Supreme Court of Canada
Immeubles Fournier Inc. et al. v. Construction St-Hilaire Ltée, [1975] 2 S.C.R. 2
Date: 1974-04-29
Les Immeubles Fournier Inc. and Rimouski Transport Limitée (Defendants) Appellants;
and
Construction St-Hilaire Limitée (Plaintiff) Respondent.
1974: February 15; 1974: April 29.
Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.
ON APPEAL FROM THE COURT OF QUEEN’S BENCH, APPEAL SIDE, PROVINCE OF QUÉBEC
Mortgages—Penal clause—Invalidity—Interest Act, R.S.C. 1952, c. 156, s. 8—Civil Code, Art. 1077.
Appellant Les Immeubles Fournier Inc. owed respondent Construction St-Hilaire Limitée a balance of $313,033.70 under terms of a contract for the construction of certain buildings. It gave the latter a hypothec and the other appellant, Rimouski Transport Limitée, bound itself jointly and severally as guarantor. The deed included an undertaking to pay the sum owed before May 1, 1967, with interest at six per cent from December 30, 1966. A clause further provided that the “borrower”, as the debtor company was described, would be required to pay an “indemnity” of fifteen per cent if it went bankrupt etc. or if the “lender”, the creditor, that is, instituted legal proceedings under the contract. An extension until June 23, 1967 was granted. On the appointed day, however, the creditor was informed that payment would not be made until June 29. On that date the bank informed the creditor that it had the funds required for payment, provided the bank was subrogated to the claim of respondent. Draft deeds were prepared and their contents discussed. On July 10 an action was instituted by respondent. The defendant, appellant Les Immeubles Fournier Inc. and its guarantor, Rimouski Transport Limitée, made tender and payment into Court of the principal, interest and costs owed, but without the fifteen per cent stipulated in the penal clause. This tender was held to be sufficient and the action dismissed. The Court of Appeal, ruling that Art. 1077 of the Civil Code is not a provision of public order, condemned appellants to pay the indemnity of fifteen per cent with interest and costs. They accordingly appealed to this Court.
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Held (Martland, Judson, Ritchie and de Grandpré JJ. dissenting): The appeal should be allowed.
Per Laskin C.J. and Spence, Pigeon, Dickson and Beetz JJ.: Appellants have shown no error in the reasons of the Court of Appeal. Their factum does not establish that respondent had “formally undertaken” to sign a subrogatory release, as the trial judge believed. Under the general law the parties may by means of a penal clause determine as they see fit the amount of damages which the debtor will have to pay if he fails to carry out his obligation, or delays in doing so. Art. 1077 of the Civil Code does not rule out the stipulation of a compensation to be paid by a debtor in default of paying a sum of money.
It is only by the force of s. 8 of the Interest Act R.S.C. 1952, c. 156, that the penal clause stipulated by respondent could be set aside as null and void. This provision does not appear to have been considered at first instance or on appeal, this being the reason that a re-hearing of the present appeal was ordered. It deals not only with interest proper but with any “fine or penalty or rate of interest that has the effect of increasing the charge on any such arrears beyond the rate of interest payable on principal money not in arrears”. This wording is thus counter to the limitation which respondent seeks to introduce by interpretation, namely that it would only apply to an amount which increases on a daily basis. The intention to prohibit the recovery of any form of additional payment is made all the more obvious by subs. 2, which expressly authorizes a stipulation 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 arrear”.
Respondent did not challenge the constitutionality of s. 8 of the Interest Act, although informed expressly by the order for a re-hearing that this provision would be the main object of the argument. Consequently, no notice was given to the Attorney General of Canada and the Attorneys General of the provinces. The Court cannot therefore decide here on the extent of the federal power regarding interest. It must construe s. 8 irrespective of the argument that respondent seeks to make from the provisions of the British North America Act, and accordingly the constitutional question must be left completely open.
Construing s. 8 by itself the words “penalty” and “fine” cannot be limited to what would be interest,
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that is to something accruing on a daily basis. The indemnity of 15 per cent cannot therefore be recovered.
Per Martland, Judson, Ritchie and de Grandpré JJ., dissenting: The philosophy of the Interest Act is simple: absolute freedom of contract exists, and the Act intervenes, to fix the interest rate at five per cent, only where there has been no agreement. There are only two exceptions to this general principle: those of s. 4 and s. 6. In these two exceptional cases, special provisions apply. This, moreover, was how the legislation now before the Court came into being. From the time the usury laws were abolished freedom of contract has been the rule, and the legislator has only intervened in specific problem situations. Such freedom of contract with respect to interest, introduced over a hundred years ago and unchanged since that time, has been and continues to be given full judicial recognition. Seen in this light ss. 6, 7, 8 and 9 of the Interest Act must be read as a whole, and any other approach does violence to the spirit of this legislation, by extending it into an area not properly its own. Even if an agreement such as that of clause 6 should be governed by s. 8 of the Interest Act, the words used in that section do not support a dismissal of the claim made by respondent. The proper subject of the Interest Act is precisely the cost of borrowed money, payable on a daily basis, and nothing else. Even if the history of the statute could be left out of account, the fines or penalties in question in s. 8 can only be charges partaking of the nature of interest, that is, increasing on a daily basis. They cannot extend to damages fixed contractually by the penal clause, damages which are settled once and for all, and which do not go on increasing day by day.
Moreover, for s. 8 to apply, two things must be true: (1) principal money not in arrears must still be owing on the day of default; (2) this payment must increase “the charge on any such arrears”; a penal clause is not a charge on arrears, but purely and simply an amount of damages liquidated in advance, arbitrarily, in accordance with an agreement. These two conditions do not exist here.
