Pizzey v. Crestwood Lake Ltd., 2004 CanLII 36108 (ON CA)

Pizzey et al. v. Crestwood Lake Limited et al. [Indexed as: Pizzey v. Crestwood Lake Ltd.]

69 O.R. (3d) 306

[2004] O.J. No. 246

Docket Nos. C38601 and C38602

Court of Appeal for Ontario

Weiler, Laskin and Goudge JJ.A.

January 30, 2004

*Application for leave to appeal to the Supreme Court of Canada was filed October 21, 2004, and submitted to court January 24, 2005.

Bills of exchange -- Promissory note -- Interest -- Note bearing interest "at the rate of 10 per cent per annum calculated semiannually not in advance" -- Note not stipulating interest rate after maturity -- Prejudgment provisions of Courts of Justice Act applying to fix amount of interest -- Bills of Exchange Act, R.S.C. 1985, c. B-4, s. 133 -- Interest Act, R.S.C. 1985, c. I-15, s. 3 -- Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 128(1), (4)(g), 130.

Debtor and creditor -- Interest -- Promissory note bearing interest "at the rate of 10 per cent per annum calculated semiannually not in advance" -- Note not stipulating interest rate after maturity -- Prejudgment provisions of Courts of Justice Act applying to fix amount of interest -- Bills of Exchange Act, R.S.C. 1985, c. B-4, s. 133 -- Interest Act, R.S.C. 1985, c. I-15, s. 3 -- Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 128(1), (4)(g), 130. [page307]

In 1989, the Pizzey family sold its shares in Crestwood Lake Limited to the St. Pierre family for $1.25 million. The purchase price was paid in part by a promissory note bearing interest "at the rate of 10 per cent per annum calculated semiannually not in advance". The note provided that interest would be calculated from March 8, 1990 to the date of maturity, March 8, 1995"when the total amount of principal and interest shall be fully due and payable". The note made no mention of interest after maturity. Crestwood guaranteed payments of the promissory note and gave the Pizzeys a $750,000 collateral mortgage on the land as security for the guarantee. In substance, the terms of the mortgage and the terms of the note were identical with one exception: the standard charge terms incorporated into the mortgage provided for interest at 10 per cent annually "as well after as before maturity".

In 1993, the St. Pierres sued the Pizzeys to set aside the promissory note and mortgage, and the Pizzeys sued to enforce the note and mortgage. Kent J. dismissed the claim to set aside the note and mortgage but found the Pizzeys liable for damages, which could be set off against the outstanding balance. The default under the note and the mortgage continued and, in September 1999, the Pizzeys brought a mortgage action. In their defence, the St. Pierres took the position that after the maturity date of the note in March 1995, interest accrued on the outstanding balance at only 5 per cent annually. The Pizzeys then sought leave to discontinue their action and, instead, to appoint a receiver and manager over the trailer park land. The St. Pierres, in turn, brought a motion to determine whether the post-maturity rate of interest on the balance owing under the promissory note was 5 per cent or 10 per cent. These two proceedings were heard by Sills J., who found that the "sole debt instrument" was the promissory note and, therefore, the terms of the note dictated the rate of interest after maturity. He also found that interest on the note after maturity was payable by law under s. 133(b) of the Bills of Exchange Act. Because that section did not specify a rate of interest, s. 3 of the Interest Act filled the gap by specifying a rate of 5 per cent. The Pizzeys appealed; the amount at stake was approximately $580,000.

Held, the appeal should be allowed.

Per Laskin J.A. (Goudge J.A. concurring): The trial judge found that the St. Pierres' debt was found in the note. There was no basis to reverse that finding and it was supported by the documentation. That left the central question about the application of s. 3 of the Interest Act.

