principal money amounts to $18,000.00. The bonus therefore amounts to 50% of the arrears. The rate of interest payable upon principal money is 16%. It is my opinion therefore that the bonus clause in this mortgage has the effect of increasing the charge on arrears of interest beyond, and substantially beyond, the rate of interest payable on principal money, and therefore is in violation of Section 8 of the Interest Act.

After referring to a few cases specially London Loan & Savings v. Meagher[3], Galligan J. declared that Tomell Investments was not entitled to the bonus. Subject only to a minor variation in the form of the order, this judgment was unanimously affirmed by the Court of Appeal of Ontario without written or recorded reasons.

At the hearing we were informed by counsel for Tomell Investments that Galligan’s judgment had been rendered without any mention of the judgment of this Court in Immeubles Fournier v. Construction St‑Hilaire[4] because it was not known to the parties, not being yet reported. However, it was mentioned at the hearing in the Court of Appeal.

It does not appear to me that counsel for Tomell Investments has made a case for reconsidering this recent decision of the full Court on the construction of the statute. However, the constitutional issue having been left open, because it was not raised, must now be dealt with.

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The argument made by the appellant and the intervenors supporting its position rests mainly on the judgment of this Court in Attorney General for Ontario v. Barfried Enterprises Ltd.[5] The question was the validity of The Unconscionable Transactions Relief Act (R.S.O. 1960, c. 410). The Ontario Court of Appeal dealing with a mortgage which included a big bonus had set aside, on the basis that the Act was unconstitutional, the judgment at trial granting relief to the borrower[6]. For the majority in this Court, Judson J. said (at p. 576):

Schroeder J.A. cited Singer v. Goldhar (1924, 55 O.L.R. 267, [1924] 2 D.L.R. 141), as defining interest in wide terms. In Singer v. Goldhar there was no provision for interest in the mortgage but there was a very big bonus. The Court of Appeal held that this infringed s. 6 of the Interest Act, the bonus being the same thing as interest. But in Asconi Building Corporation v. Vocisano ([1947] S.C.R. 358 at 365), Kerwin J. pointed out that London Loan and Savings Co. of Canada v. Meagher ([1930] S.C.R. 378, 2 D.L.R. 849), had overruled Singer v. Goldhar. It is now established that in considering s. 6 of the Interest Act, a bonus is not interest and the fact that interest may be payable on a total sum which includes a bonus does not involve an infringement of s. 6 of the Act. This was recognized in all the reasons delivered in the Asconi case. It was in this context that the wide definition of interest above referred to was used in the Saskatchewan Reference case. The Court held that the subject‑matter of the legislation was interest and that to call it a reduction of principal did not change its character.

There is, therefore, error in the judgment of Schroeder J.A. in following Singer v. Goldhar in holding that interest in the wide sense includes bonus instead of following the subsequent cases which overrule it.

It must be noted that The Unconscionable Transactions Relief Act was found not to be in conflict with the Interest Act because s. 6 was not construed as including in “interest” a charge such as a bonus: this would have made “interest”

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synonymous with “cost of the loan”. Section 6 of the Interest Act then as now read:

6. Whenever any principal money or interest secured by mortgage of real estate is, by the mortgage, made payable on the sinking fund plan or on any plan under which the payments of principal money and interest are blended, or on any plan that involves an allowance of interest on stipulated repayments, no interest whatever shall be chargeable, payable or recoverable, on any part of the principal money advanced, unless the mortgage contains a statement showing the amount of such principal money and the rate of interest chargeable thereon, calculated yearly or half-yearly, not in advance.

In Singer v. Goldhar, Masten J.A. had said, rendering the judgment of the Court of Appeal (at p. 271):

For these reasons, I think we must hold that, notwithstanding the form of the mortgage, the amount actually advanced, $3,500, is the “principal”; that the additional amount which the defendant agreed to pay beyond the $3,500 advanced is in truth and in fact interest; and that in the repayment clause the principal and interest are blended.

As to this, Rand J. had said in Asconi (at pp. 368-369):

No doubt under the usury acts, the form which the loan or the consideration for interest might take played little part in the question of the real nature of the bargain. An agreement providing for interest at the maximum rate in advance was illegal ab initio regardless of its form; what the Court was concerned to ascertain was the actual loan and the consideration for its use. In the language of Lord Mansfield in Floyer v. Edwards (1774, 98 E.R. 995, at p. 996):

And where the real truth is a loan of money, the wit of man cannot find a shift to take it out of the statute. If the substance is a loan of money, nothing will protect the taking more than 5 per cent.

...