[The Attorney General of Ontario v. Barfried Enterprises, [1963] S.C.R. 570; Standard Loan Co. v. Faucher (1913), 19 R.L.n.s. 196 distinguished. London Loan & Savings Co. v. Meagher, [1930] S.C.R. 378; Asconi Bldg. Corp. v. Vocisano, [1947] S.C.R. 358; Coupland Acceptance Ltd. v. Walsh, [1954] S.C.R. 90; Levy v. Bookspan, [1931] 2 D.L.R. 1007; Tapio v. Kajander (1965), 48 D.L.R. (2d) 302;
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Glinert v. Kosztowniak, [1972] 2. O.R. 284; Franklin v. Ciceri (1930), 69 C.S. 1; Attorney General for Canada v. Attorney General for British Columbia, [1930] A.C. 111; The Attorney General of Quebec v. Attorney General of Canada, [1945] S.C.R. 600 referred to]
APPEAL from a judgment of the Court of Queen’s Bench, Appeal Side, Province of Quebec, reversing a judgment of the Superior Court. Appeal allowed, Martland, Judson, Ritchie and de Grandpré JJ. dissenting.
P.A. Gendreau, for the defendants, appellants.
M. Hickson, for the plaintiff, respondent.
The judgment of Laskin C.J. and Spence, Pigeon, Dickson and Beetz JJ. was delivered by
PIGEON J.—In the early part of February 1967 appellant, Les Immeubles Fournier Inc., owed respondent, Construction St. Hilaire Limitée, a balance of $313,033.70 on the construction of certain buildings. To avoid the registration of a builder’s privilege, it gave the latter a hypothec and the other appellant, Rimouski Transport Limitée, bound itself jointly and severally as guarantor. The deed includes an undertaking to pay the sum owed before May 1, 1967, with interest at six per cent from December 30, 1966. A clause further provides that the “borrower”, as the debtor company was described, will be required to pay an “indemnity” of 15 per cent if it “goes bankrupt, etc.” or if the “lender” (the creditor, that is) “institutes legal proceedings under this contract…”
An extension until June 23 was granted, as acknowledged in a letter from the creditor dated June 15. On the appointed day, however, the latter only received another letter informing it that payment would be made on the 29th. Then, on that date, a letter from the Provincial Bank informed it that the Bank had the funds required for payment, provided the Bank was subrogated to the claim of respondent. Draft deeds were
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prepared and their contents discussed. Finally, on July 10, an action was instituted in which Les Immeubles Fournier Inc. and its guarantor Rimouski Transport Limitée made tender and payment into court of the principal, interest and costs owed, but without the 15 per cent stipulated in the penal clause.
The action was dismissed in the Superior Court, and the lender held to be sufficient. The principal reasons for the judgment were as follows:
[TRANSLATION] WHEREAS as early as June 29, 1967, on signature of a subrogatory release in favour of the Provincial Bank of Canada, plaintiff could then have received payment of all sums which were owed to it at the time;
WHEREAS a debtor is not liable for damages, a fortiori for the performance of a penal clause, when the non-performance of the principal obligation or the delay in such performance proceeds from a cause which cannot be imputed to him: 1071 C.C.;
WHEREAS the time that elapsed between June 29 and July 17 may not be imputed to defendants, since the money was always available provided plaintiff agreed to sign the subrogatory release which it had formally undertaken to sign;
In the Court of Appeal Turgeon J.A., with the concurrence of his colleagues, stated:
[TRANSLATION] With respect, I cannot subscribe to the view of the trial judge. Appellant was obliged, provided it received payment, to sign a pure and simple release and to grant a discharge of the hypothec. The debtors were bound to pay the cost of a notarial release and discharge, and to tender same to appellant for signature with the payment. Appellant’s witness Claude St. Hilaire said that he was authorized by resolution of the board of directors to sign the release and discharge. As for the two promissory notes which had been discounted at the Bank with the consent of the debtors, there was an obligation to repay the National Bank with the money obtained by the payment, which was done after the tender.
That is not all. The Bank, without right, insisted that appellant sign a subrogatory release in its favour. The third party who pays another’s debt may certainly require the creditor to receive payment of that debt, but he may not require the latter to subrogate
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him in his rights. That is why the second paragraph of Art. 1155 of the Code provides for subrogation by the debtor himself, allowing him to subrogate the third party who pays his debt, and this subrogation takes effect without the concurrence of the creditor.
Holding that no “monetary obligations under a loan of money” were involved, that art. 1040c of the Civil Code was therefore not applicable in the circumstances, and that the provisions of art. 1077 were not provisions of public order, the Court of Appeal went on to set aside the judgment of the Superior Court and condemned the debtor and its guarantor to pay the balance owing, namely the indemnity of 15 per cent amounting to $48,429.31 with interest and costs, as Construction St. Hilaire Limitée had received the amount paid into Court.
In my opinion appellants have shown no error in these reasons of the Court of Appeal. In particular, their factum does not establish that Construction St. Hilaire Limitée had “formally undertaken” to sign a subrogatory release, as the trial judge believed. The comments of certain French writers on art. 1153 C.N. were inappropriately cited in support of the argument that art. 1077 C.C. is a provision of public order. Here is what P.B. Mignault says (Droit civil canadien, Vol. V, pp. 426-427):
[TRANSLATION] Under the general law the parties may by means of a penal clause determine as they see fit the amount of damages which the debtor will have to pay if he fails to carry out his obligation, or delays in doing so.
Is the same rule applicable to obligations for sums of money? May the parties, by means of a penal clause, raise or lower the amount of damages?
They undoubtedly may, since under Article 1785 the rate of interest may be fixed by agreement between the parties, with the exception of certain cases mentioned in that article. In theory under our system, any rate of interest may legally be agreed on; if none is stipulated, the applicable rate will be the legal rate, fixed by law at six per cent per annum.
The answer would be different under French law; in France, since the law of September 3, 1807, the rate of interest that may be agreed on has been limited: under that law any clause which increases it
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over the legal rate, that is to say five per cent in civil matters, or six per cent in commercial transactions, is classified as usurious and as such is void. Of course, that does not prevent a penal clause from being valid when it is favourable to the debtor, that is when it lowers the compensation fixed by the law.