Section 133(b) of the Bills and Exchange Act provides that when a bill, which, pursuant to s. 186(1), includes promissory notes, is dishonoured, the measure of damages includes interest after maturity. But s. 133(b) does not specify a rate of interest. The trial judge applied the 5 per cent rate from s. 3 of the Interest Act. This was an error in law for two reasons. First, this conclusion did not take into account modern provincial prejudgment interest legislation, namely, in Ontario's case, ss. 128 to 130 of the Courts of Justice Act. These provisions applied notwithstanding s. 128(4)(g), which provides that interest shall not be awarded under s. 128(1) where it was "payable by a right other than under this section". An interest provision such as s. 133(b) of the Bills of Exchange Act does not provide either a rate or method of calculation and was not a "right other than under" s. 128(1). Section 133(b) could coexist with s. 128(1) of the Courts of Justice Act. The exclusion of s. 128(4)(g) applies only when the "other right" contains a rate of interest or method of calculation more appropriate than or inconsistent with s. 128(1) of the Courts of Justice Act. The second reason was that the trial judge's conclusion failed to give effect to the rationale underlying the modern Supreme Court of Canada case law on s. 3 of the Interest Act. The modern rationale narrows the scope of s. 3 to the rare case where [page308] a court or statutory body cannot legitimately award interest. Accordingly, interest was payable under the Courts of Justice Act. The statutory rate was 4.8 per cent; however, s. 130 gives the court discretion to vary the rate. Here, the appropriate rate was the same as the pre-maturity rate on the note.

Per Weiler J.A. (concurring): There was an alternative route to arriving at the conclusion that the post-maturity rate of the promissory note is 10 per cent. Section 3 of the Interest Act only applies when there is no agreement, statute, or mechanism provided to fix the rate. In the immediate case, the common law provided the mechanism to fix the rate. In Bank of America Canada v. Mutual Trust Co., the Supreme Court rejected the approach that the rate of interest on a loan had to be stipulated. Absent exceptional circumstances, the rate of interest that was fair and equitable was the rate that governed the loan beforehand and should govern the loan after default.

APPEAL from a judgment determining the rate of post-maturity interest on a promissory note.

Toronto-Dominion Bank v. Mr. Klean Enterprises Ltd. (1987), 1987 4893 (SK CA), 37 D.L.R. (4th) 717 (Sask. C.A.), not folld Cases referred to Bank of America Canada v. Mutual Trust Co., [2002] 2 S.C.R. 601, 2002 SCC 43, 211 D.L.R. (4th) 385, 287 N.R. 171, [2002] S.C.J. No. 44 (QL); British Pacific Properties Ltd. v. British Columbia (Minister of Highways and Public Works), 1980 209 (SCC), [1980] 2 S.C.R. 283, 112 D.L.R. (3d) 1, 33 N.R. 98, [1981] 1 W.W.R. 666, 20 L.C.R. 1 (sub nom. British Pacific Properties Ltd. v. Province of British Columbia); Diefenbacher v. Young (1995), 1995 2481 (ON CA), 22 O.R. (3d) 641, 123 D.L.R. (4th) 641, [1995] O.J. No. 939 (QL), 80 O.A.C. 216 (C.A.), revg in part (1991), 1 B.L.R. (2d) 161 (Ont. Gen. Div.); Foundation Co. of Canada Ltd. v. Prince Albert Pulp Co. Ltd., 1976 151 (SCC), [1977] 1 S.C.R. 200, 68 D.L.R. (3d) 283, 8 N.R. 181, [1976] 4 W.W.R. 586, 1 C.P.C. 74; Hossack v. Shaw (1918), 1918 521 (SCC), 56 S.C.R. 581, 42 D.L.R. 130; Toronto Railway Co. v. Corporation of the City of Toronto, [1906] A.C. 117 (C.A.); Toronto-Dominion Bank v. Mr. Klean Enterprises Ltd. (1987), 55 Sask. R. 93, 37 D.L.R. (4th) 717, [1987] 4 W.W.R. 461 (C.A.) Statutes referred to Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 133(b), 186(1) Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 127(1) "prejudgment interest rate", 128, 129, 130 Interest Act, R.S.C. 1985, c. I-15, s. 3 Partnerships Act, R.S.O. 1990, c. P.5, s. 42 Authorities referred to Waldron, M.A., The Law of Interest in Canada (Scarborough: Carswell, 1992)

Milton A. Davis and J.M. Arthur Lefebvre, for appellants. James W.W. Neeb and Shelly J. Harper, for respondents.

