July 15, 2009
By Robert Kennaley
McLauchlin & Associates

Robert KennaleyYou have completed your contract and sent your invoice, but no payment appears to be forthcoming. Upon reflection, you remember that your invoice references a healthy rate of interest, which you think can work in your favour. Stating a rate of interest on an invoice, however, might not be effective. Recovering a contractual rate of interest in the event of continued non-payment, or a dispute, can help off-set collection costs. Accordingly, it is important to understand how interest rates will, and will not, apply in particular circumstances.  

It is not sufficient to simply insert the interest rate on an invoice.  Rather, in order to receive a specified rate of interest, the interest rate should be expressly provided for in the contract. Further, section 4 of the federal Interest Act states that the rate of interest must be expressed on a per annum basis in a contract, and that, if it is not, the applicable interest may generally not exceed five per cent per annum, or year. Accordingly, stating in a construction, supply or maintenance contract that interest will be charged at a rate of five per cent per month will not be effective, as a “per annum” rate must be specified.    

It should also be noted that section 347 of the Criminal Code of Canada establishes a criminal rate of interest of, currently, 60 per cent per annum. You are therefore prohibited by law from charging a rate of interest in Canada which exceeds this amount.

The Interest Act recognizes that interest might be payable by law, even if the contract is silent on the issue. It recognizes, for example, that the Courts of Justice Act in Ontario specifies a pre-judgment interest rate to be paid on judgments obtained by parties through litigation in the Ontario courts. These rates, however, are nominal in comparison to what you might otherwise be entitled to charge under your contract. Since January of 2008, for example, the annual rates in Ontario have varied between 0.5 per cent and 4.8 per cent.  

The courts will generally recognize a contractual rate of interest, so long as it is applied on a per annum basis and is not at, or above, the criminal rate. In other words, if the Courts of Justice Act would only give you 0.5 per cent per annum, but your contract states you are to be paid 12 per cent per annum, the courts will generally allow the contractual rate of 12 per cent to apply. The difference, of course, can be very significant.

The Ontario courts might also award compound interest, but only if it can be shown that the parties agreed that, and how, the debt would bear compound interest as damages for default of payment. Interest is compounded, of course, as the applicable rate is applied not only to the principal amount owing, but also to the interest that has previously built up over time. The easiest way to show that the parties agreed to the compounded rate is to expressly provide for it in the contract. The courts, in fact, will rarely apply compound interest where the contract does not expressly provide for it.  

Providing for interest at a rate which exceeds the relatively nominal rates established by the Courts of Justice Act can better protect your position in the event of a dispute. Further, if you state that the interest will be compounded (for example, monthly), your position will be even further strengthened should litigation be necessary. Given the amount of time it can take to bring litigation through our court system, the interest can add up quickly and put significant pressure on the other side during the process.  

In summary, we suggest that you always include a provision in the contract which specifies the interest rate to be applied on a per annum basis. Also, if you wish the interest be compounded, you should make sure to include a provision in the contract which expressly provides this. (Whether or not you want to state this might be a business decision, based on how you believe your clients will react to the requirement). 
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America.  He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.