May a creditor, in addition to the interest on the sum owed, stipulate for example that a certain sum will be paid for costs of collection? In Leduc v. Gourdine, 10 L.N., p. 161, Wurtele J. held that such a stipulation is illegal. However, I do not see how freedom of contract can be limited in this way. The learned judge based his finding on Art. 1077, but that article does not seem to me to rule out stipulation of a penal clause, or agreeing on the compensation to be paid by a defaulting debtor. (In France such a clause would be void as usurious, but as usury is not prohibited by our law the argument made by writers does not apply here).
Among the French writers cited by appellants is Baudry-Lacantinerie, who says in para. 508 of his Traité des Obligations (Vol. 12, 3rd ed., pp. 536-537):
[TRANSLATION] 508. But may the parties, by making special provision against a specific loss other than that resulting naturally to the creditor from the loss of his capital and from the risk incurred by him until it is repaid (apart, moreover, from bad faith or gross neglect of the debtor), stipulate in a penal clause for an amount in addition to interest on overdue payment?…
A number of rightly respected writers conclude that they may…
However, other equally respected writers take the opposite view, and we feel this latter opinion follows necessarily from the text and policy of the law: Art. 1153 states that “The damages resulting from delay in the payment of a sum, to which the debtor is liable, never consist but of the award of interest at the rate fixed by law, saving the special rules applicable to commerce and suretyship”. The principle thus admits only of the exceptions provided by the legislature. Moreover, the purpose of the provision is to prevent difficulties relating to determination of damage. This purpose would be defeated if the parties could, by providing against a specific loss, stipulate a penalty in addition to the interest allowed by law, for the courts would be obliged to consider whether such loss had been sustained. They would even, at least in a civil case, so as to thwart the fraud of an usurer, be
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required to consider whether the penalty stipulated exceeds the amount of the damage, otherwise it would be a simple matter to evade the provisions of Art. 1 of the law of September 3, 1807.
It may be noted in passing that the word “never” underlined by Baudry-Lancantinerie is not found in art. 1077 C.C. One may also note the following statement in Laurent (Vol. 16, p. 377, No. 317):
[TRANSLATION] The 1807 law was legislation of public order, hence any derogation therefrom was an unlawful agreement; it follows that individuals could not, directly or indirectly, by adopting a penal clause, stipulate for interest in excess of the legal rate.
Accordingly, it is only by the force of s. 8 of the Interest Act (R.S.C. 1952, c. 156, now R.S.C. 1970, C. I-18) that the penal clause stipulated by respondent could be set aside as null and void. In view of the special importance of this question relating to a federal enactment which does not appear to have been considered at first instance or on appeal, a re-hearing of the present appeal was ordered. The provision relied upon by appellant is part of a group of sections under the heading “Interest on moneys secured by mortgage on real estate”. The first three read as follows:
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.
7. Whenever the rate of interest shown in the statement mentioned in section 6 is less than the rate of interest that would be chargeable by virtue of any other provision, calculation or stipulation in the mortgage, no greater rate of interest shall be chargeable, payable or recoverable, on the principal money advanced, than the rate shown in such statement.
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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.
Is the indemnity of 15 per cent claimed by respondent a penalty within the meaning of this provision which does not appear to have been considered either at first instance or on appeal? The two Courts were agreed in treating the stipulation in question as a “penal clause”. At the conclusion of the reasons of Turgeon J.A. there is the following sentence:
[TRANSLATION] In the case at bar I consider we are dealing with a penal clause, which Article 1131 of the Civil Code defines as a secondary obligation by which a person, to assure the performance of the primary obligation, binds himself to a penalty in case of its inexecution.
Respondent argued in its factum and at the hearing that because this is a federal statute on interest, s. 8 could only apply to a price which increases on a daily basis. It cited inter alia the following passage from the reasons of Judson J., dealing with the constitutionality of an Ontario statute against harsh loans (Attorney General of Ontario v. Barfried Enterprises Ltd. at p. 575):
…The foundation for the judgment under appeal is to be found in the adoption of a wide definition of the subject-matter of interest used in the Saskatchewan Farm Security Act reference. The judgment of this Court in that case was affirmed in the Privy Council. Interest was defined:
In general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.
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This is substantially the definition running through the three editions of Halsbury. However, in the third edition (27 Hals., 3rd. ed., p. 7) the text continues:
Interest accrues de die in diem if payable only at intervals, and is, therefore, apportionable in point of time between persons entitled in succession to the principal.
The day-to-day accrual of interest seems to me to be an essential characteristic. All the other items mentioned in The Unconscionable Transactions Act except discount lack this characteristic. They are not interest. In most of these unconscionable schemes of lending the vice is in the bonus.
Here it should be noted that the wording of s. 8 of the Interest Act deals not only with interest proper but with any “fine or penalty or rate of interest that has the effect of increasing the charge on any such arrears beyond the rate of interest payable on principal money not in arrears.” The wording of the enactement is thus counter to the limitation which respondent seeks to introduce by interpretation. The intention to prohibit recovery of any form of additional payment is made all the more obvious by subs. 2, which expressly authorizes a stipulation 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”.