LASKIN J.A. (GOUDGE J.A. concurring): --

A. INTRODUCTION

1A promissory note bears interest at the rate of 10 per cent annually up to the date the note matures, but specifies no interest [page309] rate after maturity. The principal question on this appeal is what interest rate applies to money still owing after the maturity date. The trial judge held that the applicable rate was 5 per cent. He relied on s. 133(b) of the Bills of Exchange Act, R.S.C. 1985, c. B-4, which provides for interest after maturity but does not specify a rate; and on s. 3 of the federal Interest Act, R.S.C. 1985, c. I-15, which provides that "[w]henever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum."

2I take a different view. In my opinion, the applicable annual rate is 10 per cent because s. 3 of the Interest Act is ousted by the prejudgment interest provisions of the Courts of Justice Act, R.S.O. 1990, c. C.43.

B. BACKGROUND FACTS

(a) The Pizzey Family Sells its Trailer Park to the St. Pierre family

3The appellants, the Pizzey family, held the shares of the respondent Crestwood Lake Limited. Crestwood owns about 47 acres of land in Brant County, on which it manages over 200 trailer park lots.

4In October 1989, the Pizzey family entered into a written agreement to sell its shares in Crestwood to the respondent members of the St. Pierre family for a purchase price of $1.25 million. The sale closed in March 1990.

(b) The Terms of Payment

5The St. Pierres paid $500,000 of the $1.25 million purchase price on closing. For the balance of the purchase price, the St. Pierres gave the Pizzeys the promissory note in question: a note for $750,000 bearing interest "at the rate of 10 per cent per annum calculated semiannually not in advance". The note provided that interest would be calculated from March 8, 1990 to the date of maturity, March 8, 1995"when the total amount of principal and interest shall be fully due and payable". The note made no mention of interest after maturity.

6As security for the balance of the purchase price, Crestwood guaranteed payments of the promissory note. And Crestwood secured its own guarantee obligation by giving the Pizzeys a $750,000 collateral mortgage on the land. In substance, the terms of the mortgage and the terms of the note were identical with one exception on which the Pizzeys rely: the standard charge terms incorporated into the mortgage provided for interest at 10 per cent annually "as well after as before maturity". [page310]

(c) The Litigation Between the Parties

7In 1993, the St. Pierres sued the Pizzeys for fraud, negligent misrepresentation and breach of contract in connection with the sale. They asked to set aside both the promissory note and the mortgage. They also stopped paying under the note. The Pizzeys then brought an action for $37,500, representing a single interest payment owing under the note and the mortgage. The Pizzeys' action was stayed pending the determination of the St. Pierres' fraud action. That action was tried for nine days before Kent J.

8In reasons delivered in March 1998, Kent J. dismissed the St. Pierres' claim in fraud and negligent misrepresentation, and he refused to set aside either the note or the mortgage. But he found the Pizzeys liable for breach of contract and assessed damages at $180,000, which included an $80,000 reduction in the purchase price. He also held that "[t]he damages to which St. Pierre is entitled may be set off against the balance overdue under the mortgage back to which Pizzey is entitled."

9The St. Pierres' appeal to this court was dismissed. Their application for leave to appeal to the Supreme Court of Canada was also dismissed. However, their default on the note and the mortgage continued.

10In September 1999, the Pizzeys brought a mortgage action against the St. Pierres and Crestwood claiming principal and interest owing of over $1.4 million. In their defence, the St. Pierres for the first time took the position that after the maturity date of the note in March 1995, interest accrued on the outstanding balance at only 5 per cent annually. The Pizzeys then sought leave to discontinue their action, and instead to appoint a receiver and manager over the trailer park land. The St. Pierres, in turn, brought a motion to determine whether the post-maturity rate of interest on the balance owing under the promissory note was 5 per cent or 10 per cent. These two proceedings were heard by Sills J. and resulted in the order now under appeal.