Now section 6 of the Interest Act is not designed to protect a borrower against agreeing to pay any particular rate or amount of interest; in fact, under section 2 of the Act there is complete freedom of action in a contract

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for interest. The object of section 6 is something quite different. It is that where repayment under a mortgage involves, in the forms mentioned, an increment of interest, it shall be made clear in the mortgage what the amount of the principal and the rate of interest are. Obviously no device to defeat that purpose could be tolerated; but where the transaction is not either on its face or by the real intention of the parties within the section and the borrower is fully aware both of the actual amount of interest which he is paying, and the rate and principal with reference to which that calculation is made, the purpose of the section suffers no infringement.

From all this it is apparent that the judgment in Barfried Enterprises was predicated on the view that s. 6 of the Interest Act deals only with “interest” properly so-called, that is a charge for use of money accruing day by day. This obviously implied the same construction of “interest” in s. 2:

2. Except as otherwise provided by this or by any other Act of the Parliament of Canada, any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed upon.

In Immeubles Fournier the respondent in this Court, plaintiff in the original action, had claimed as liquidated damages stipulated in the mortgage contract a penalty of 15 per cent of the principal amount. The Court of Appeal overruling the trial judge had found the penalty payable under the terms of the contract, by virtue of the debtor’s default and the creditor’s action in instituting the proceedings. The question in this Court was whether the recovery of the penalty was barred by s. 8 of the Interest Act reading:

8. (1) No fine or penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage of real estate, that has the effect of increasing the charge on any such 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.

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As no constitutional question was raised by the respondent, what this Court had to decide in Immeubles Fournier was whether this provision could somehow be read so as not to apply to a penalty of a fixed percentage which did not accrue day by day and therefore was not interest. In essence, respondent’s submission was that the application of s. 8 should be limited to “interest” properly so-called, that is, a charge accruing day by day. It was urged that in Asconi it had been held that the stipulation of a fixed bonus did not make the contract a “plan under which the payments of principal money and interest are blended” within the meaning of s. 6. Thus, in that section, “interest” was held not to include a bonus, as previously mentioned.

However, s. 8 is differently worded, it refers to a “fine or penalty or rate of interest…that has the effect of increasing the charge”. In the view of the majority this wording was clearly applicable to any kind of penalty and could not be restricted to a charge accruing day by day. This means, of course, that s. 8 was construed as aiming at something that is not strictly “interest”. That such construction might put in doubt the constitutional validity of the enactment was not overlooked, but the majority considered that this difficulty was unavoidable. They saw no escape from the literal construction of the enactment that was clearly applicable, in their view, to any charge on “arrears beyond the rate of interest payable on principal money not in arrears”.

In my opinion, s. 8 as construed in Immeubles Fournier, really deals only with interest. The object of the provision is to define what interest may be charged on “arears of principal or interest secured by mortgage on real estate”. Subsection 2 should, I think, be considered as stating the governing principle, that is, that a stipulation of interest on interest is permissible provided it is at a “rate not greater than the rate payable on principal money not in arrears”. The object of subs. 1 is to invalidate any stipulation of a “charge” beyond such interest. In order to hold that Parliament cannot enact such a provision under the B.N.A. Act, s. 91, head no. 19, “Interest”, it seems to me

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that one has to say that Parliament is not thereby authorized to prescribe a maximum rate. Any legislation fixing a maximum rate of interest is futile if it does not, expressly or impliedly, prohibit any stipulation that would have the effect of increasing the charge beyond the rate of interest allowed.

In Barfried Enterprises, the Court was not concerned with that aspect of federal jurisdiction over interest; Here, is how Judson J. came to the conclusion that The Unconscionable Transactions Relief Act was valid provincial legislation (at pp. 577-578):

In my opinion, it is not legislation in relation to interest but legislation relating to annulment or reformation of contract on the grounds set out in the Act, namely, (a) that the cost of the loan is excessive, and (b) that the transaction is harsh and unconscionable. The wording of the statute indicates that it is not the rate or amount of interest which is the concern of the legislation but whether the transaction as a whole is one which it would be proper to maintain as having been freely consented to by the debtor. If one looks at it from the point of view of English law it might be classified as an extension of the doctrine of undue influence. As pointed out by the Attorney-General for Quebec, if one looks at it from the point of view of the civil law, it can be classified as an extension of the doctrine of lesion dealt with in articles 1001 to 1012 of the Civil Code. The theory of the legislation is that the Court is enabled to relieve a debtor, at least in part, of the obligations of a contract to which in all the circumstances of the case he cannot be said to have given a free and valid consent. The fact that interference with such a contract may involve interference with interest as one of the constituent elements of the contract is incidental. The legislature considered this type of contract as one calling for its interference because of the vulnerability of the contract as having been imposed on one party by extreme economic necessity. The Court in a proper case is enabled to set aside the contract, rewrite it and impose the new terms.