In London Loan & Savings Co. v. Meagher, this Court had to consider whether a bonus, paid to the lender at the time of loan under a separate agreement out of the princiapl sum guaranteed by the mortgage, was contrary to the provisions of the Interest Act. The only point at issue was the application of s. 6, as s. 8 relates only to amounts stipulated on “arrears”. It was held that even if the bonus was regarded as the equivalent of a reduction in the amount advanced, s. 6 had not been violated. Stating the unanimous opinion of the Court, Smith J. said (at pp. 381 and 384):
I am of opinion that the payment of the full amount of $30,000 by the mortgagee and payment of the bonus by the mortgagor’s cheque, as arranged, had no
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different legal effect from payment of that bonus by simply deducting and retaining it from the loan…
The Act, however, as it stands does not aim at controlling or limiting the rate of interest or recompense that lenders may exact for loans, and has no such effect if the last part of section 6 is complied with, except that no greater rate can be exacted than the rate mentioned in the statement thereby called for. The aim is to prevent the collection of interest provided for in the mortgage by plans described in section 6, which do not disclose to the ordinary borrower the real rate of interest being exacted by such plans. So far, however, as this Act is concerned, any rate of interest may be provided for by such plans, and enforced, if that rate is disclosed by a statement in the mortgage of the principal money and of the rate of interest, as provided in the latter part of section 6.
There is, therefore, in the mortgage in question, no offence against the spirit of the Act, because it does not fail to disclose to an ordinary borrower what he is to pay for the loan, though he might not realize what rate per cent. the $3,000 cash in advance, added to the 7½ per cent., would amount to. The $3,000 cash payment might, however, give him a clearer idea of what the loan was costing him than if provided for in terms of an added rate of interest.
Though this passage refers to the Act there in question in general terms, the context makes it clear that in fact only the provision in dispute, i.e. s. 6, was being considered. It may also be noted that in Asconi Bldg. Corp. v. Vocisano this Court based itself only on s. 6 in deciding in the same way as in London Loan with respect to a bonus.
In another case, Coupland Acceptance Ltd. v. Walsh, which this time dealt with s. 8, this Court held that additional interest at the rate of two per cent per month, stipulated to be payable after the due date, was not recoverable. Speaking for the Court, Kellock J. said (at p. 94):
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The respondents contend in any event, however, that the appellant’s claim is to be reduced by the sum of $2,126.25, representing interest at the rate of 2 per cent per month for the two months following the maturity of the Kerbel mortgage to the time of its payment off, as recovery of any amount beyond the rate of 5 per cent payable before maturity is prohibited by s. 8 of the Interest Act, R.S.C. 1927, c. 102. To this the appellant objects that the payment of this amount is not to be ascribed to any moneys advanced by it but that the mortgagor, who provided the sum of $8,500 over and above the amount advanced by the appellant, must be taken to have made this payment. I think this objection is well taken but nonetheless, following the terms of s. 8, the appellant may not rely upon the provisions of the Kerbel mortgage with respect to interest beyond a rate of 5 per cent from May 9, 1951.
No reference was made to the London Loan case; this was undoubtedly because no one thought it was relevant, it was cited in appellant’s factum.
In Levy v. Bookspan, Wright J., holding that London Loan was inapplicable, invalidated under s. 8 of the Interest Act a clause reading as follows (at p. 1009):
And also it is agreed that… in the event of a sale or foreclosure under the provisions of this mortgage a bonus of three months’ interest shall be added to the mortgage-debt.
Similar decisions were handed down in Tapio v. Kajander and Glinert v. Kosztowniak.
Quebec case law contains only one decision on the point. It is to the same effect: Franklin v. Ciceri. There, Boyer J. held invalid under s. 8 of the Interest Act a clause in a deed of hypothec stipulating an indemnity in the event of sale by court order, receipt of the principal before maturity, or legal proceedings.
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In its factum and at the hearing respondent relied on the decision of the Court of Appeal of Quebec in Standard Loan Co. v. Faucher. That decision does not touch the point at issue. The only point which it considered was whether a reference to the rate of interest payable was in accordance with the requirements of s. 6 of the Interest Act. It is true that in the reasons for judgment it is said, as stated by the law editor, that [TRANSLATION] “the federal Interest Act applies to the case of a hypothecary loan only in the absence of specific indication of the interest rate in the constituent instrument”. However, when the reasons stated by Gervais J. are examined it is apparent that no such conclusion was reached. Here is what he said (at p. 209):
[TRANSLATION] Respondent stated that the deed in question contained no reference to yearly or half-yearly interest, not calculated in advance; that there was no such reference to interest on the interest in the said deed; that, consequently, ss. 6, 7 and 8 of Chapter 120 of the Revised Statutes of Canada had been infringed…
Is such a reference in fact lacking here? Clearly not. The clause granting hypothec and the stipulations in the additional clauses clearly set the yearly interest rate, as well as the rate of the interest on the interest, at ten and four tenths per cent. The sections of the Interest Act above cited thus do not apply to the present case;…
Counsel for the respondent argued that, as head 19 of s. 91 of the B.N.A. Act refers only to “interest”, [TRANSLATION] “it follows that the legislative authority, on which the power to legislate on interest must be based, must remain within the compass of the subject—namely a consideration earned daily in payment of a sum of money or debt.” This contention cannot be considered without considering the ancillary doctrine and its corollary, that of the unoccupied field. These are the third and fourth propositions of Lord Tomlin in the Fish canneries case (Attorney General for Canada v. Attorney General for British Columbia, at p. 118):
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(3.) It is within the competence of the Dominion Parliament to provide for matters which, though otherwise within the legislative competence of the provincial legislature, are necessarily incidental to effective legislation by the Parliament of the Dominion upon a subject of legislation expressly enumerated in s. 91:…
(4.) There can be a domain in which provincial and Dominion legislation may overlap, in which case neither legislation will be ultra vires if the field is clear, but if the field is not clear and the two legislations meet the Dominion legislation must prevail:…
This Court applied these principles in Attorney General of Quebec v. Attorney General of Canada and 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. Taschereau J. referred to the aforementioned decision of the Privy Council and to other earlier decisions, and said (at p. 604):
It follows as a result of this jurisprudence which is applicable to the present case, that section 770 of the Criminal Code, although not being strictly legislation in relation to criminal law and procedure, is nevertheless within the competence of the Dominion of Canada, on account of its incidence upon criminal law and procedure. And in such a case, the field being occupied, the provincial legislation becomes inoperative.