(d) The reasons of the Trial Judge

11The trial judge appropriately considered that the main issue before him was the applicable post-maturity interest rate. The Pizzeys put forward two arguments in support of their submission that the rate was 10 per cent. First, they argued that the terms of the mortgage gave them the right to interest at 10 per cent after maturity. Second, they argued that s. 3 of the Interest Act, which sets a 5 per cent interest rate where no rate is fixed by the parties or by law, did not apply because of the interest provisions in either the mortgage or the Courts of Justice Act. [page311]

12The trial judge rejected both of the Pizzeys' arguments. He found that the "sole debt instrument" was the promissory note and that, therefore, the terms of the note dictated the rate of interest after maturity. He also found that interest on the note after maturity was payable by law under s. 133(b) of the Bills of Exchange Act. Because that section did not specify a rate of interest, s. 3 of the Interest Act filled the gap by specifying a rate of 5 per cent. The Pizzeys have appealed both these findings to this court.

13The trial judge also held that he had good grounds to appoint a receiver over the trailer park property unless the St. Pierres paid the undisputed amount owing under the note. They did pay. Thus, the dispute in this court is over the applicable post-maturity interest rate. The amount at stake is approximately $580,000.

C. ANALYSIS

(a) Did the Trial Judge Err in the Way he Characterized the Nature of the Transaction?

14The Pizzeys submit that the trial judge erred in characterizing the promissory note as the "sole debt instrument". They contend that the mortgage creates a separate debt obligation that is complementary rather than subordinate to the note. In support of their contention they point to the ninth standard charge term, which provides that no "other dealing by the Chargee with the owner or owners of the said lands . . . shall in any way affect or prejudice the rights of the Chargee against the Chargor". I do not accept the Pizzeys' submission.

15Faced with the two inconsistent interest obligations in the note and the mortgage, the trial judge had to determine which obligation the St. Pierres were required to meet. That determination turned on how he characterized the nature of the transaction. He characterized the transaction as a share purchase, paid for by cash and a promissory note, with the note guaranteed by Crestwood and Crestwood's guarantee secured by a collateral mortgage on the property. Thus, the trial judge found that the St. Pierres' debt obligation was found in the note, not the mortgage.

16The trial judge's characterization of the transaction is a finding of mixed fact and law. It is therefore entitled to some deference on appeal. I see no basis to reverse that finding. Indeed, it is supported by the documentation.

17First, the agreement of purchase and sale stipulates that the purchase price consists of the down payment and "take back financing" in the form of the promissory note secured by Crestwood's mortgage. The St. Pierres are not parties to the mortgage and, thus, the Pizzeys have no claim against them under the [page312] mortgage. Second, the mortgage provides that "[p]ayment of the note is payment of the mortgage and payment of the mortgage is payment of the note." Therefore, once the St. Pierres (or Crestwood) have paid off the promissory note, Crestwood is entitled to a discharge of the mortgage. For these reasons, I would not interfere with the trial judge's finding that the promissory note alone governs the St. Pierres' debt obligation. That leaves the central question on this appeal, the application of s. 3 of the Interest Act.

(b) Does S. 3 of the Interest Act Supply the Rate of Interest After Maturity?

18In my view, whether s. 3 of the Interest Act supplies the post-maturity rate turns on the effect of s. 133(b) of the Bills of Exchange Act, ss. 128(1) and 130 of the Courts of Justice Act, which are laws for the payment of interest, and s. 128(4)(g) of the Courts of Justice Act, which prescribes when s. 128(1) does not apply.

(i) The traditional approach

19As I have said, the promissory note does not specify a post-maturity rate of interest. Accordingly, the trial judge turned to ss. 186(1) and 133(b) of the Bills of Exchange Act. Section 186(1) states that the provisions of the Act relating to bills apply to promissory notes. Section 133(b) provides that when a bill is dishonoured -- and thus when a note is dishonoured -- the measure of damages includes interest after maturity. But s. 133(b) does not specify a rate of interest:

133. Where a bill is dishonoured, the measure of damages, which shall be deemed to be liquidated damages, are

(b) interest thereon from the time of presentment for payment, if the bill is payable on demand, and from the maturity of the bill in any other case . . .