This legislation raises the very case which the Privy Council refrained from deciding in the Saskatchewan Farm Security case ([1949] A.C. 110) when it said, at p. 126:

Their Lordships are not called on to discuss, and do not pronounce on, a case where a provincial enact-

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ment renders null and void the whole contract to repay money with interest. Here the contracts survive, and once the conclusion is reached that, as Kerwin J. said, “the legislation here in question is definitely in relation to interest”, reliance on such a decision as Ladore v. Bennett is misplaced.

Under the Ontario statute an exercise of judicial power necessarily involves the nullity or setting aside of the contract and the substitution of a new contractual obligation based upon what the Court deems it reasonable to write within the statutory limitations. Legislation such as this should not be characterized as legislation in relation to interest.

Before coming to this conclusion, Judson J. had earlier said of the Saskatchewan Farm Security case (at p. 576):

Legislation which provided that in case of crop failure as defined by the Act, the principal obligation of the mortgagor or purchaser of a farm should be reduced by 4 per cent in that year but that interest should continue to be payable as if the principal had not been reduced, was held to be legislation in relation to interest.

With respect for those who have expressed a contrary opinion in Immeubles Fournier, it does not appear to me that the conclusion reached in Barfried Enterprises implies a view of the extent of federal power over interest which excludes from its scope enactments such as s. 8 of the Interest Act. All that was decided was that the federal jurisdiction over interest does not exclude all provincial jurisdiction over contracts involving the payment of interest so as to invalidate provincial laws authorizing the courts to grant relief from such contracts, when they are adjudged to be harsh and unconscionable. This conclusion was based on the view that the subject of interest assigned to the Federal Parliament was not to be equated with the cost of money, in other words with interest in the widest sense.

This view of the limited scope of this federal power is consonant with the view taken in earlier cases that federal jurisdiction over interest does not extend to interest on all kinds of debts or claims, but only on contractual obligations. For instance, it was held in Lynch v. The Canada

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North-West Land Co.[7] that the federal jurisdiction does not apply to interest on taxes levied under provincial legislation. It seems clear the same would have to be said of interest on provincial government bonds. In fact, it was held that provincial jurisdiction over municipal corporations would authorize a reorganization of defaulting municipalities involving reduced interest on their obligations (Ladore v. Bennett[8]), although it would not allow a mere reduction of the rate of interest payable on municipal bonds (Lethbridge Irrigation District v. Independent Order of Foresters[9]).

In my view, the present case calls for the application of the doctrine of ancillary power and its corollary that of the unoccupied field (Lord Tomlin’s third and fourth propositions in the Fish Canneries case, Attorney General for Canada v. Attorney General for British Columbia[10], at p. 118). Although in principle the abstention by the federal Parliament to exercise its exclusive legislative power does not enable the provincial legislatures to enact legislation on the subject, this is true only of what may be called the federal primary power. With respect to matters which are not strictly within such primary power but can be dealt with ancillarily, provincial jurisdiction over property and civil rights and over matters of a local nature remains unimpaired until such time as the field is occupied. In the voluntary assignments case (Attorney General for Ontario v. Attorney General for Canada[11]), a very limited scope was given to the federal primary power over bankruptcy and insolvency. However, a very wide ancillary jurisdiction was recognized in Royal Bank of Canada v. Larue[12], in the Companies’ Creditors Arrangement Act Reference[13] and in the Farmers’ Creditors Arrangement Act Reference[14]. Similarly, in Attorney General of Quebec v. Attorney

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General of Canada[15], this Court recognized the validity of federal legislation dealing with costs in criminal prosecutions brought in provincial courts, though it refused to accept that criminal law or criminal procedure in the strict sense were involved.

We heard submissions concerning s. 10 of the Interest Act (the right of a borrower after five years to tender the capital with three months’ further interest in lieu of notice) and I did also give consideration to the Small Loans Act and its preamble (S.C. 1939, c. 23, now R.S.C. 1970 c. S-11). In the circumstances, it appears to me preferable to make no observations with respect to those legislative provisions which are not presently at issue.

In my opinion, s. 8 of the Interest Act is valid federal legislation in respect of interest because, although it does not deal exclusively with interest in the strict sense of a charge accruing day by day, it is, insofar as it deals with other charges, a valid exercise of ancillary power designed to make effective the intention that the effective rate of interest over arrears of principal or interest should never be greater than the rate payable on principal money not in arrears.

I would dismiss the appeal with costs but there should be no costs to or against the intervenants.

Appeal dismissed with costs.

Solicitors for the appellant: Robins & Partners, Toronto.

Solicitors for the respondent: Morris, Bright & Rose, Toronto.