It is useless to emphasize further the point that all other provincial legislation concerning fees payable to provincial employees in criminal courts, is entirely valid and competent legislation, when the Dominion, although not precluded from legislating, has refrained from taking any action.
In the case at bar respondent did not challenge the constitutionality of s. 8 of the Interest Act, although informed expressly by the order for a re-hearing that this provision would be the main object of the argument. Consequently, no notice was given to the Attorney General of Canada and the Attorneys General of the provinces, as required by Rule 18 of this Court. Counsel for respondent was further advised at
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the hearing that, in the absence of any notice, the constitutionality of the provision could not be discussed. In my view, we should not in any way here decide on the extent of the federal power regarding interest. Any adoption of a construction of s. 8 by reference to the extent of that power would, at least in the circumstances of this case, be tantamount to a decision on the extent of that power. Clearly this would be the very object of any argument on constitutionality if the issue of constitutionality were raised. In my opinion, s. 8 must consequently be construed irrespective of the argument that respondent seeks to make from the provisions of the constitution, and accordingly the constitutional question must be left completely open.
As to the construction of the section by itself, I have already indicated why it does not appear to me that the words “penalty” and “fine” can be limited to what would be interest, that is to something accruing on a daily basis. This is not a case in which the maxim noscitur a sociis should be applied, as counsel for the respondent urged us to do, relying on certain sentences found in Maxwell on The Interpretation of Statutes, 10th ed., p. 332. One needs only read the cases cited by the author to see that his statement cannot apply in the present circumstances. The suggested construction would amount to no less than depriving the words “penalty” and “fine” of any meaning, since “rate of interest” obviously includes whatever may be described as interest.
For these reasons I conclude that the appeal should be allowed, the judgment of the Court of Appeal set aside, and the jugment of the Superior Court restored with costs against respondent in all Courts.
DE GRANDPRÉ J. (dissenting)—In the circumstances, the issue is really between appellant, Les Immeubles Fournier Inc., and respondent, as appellant Rimouski Transport Ltée was only a party to the case in its capacity of guarantor.
Respondent did a considerable amount of work for appellant Fournier during the course of 1966. Fournier found itself unable to pay the
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balance of $313,033.70 owed under the contract for services, and not wanting to see the building subjected to a builder’s privilege, entered into an agreement the introductory paragraph of which reads as follows:
[TRANSLATION] In consideration of the fact that Construction St-Hilaire Ltée is within the time limit for registration of a builder’s privilege, and that it waives the right of registering a builder’s privilege as a guarantee of its claim, so as to enable the owner to obtain a first mortgage, Immeubles Fournier Inc. has agreed to grant Construction St‑Hilaire Ltée a mortgage to guarantee payment of the said amount of $313,033.70, of the interest on the said amount, and of any costs and expenditures needed for the preservation and recovery of said amount, and Les Immeubles Fournier Inc. specially assigns and mortgages to Construction St-Hilaire Ltée, which accepts through its representatives here present, to the extent of the sum owed, the following immoveables, to wit:
This agreement was signed on February 10, 1967, and gave appellant Fournier until May 1, 1967 for payment of the balance, with interest at six per cent as of December 30, 1966. It should be noted that the work had been concluded in November 1966.
The agreement contained the following stipulation:
Clause Six: INDEMNITY—If during the currency of this loan (that is to say, until the lender has received payment of all of the monies it is owed under these presents) the borrower or any other subsequent owner of the property, or of any part thereof, is declared bankrupt or makes a voluntary or forced assignment, or an authorized assignment, or files a proposal with his creditors, or if the property or any part thereof is subject to sale by the sheriff, or to any sale having the same effect, or to forced liquidation, or is expropriated, or is subject to a judgment ratifying title, or if the lender institutes legal proceedings pursuant to this contract, or if as the result of default by the borrower the lender is paid by any means other than as heretofore provided (for example, if collection of the monies owed is entrusted to an attorney at law as the result of any delay in payment by the borrower), the borrower shall pay the lender an indemnity equal to fifteen per cent (15%) of the total amount then due under this contract.
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The sum of money referred to in the agreement was not paid on May 1st, and respondent granted a few extensions for payment, until it finally instituted the proceedings herein on July 10, 1967. In addition to the principal sum, interest and costs, the action claims the sum of $48,429.31, being the 15 per cent indemnity provided for by clause six above.
While appellants made offers of payment of the principal, interest and costs, they raised three grounds of defence to the action, in the Superior Court as well as in the Court of Appeal:
—the action is premature, as appellants were not in breach of their obligations;
—article 1040c of the Civil Code should be applied, as the cost of the loan is excessive and the transaction harsh and unconscionable;
—the penal clause represented by clause six is contrary to art. 1077 of the Civil Code, and so contrary to public order.
The trial court accepted appellants’ argument on the first point. This holding was set aside by the Court of Appeal, and I concur completely with the opinion of Turgeon J.A., who spoke for the Court. One might add that appellants themselves waived this argument when they included the costs of the action in their offers of payment: if the action were premature no costs would be due.
The Court of Appeal also rejected the argument based on art. 1040c of the Civil Code. As this point was not raised in this Court, I shall not deal with it further.
With regard to art. 1077, the Court of Appeal concluded that this was not a public order provision, and that the type of penal clause represented by clause six of the agreement is perfectly valid under art. 1133 of the Civil Code. Here again I concur with Turgeon J.A., and can find no better statements of the law than those of Mignault, Droit civil canadien, vol 5, p. 427, and Faribault, Traité de droit civil du Québec, vol 7a, No. 490, p. 433.
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The real problem is to determine the scope of the Interest Act, R.S.C. 1952, c. 156 (now R.S.C. 1970, c. I-18), in particular s. 8. This point was raised in this Court for the first time, and for this reason a re-hearing before the full Court was ordered. Before the second hearing the parties were asked to indicate whether they wished to argue the question of constitutionality, but they preferred to submit the case on the record as it stood.