20Because s. 133(b) of the Bills of Exchange Act is a law for the payment of interest but does not specify the rate of interest, the trial judge held that s. 3 of the Interest Act applied and fixed the rate at 5 per cent:

Whenever any interest is payable by the agreement of parties or by law, and no rate is fixed by the agreement or by law, the rate of interest shall be five per cent per annum.

21The trial judge's holding finds support in 19th and early 20th century Supreme Court of Canada case law and in the Saskatchewan Court of Appeal's decision in [page313] Toronto- Dominion Bank v. Mr. Klean Enterprises Ltd. (1987), 1987 4893 (SK CA), 37 D.L.R. (4th) 717, 55 Sask. R. 93 (C.A.). In Hossack v. Shaw (1918), 1918 521 (SCC), 56 S.C.R. 581, 42 D.L.R. 130, at p. 585 S.C.R., Anglin J. summarized the early Supreme Court of Canada jurisprudence:

A stipulation for interest at a certain rate on a loan "until paid" is established by a long series of cases, of which it is needful to refer only to St. John v. Rykert, [(1884), 1884 7 (SCC), 10 S.C.R. 278] and People's Loan and Deposit Co. v. Grant, [(1890), 1890 7 (SCC), 18 S.C.R. 262], in this court, to import a contract to pay interest at the specified rate only until the maturity of the loan. To carry the contract for the stipulated rate beyond the maturity of the loan explicit provision to that effect must be made. It follows that after the maturity of the several obligations taken by the plaintiffs (including any renewals which specified the rate of interest) the defendants were under no contractual liability to pay interest at the high rate agreed upon. They were liable only for the statutory rate of 5 [per cent].

22In Mr. Klean Enterprises, Bayda C.J.S. relied on this jurisprudence in holding that the rate of interest on a dishonoured promissory note that does not specify a rate is the statutory rate under the Interest Act. Although he recognized a competing line of authority in which the Supreme Court (and the Privy Council) in breach of contract cases had exercised discretion to grant a fair prejudgment interest rate, he held that this line of authority did not apply to dishonoured notes. See Toronto Railway Co. v. Corporation of the City of Toronto, [1906] A.C. 117 (C.A.) and Foundation Co. of Canada Ltd. v. Prince Albert Pulp Co. Ltd., 1976 151 (SCC), [1977] 1 S.C.R. 200, 68 D.L.R. (3d) 283. Bayda C.J.S. discussed the two lines of authority, at pp. 723-24 D.L.R. of Mr. Klean Enterprises:

The attentive reader might wonder what underlays the distinction we have seen emerge between the two lines of cases: that is, if a debt arises from a breach of contract or other similar obligation, the courts have exercised a discretion in the granting of prejudgment interest; if, however, a debt arises from a promissory note, the courts have awarded nothing more than the statutory rate from the date of the maturity of the note or the date of the demand.

The common law of prejudgment interest is found in the cases that follow from Toronto Railway: the rate and duration of such interest as damages is determined on the basis of what the court thinks is fair and equitable. With respect to bills of exchange (which include, by virtue of s. 186(1) of the Bills of Exchange Act, promissory notes), however, the Legislature has determined that the rate of prejudgment interest ought to be the statutory rate, i.e., 5 [per cent] per annum. Section 134 [now s. 133] is a law that provides for interest, without providing a rate of such interest, within the meaning of the Interest Act. The effect of the combined operation of s. 134 of the Bills of Exchange Act and s. 3 of the Interest Act is that the measure of interest as damages in a case of a dishonoured promissory note must be the statutory rate. This conclusion is consistent with cases from the Supreme Court of Canada and this court spanning over 100 years.

(Emphasis added) [page314]

(ii) Is the traditional approach correct?

23The question whether the 5 per cent rate in the Interest Act applies is a question of law. The applicable standard of review, therefore, is correctness. I consider the holding of the trial judge -- and by extension, that of the Saskatchewan Court of Appeal -- to be incorrect for two reasons.

The impact of modern provincial interest legislation

24The main reason is that it does not take account of modern provincial prejudgment interest legislation, in Ontario's case ss. 128 to 130 of the Courts of Justice Act. Section 128(1) provides that a person entitled to an order for the payment of money is entitled to an award of interest at the prejudgment interest rate (as defined in the statute) [see Note 1 at end of document]:

128(1) A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order.

Section 130 gives the court discretion to vary the prejudgment interest rate where the "circumstances of the case" so require.

25Because ss. 128(1) and 130 are laws for the payment of interest, looked at alone, they oust the application of the default rate in s. 3 of the Interest Act. However, the St. Pierres submit that the Courts of Justice Act cannot be used to fix the post-maturity rate on the note because of s. 128(4)(g) of the Courts of Justice Act. Section 128(4) lists a series of exceptions where prejudgment interest under s. 128(1) shall not be awarded. Here, the relevant exception is s. 128(4)(g):

128(4) Interest shall not be awarded under subsection (1),

(g) where interest is payable by a right other than under this section.

Section 129(5) provides a similar exception for post-judgment interest. The St. Pierres say that interest on the note is payable by s. 133(b) of the Bills of Exchange Act, which is "a right other than under this section". Therefore s. 3 of the Interest Act, not s. 128(1) to s. 130 of the Courts of Justice Act, supplies the post-maturity rate on the note. I do not agree with this submission. [page315]

26At bottom, this is a question of legislative intent: what kinds of interest provisions did the legislature intend should oust the application of the interest provisions of the Courts of Justice Act? As I view it, an interest provision that prescribes a rate or method of calculating interest inconsistent with or more appropriate than s. 128(1) would be an "other right" triggering s. 128(4)(g). But an interest provision, such as s. 133(b) or the Bills of Exchange Act, that does not provide either a rate or a method of calculation and that, therefore, can coexist with s. 128(1) is not a "right other than under" s. 128(1). In other words, s. 133(b) is not a code for the payment of interest. Recent case law in the Supreme Court of Canada and in this court supports my view.

27The main case is the Supreme Court of Canada's decision in Bank of America Canada v. Mutual Trust Co., [2002] 2 S.C.R. 601, 2002 SCC 43. That case is the reverse of the present case, because there the Supreme Court relied on the exceptions in s. 128(4)(g) and s. 129(5) to award interest that fairly compensated the lender.

28In the Bank of America Canada case, Mutual Trust breached its agreement to advance long-term mortgage financing and was found liable for damages for breach of contract. The question the Supreme Court of Canada had to resolve was whether the plaintiff bank was entitled to compound interest on its damages award. The Courts of Justice Act did not assist the plaintiff because s. 128(4)(b) prohibits an award of compound interest. The court, therefore, turned to the common law.

29Under the line of authority referred to by Bayda C.J.S. in Mr. Klean, the court unquestionably had the right at common law to award simple interest, because interest was included in an award of expectation damages for breach of contract. Major J. went further, however, and held that the common law right to expectation damages included the right to receive compound interest. Moreover, he held that this right to receive compound interest at common law was an "other right" under ss. 128(4)(g) and 129(5) of the Courts of Justice Act.

30Major J. emphasized the commercial unfairness of concluding otherwise. He wrote, at paras. 45-46:

If the court was unable to award compound interest on the breach of a loan which itself bore compound interest, it would be unable to adequately award the plaintiff the value he or she would have received had the contract been performed. To keep the common law current with the evolution of society and to resolve the inconsistency between awarding expectation damages and the courts' past unwillingness to award compound interest, that unwillingness should be discarded in cases requiring that remedy for the plaintiff to realize the benefit of his or her contract. [page316]

A contrary rule would lead to inequity and provide incentives to breach contracts. . . .