The relevant sections of the Interest Act are as follows:
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. R.S. c. 102, s. 6.
7. Whenever the rate of interest shown in the statement mentioned in section 6 is less than the rate of interest that would be chargeable by virtue of any other provision, calculation or stipulation in the mortgage, no greater rate of interest shall be chargeable, payable or recoverable, on the principal money advanced, than the rate shown in such statement. R.S.c. 102, s. 7.
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. R.S.C. 102, s.8.
9. If any sum is paid on account of any interest, fine or penalty not chargeable, payable or recoverable
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under section 6, 7 or 8, such sum may be recovered back, or deducted from any other interest, fine or penalty chargeable, payable or recoverable on the principal. R.S. c. 102, s. 9.
Before examining the Interest Act to determine whether, as appellants maintain, it constitutes a bar to the action, we should consider the history of this legislation.
In 1853, by 16 Victoria, c. 80, the two houses of the Canadian Legislature enacted that
(a) penalties for usury were abolished; (s. II)
(b) the interest rate was set at six per cent, and contracts and securities were void as regards any excess of interest above six per cent; (s. III)
(c) these provisions were not to apply to banks, insurance companies nor to persons or corporations authorized by law to lend money at higher rates; (s.IV).
In 1858, by 22 Victoria, c. 85, s. III of the 1853 Act was repealed, and the following two provisions, inter alia, were adopted:
2. It shall be lawful for any person or persons, other than those excepted in this Act, to stipulate for, allow and exact, on any contract or agreement whatsoever, any rate of interest or discount which may be agreed upon.
…
5. Six per cent per annum shall continue to be the rate of interest in all cases where, by the agreement of the parties or by law, interest is payable, and no rate has been fixed by the parties or by the law.
It should be noted that the exceptions referred to in s. 2 do not apply here.
In 1859, by R.S. c. 58, ss. 2 and 5 of the 1858 Act, cited above, became ss. 3 and 8 of the revision.
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In the same year (1859), the provisions of the 1853 Act of the province of Canada were adopted in substance in New Brunswick by c. 21 of 22 Victoria.
In 1868, Prince Edward Island in its turn, by c. 8 of the Statutes 31 Victoria, adopted the principles laid down in 1853 by Canada and in 1859 by New Brunswick.
In 1873, by 36 Victoria, c. 71, the Canadian Parliament adopted an Act respecting Interest and Usury in the Province of Nova Scotia. Its main provisions were as follows:
(a) in the absence of any specific provision, the normal rate would be six per cent;
(b) the rate of interest might be as high as seven per cent for a loan or forbearance of money to be secured on real estate;
(c) if other security was given, the interest could be as high as 10 per cent;
(d) interest exceeding these percentages was uncollectable.
In 1875 the Canadian Parliament, by 38 Victoria, c. 18, adopted an Act relating to Interest and Usury in the Province of New Brunswick, according to which from April 8, 1875 onwards “any person [might] stipulate for, allow and exact on any contract or agreement whatsoever made or to be performed in the province of New Brunswick any rate of interest or discount which may be agreed upon”.
In 1880 we see appearing for the first time, in 43 Victoria, c. 42, provisions which, with some changes, were to become ss. 6, 7, 8 and 9 of the Interest Act. The title of this statute was An Act relating to Interest on moneys secured by Mort-gage of Real Estate, and the relevant sections read as follows:
1. Whenever any principal money or interest secured by mortgage of real estate is by the same 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 which involves an allowance of interest on stipulated repayments, no interest whatever shall be chargeable, pay-
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able 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.
2. Whenever the rate of interest shown in the statement referred to in the next preceding section is less than the rate of interest that would be chargeable by virtue of any other provision, calculation or stipulation in the mortgage, no greater rate of interest shall be chargeable, payable or recoverable on the principal money advanced than the rate shewn in the said statement.
3. No fine or penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrear of principal or interest which shall have the effect of increasing the charge on any such arrear beyond the rate of interest payable on principal money not in arrear: Provided always, that nothing in this section contained shall have 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 arrear.
4. In case any sum is paid on account of any interest, fine or penalty not chargeable, payable or recoverable under the foregoing sections, such sums may be recovered back or deducted from any other interest, fine or penalty chargeable, payable or recoverable on the principal.
It may be worth noting that s. 3 reproduces in essence s. 97 of the Canada Joint Stock Companies’ Act, (1877), 40 Victoria, c. 43, which read as follows:
97. The Company may stipulate for, take, reserve and exact any rate of interest or discount that may be lawfully taken by individuals, or in the Province of Quebec by incorporated Companies under like circumstances, and may also receive an annual payment on any loan by way of a sinking fund for the gradual extinction of such loan, upon such terms and in such manner as may be regulated by the by-laws of the Company: Provided always, that no fine or penalty shall be stipulated for, taken, reserved or exacted in respect of arrears of principal or interest, which shall have the effect of increasing the charge in respect of arrears beyond the rate of interest or discount on the loan.
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It should be emphasized that s. 97 of the 1877 Act is part of a grouping applicable only to loan companies, and refers to interest “on the loan”, and not interest “on principal money not in arrear”.
In 1886, by 49 Victoria, c. 44, Parliament adopted an Act respecting Interest in the Province of British Columbia.
In the same year (1886), R.S., c. 127, Parliament
(1) reaffirmed the right to exact any rate of interest or discount agreed upon;
(2) set the rate of interest at six per cent where none had been fixed by the parties or by law:
(3) repeated (in ss. 3, 4, 5 and 6) ss. 1 to 4 inclusive of 43 Victoria, c. 42, with certain changes of detail, the latter being chiefly the following:
—the new s. 5 (formerly 3) began with the words “No fine or penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrear of principal or interest secured by mortgage of real estate…”;
—in the same section, the expression “peine pécuniaire” (penalty) was changed to “somme pénale”;
(4) consolidated the statutes adopted for each province over the years.