31The principle governing when a court should award interest under the Courts of Justice Act and when it should invoke the exception in s. 128(4)(g) and s. 129(5) is found in para. 40 of Major J.'s reasons:

Sections 128(4)(g), 129(5) and 130 CJA, each of which allows the judge to award interest other than as specifically set out in ss. 128 and 129, clearly indicate that the rates and calculation methods of interest provided in ss. 128 and 129 are applicable in the absence of more appropriate rates and methods of calculation. Section 130 allows a court, where it considers it just, to vary the interest rate or the time for which interest may be awarded. Sections 128(4)(g) and 129(5) allow a court to award pre-judgment and post-judgment interest, respectively, where interest is payable by another right.

(Emphasis added)

I read this passage to mean that the exception in s. 128(4)(g) applies only when the "other right" contains a rate of interest or method of calculation more appropriate than or inconsistent with s. 128(1) of the Courts of Justice Act. Compound interest was a more appropriate rate and the common law right to award it ousted the interest provisions of the Courts of Justice Act.

32This court implicitly applied this principle in Diefenbacher v. Young (1995), 1995 2481 (ON CA), 22 O.R. (3d) 641, 123 D.L.R. (4th) 641 (C.A.) where it considered the relationship between s. 128(4)(g) of the Courts of Justice Act and s. 42 of the Partnerships Act, R.S.O. 1990, c. P.5. Section 42 stipulates that where a person ceases to be a partner of a firm and the partnership carries on, the outgoing partner may elect either a share of the profits or interest at 5 per cent on his or her share of the partnership assets. In Diefenbacher, the plaintiff, the outgoing partner, successfully claimed a share of the firm's goodwill. One of the issues before this court was the appropriate prejudgment interest rate on the plaintiff's award.

33Carthy J.A. found that the trial judge had decided that the outgoing partner was not entitled to his share of the partnership profits. He therefore had to accept the "anachronistic" 5 per cent interest rate in the statute. Section 42 constituted an "other right" under s. 128(4)(g) of the Courts of Justice Act. Carthy J.A. inferred that the legislature did not intend s. 128(1) of the Courts of Justice Act to oust s. 42 of the Partnerships Act, because s. 42 not only provided for interest, but also specified a rate. The two provisions were inconsistent and could not coexist.

34Here, in contrast to Diefenbacher, s. 133(b) of the Bills of Exchange Act and s. 128(1) are not inconsistent. Because s. 133(b) [page317] does not specify a rate or method of calculating a rate, the two provisions can live together. Each provision entitles the Pizzeys to post-maturity interest, but only the Courts of Justice Act supplies the rate.

35To repeat what Major J. said in Bank of America Canada, the rates in the Courts of Justice Act apply in the absence of more appropriate rates and methods of calculation. Therefore, consistent with the reasoning in the Bank of America Canada and Diefenbacher cases, s. 133(b) does not trigger the exception in s. 128(4)(g). Section 133(b) is not a "right other than under this section". Accordingly, the prejudgment interest provisions of the Courts of Justice Act oust the application of s. 3 of the Interest Act.

36Also, awarding interest under the Courts of Justice Act in this case gives effect to the same considerations that underlie the Bank of America Canada decision: assuring a rate of interest that accords with commercial realty and preventing the St. Pierres from relying on their own default to obtain a lower rate.

Modern Supreme Court interpretations of the Interest Act

37The second reason why I disagree with the trial judge's holding is that it fails to give effect to the rationale underlying the more modern Supreme Court of Canada case law on s. 3 of the Interest Act, first discussed in the Prince Albert Pulp Co. case, supra, and later affirmed in British Pacific Properties Ltd. v. British Columbia (Minister of Highways and Public Works), 1980 209 (SCC), [1980] 2 S.C.R. 283, 112 D.L.R. (3d) 1, at pp. 289-90 S.C.R. That rationale is to narrow the scope of s. 3 to the rare case, if any, where a court or statutory body cannot legitimately award interest. In the British Pacific Properties case, the court put it this way:

The fact that there may be a discretion to award or not to award interest does not alter my view that, where the discretion is exercised affirmatively by a judge under statutory authority, and a rate is fixed by him, the result is to exclude s. 3 of the Interest Act, if otherwise applicable. . . .