In 1889 the Act respecting Interest was amended for the Northwest Territories with respect to interest on judgment debts.
In the following year, by 53 Victoria, c. 34, s. 7 was amended to remove from its application mortgages given by corporations.
In 1894, 57-58 Victoria, c. 22 introduced a new amendment, relating this time to British Columbia, with respect to interest on judgment debts.
In 1897 a new Act, titled an Act respecting Interest, was adopted by 60-61 Victoria, c. 8, in the following form:
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Her Majesty, by and with the advice and consent of the Senate and House of Commons of Canada, enacts as follows:—
1. This Act may be cited as The Interest Act, 1897.
2. Whenever any interest is, by the terms of any written or printed contract and whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of six per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which such other rate or percentage is equivalent.
3. If any sum is paid on account of any interest not chargeable, payable or recoverable under the last preceding section, such sum may be recovered back or deducted from any principal or interest payable under such contract.
4. This Act shall not apply to mortgages on real estate.
In 1900, by 63-64 Victoria, c. 29, the legal rate was lowered from six to five per cent.
The 1906 revision (R.S.C., c. 120) codified the various statutes adopted since 1886, and since that time the Interest Act has had its present form, with regard to the provisions that concern us here. The relevant amendments enacted subsequently really consisted of
(a) creating two subsections in s. 8 (R.S.C. 1927, c. 102);
(b) replacing the expression “somme pénale” (penalty) in the first paragraph of s. 8 by the word “peine” (R.S.C. 1952, c. 156).
Before considering the effect of the Interest Act on the matter at bar, I would like to review in outline the decisions of this Court on the subject.
The Peoples Loan and Deposit Company v. Grant applied the common law principle that if an agreement has not clearly stipulated the rate of interest for the period after the due date, only
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the legal rate will be allowed.
In Lynch v. The Canada North-Westland Company, it was held that a 10 per cent penalty added on to unpaid taxes was not interest.
The following cases, decided on the same day—The Canadian Mortgage Investment Company v. W.F. Cameron and Standard Reliance Mortgage Corporation v. Lewis St. George Stubbs—established that the sole requirement of the provisions of s. 6 of the Interest Act was that the principal money advanced and the rate of interest exacted by the lender be stated, and affixing to the mortgage deed a tabulation giving a breakdown of interest and capital for each payment was held not to be necessary.
In The London Loan and Savings Company of Canada v. Robert K. Meagher, the following problem was before the Court: if at the time the loan document was signed the borrower paid a bonus of $3,000 to the lender forthwith from the monies loaned, was the latter in breach of the provisions of the Interest Act, in particular s. 6? This question was unanimously answered in the negative.
A problem of the same type arose in Asconi Building Corporation v. Dominique Vocisano, with the difference that, on receipt of the borrowed funds, the borrower immediately paid a portion of the interest in advance and paid the lender a bonus. Here again the Court unanimously concluded that the principles of the Interest Act had not been infringed.
In 1963 the Act was considered from the constitutional standpoint in The Attorney General for Ontario v. Barfried Enterprises Ltd.. In essence, the decision of the Court was that the
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Interest Act should be strictly construed and limited to interest qua interest, with the result that provincial legislation on unconscionable transactions was held to be perfectly valid.
Once again, in Kilgoram Hotels Limited et al. v. John Samek et al., freedom of contract was upheld, with the Court holding that a mortgage which clearly stated the principal amount borrowed and the rate of interest, and which noted that payments were to be applied to interest first, and then to principal, did not fall within the scope of s. 6.
This review would be incomplete without reference to Coupland Acceptance Limited v. Edwin Alexander Walsh. I shall discuss that case in a moment.
I turn again to the contention of appellants that the Interest Act, in particular s. 8 of that Act, constitutes a bar to respondent’s action with respect to the 15 per cent indemnity stipulated in clause 6 of the agreement. In my opinion this ground cannot be accepted.
The philosophy of the Interest Act is simple: absolute freedom of contract exists, and the Act intervenes, to fix the interest rate at five per cent only where there has been no agreement.
I see only two exceptions to this general principle:
—the first (s. 4), applies to all arrangements which are not mortgages on real estate, whenever the interest is made payable at a percentage per day, week or month, or at any rate or percentage for any period less than a year;
—the other (s. 6), applies to mortgages on any of the plans referred to in the section, the underlying idea being the blending of principal and interest.
In these two exceptional cases, special provisions apply. As to the remainder, once again,
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the Act recognizes absolute freedom of contract.
This, moreover, was how the legislation now before the Court came into being, and it is for this reason that I have thought it advisable to deal with the successive legislative enactments at some length. It is clear that from the time the usury laws were abolished freedom of contract has been the rule, and that the legislature has only intervened in specific problem situations. In the present case, I should like to adopt the following remarks from an article in 18 Revue du Notariat, at p. 166:
Formerly building societies and individuals stipulated in mortgage deeds wherein capital and interest were blended, that if payments were not made at the due date the debtor would have to pay, over and above these payments, a predetermined, fixed fine. Such fines may no longer be stipulated for:
In its decisions our Court has from the first applied this philosophy. We need only read the decisions to which I referred briefly above to see that such freedom of contract with respect to interest, introduced over a hundred years ago and unchanged since that time, has been and continues to be given full judicial recognition.
Seen in this light, ss. 6, 7, 8 and 9 must, and I say this with all due respect for the contrary opinion, be read as a whole. Indeed, the very wording of s. 9 suggests such method of construction, and any other approach does violence to the spirit of this legislation, by extending it into an area not properly its own.
This is the proposition to be found in the decision of this Court in London Loan & Savings Co. of Canada v. Meagher. It is true that it was not strictly necessary to decide the point in that case. However, the decision asserts the proposition at least by implication, in quoting the four sections now under consideration, and the quotation corresponds to those to be found
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in the factums of appellant and respondent. It follows, therefore, that the matter in issue was at least presented in that light, particularly as the trial decision refers in passing to s. 8 of the Act.
The decision in Vocisano adopted the conclusions of the Meagher decision without discussion.
It is true that in Coupland Acceptance Limited v. Edwin Alexander Walsh, Kellock J., for the Court, said the following at p. 94:
The respondents contend in any event, however, that the appellant’s claim is to be reduced by the sum of $2,126.25, representing interest at the rate of 2 per cent per month for the two months following the maturity of the Kerbel mortgage to the time of its payment off, as recovery of any amount beyond the rate of 5 per cent payable before maturity is prohibited by s. 8 of the Interest Act, R.S.C. 1927, c. 102. To this the appellant objects that the payment of this amount is not to be ascribed to any moneys advanced by it but that the mortgagor, who provided the sum of $8,500 over and above the amount advanced by the appellant, must be taken to have made this payment. I think this objection is well taken but nonetheless, following the terms of s. 8, the appellant may not rely upon the provisions of the Kerbel mortgage with respect to interest beyond a rate of 5 per cent from May 9, 1951.
As to this, I would make the following observations:
(1) the sum of $2,126.25 was not in fact deducted from the amount for which appellant was given priority over respondents;
(2) the interest was reduced to five per cent only after the payment by appellant to Kerbel, that is on May 9, 1951;
(3) this question had not been discussed by appellant in its factum, as its reference to the Meagher case applied only to the bonus of $6,000;
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(4) with respect to the interest of two per cent per month, respondent had alleged in its factum both s. 8 of the Interest Act and the principles of equity applicable in Ontario;
(5) the real questions involved were entirely different, as appears from the headnote; this question of the two per cent monthly interest was minor and the whole of ss. 6 to 9 does not appear to have been considered.
For these reasons I do not feel I should follow the Coupland case in this instance, and I prefer to rely on the decision in Meagher.
Furthermore, even if an agreement such as that before the Court should be governed by s. 8 of the Interest Act, it is my opinion that the words used in that section do not support a dismissal of the claim of $48,429.31 made by respondent. The proper subject matter of the Interest Act is precisely the cost of borrowed money, payable on a daily basis, and nothing else. Even if the history of the statute could be left out of account, the meaning of the words “fine” and “penalty” used in the section is necessarily dependent on the key word, the noun “interest”. The fines or penalties in question can only be charges partaking of the nature of interest, that is, increasing on a daily basis. They cannot extend to damages fixed contractually by the penal clause, damages which are settled once and for all, and which do not go on increasing day by day.
This was the conclusion arrived at by this Court in Barfried. If appellants’ submissions are valid, and s. 8 of the Interest Act should be given the interpretation they suggest, the Bar-fried case was wrongly decided, and the Ontario legislation impugned in that case should not have been upheld. However, I believe the Bar-fried case was rightly decided, and I adopt the conclusions of the majority judges in that case. I shall not repeat them here.
Moreover, what is meant by s. 8, if not a payment the effect of which is to increase the charge on any such arrears beyond the rate of interest payable on principal money not in
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arrears? Quite apart from any other consideration, for s. 8 to apply two things must be true:
(1) principal money not in arrears must still be owing on the day of default; as to this, it should be noted
(a) that s. 7 refers to principal money “advanced” and s. 8 to principal money “not in arrears”; Parliament having used two different expressions, we are thus dealing with two different situations;
(b) that the 1877 statute, from which s. 8 is derived, also refers to the loan, and not the arrears; two distinct wordings, and so two different situations;
(2) this payment must increase “the charge on any such arrears”; a penal clause is not a charge on arrears, but purely and simply an amount of damages liquidated in advance, arbitrarily, in accordance with an agreement.
These two conditions do not exist here.
Two words before concluding with this aspect of the issue. Subsection (2) of s. 8 was necessary, taking into account common law principles, if the creditor wished to obtain from his debtor, after partial default, a rate of interest exceeding the legal rate; otherwise the rule applied by our Court in Grant, cited above, would have limited the creditor’s entitlement to this legal rate. Further, if appellants are correct, a debtor who settles in advance of the due date must pay an indemnity of three months’ interest (s. 10), whereas a defaulting debtor would not have to pay any indemnity; Parliament must be taken to have been very kind indeed to defaulters.
For all these reasons, based on the philosophy, history and wording of the Interest Act, I conclude that the submissions of appellants on this point cannot be accepted.
It is thus unnecessary that I go one step further and consider that Act in the light of principles of construction proceeding from the division of legislative authority in Canada. Had
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I done so, my point of departure would have been the following passage from Falconbridge, Law of Mortgages of Land, 3rd ed., 1942, at p. 646:
Mortgages, generally speaking, come within “property and civil rights in the province” (c), and for the present purpose difficulty arises only where interest and mortgages impinge on each other. The natural division between the legislative authority of the Dominion and that of the provinces would appear to be (1) to assign to the Dominion the power to legislate in relation to usury and the rate of interest generally, including the right to require that the rate of interest shall be stated clearly in a mortgage securing the repayment of a loan with interest and the power to prescribe the rate of interest payable in cases where the rate is not specified in a mortgage, and (2) to assign to the provinces the power to legislate in relation to the time and terms of redemption of a mortgage, including the power to provide upon what terms a mortgage shall be redeemable after a given period or after maturity, even though the terms prescribed involve the payment of interest in lieu of notice.
I would dismiss the appeal with costs.
Appeal allowed with costs in all Courts, MARTLAND, JUDSON, RITCHIE and DE GRANDPRÉ JJ. dissenting.
Solicitors for the plaintiffs, appellants: Gendreau & Pelletier, Rimouski.
Solicitors for the defendant, respondent: Rivard, Hickson, Sirois & Lemieux, Quebec.
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