I would apply a liberal construction to the words "fixed by law" so as to embrace the establishment of a rate of interest by virtue of a statute or under its provisions when the resulting rate is a binding one upon those affected by it. I would regard s. 3 of the Interest Act as applicable only when there is no provision made in an applicable statute or in an agreement and no mechanism is provided by which a rate can be fixed.

(Emphasis added)

The last sentence of this passage, which I have underlined, also confirms that s. 3 of the Interest Act cannot apply in the face of provisions such as ss. 128(1) to 130 of the Courts of Justice Act, [page318] which provide for interest and a mechanism to fix a rate. See also the discussion in M.A. Waldron, The Law of Interest in Canada (Scarborough: Carswell, 1992) at pp. 82-84.

(c) The Appropriate Rate

38The last question that needs to be determined is what prejudgment interest rate should be awarded after maturity of the note. The statutory prejudgment interest rate under s. 128(1) of the Courts of Justice Act is 4.8 per cent.

39However, s. 130 gives the court discretion to vary the prejudgment interest rate where the "circumstances of the case" so require. Here, the appropriate post-maturity rate is the same as the pre-maturity rate on the note, 10 per cent. This is consistent with the reasoning of Major J. in the Bank of America Canada case, at paras. 49-50:

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

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

I would therefore award prejudgment interest on the note at 10 per cent per annum.

40Finally, on the view I take of this appeal, it is unnecessary to address the Pizzeys' submission on res judicata arising from the judgment of Kent J. Res judicata was not raised before the trial judge and therefore I decline to consider it on appeal.

D. CONCLUSION

41In my opinion, the trial judge erred in awarding interest on the note after maturity at the 5 per cent rate provided for in the Interest Act. The appropriate rate after maturity is the rate before maturity stipulated in the note, 10 per cent. Sections 128(1) and 130(1) of the Courts of Justice Act authorize this post-maturity rate. Therefore, the 5 per cent rate in s. 3 of the Interest Act does not apply.

42I would allow the appeal and vary the judgment of Sills J. by deleting the words "the statutory rate of 5 percent per annum" in para. 1, and in their place inserting the words "10 percent per annum".

43Lastly, I deal with costs. The trial judge awarded costs to the St. Pierres on a partial indemnity basis in para. 5 of his judgment. I would reverse that order and award the Pizzeys their costs of the proceedings before Sills J. on a partial indemnity [page319] basis. In light of the hours spent, I would fix those costs at $20,000 plus disbursements and GST. The Pizzeys are also entitled to their costs of the appeal on a partial indemnity basis. I would fix those costs at $15,000 plus disbursements and GST.

44WEILER J.A. (concurring): -- I have had the benefit of reading the draft reasons of Laskin J.A. and I agree with him that the trial judge erred in awarding interest at the rate of five per cent on the promissory note in question after the note matured. I agree, too, that the Courts of Justice Act, R.S.O. 1990, c. C.43 can be used to fix the post-maturity rate on the note at ten per cent because it does not conflict with the combined effect of s. 133(b) of the Bills of Exchange Act, R.S.C. 1985, c. B-4 and s. 3 of the Interest Act, R.S.C. 1985, c. I-15.

45I would also hold that there is an alternative route to arriving at the conclusion that the post-maturity rate of interest on the promissory note is 10 per cent. This alternative method assumes that s. 128(1) of the Courts of Justice Act, which gives a person entitled to the payment of money the right to prejudgment interest, does not apply because interest is payable pursuant to s. 133(b) of the Bills of Exchange Act. The question is, therefore, what the rate of interest should be.

46Section 3 of the Interest Act fixing interest at five per cent only applies when there is no agreement, statute, or mechanism provided to fix the rate: British Pacific Properties Ltd. v. British Columbia (Minister of Highways and Public Works), 1980 209 (SCC), [1980] 2 S.C.R. 283, 112 D.L.R. (3d) 1, at pp. 289-90 S.C.R. In my opinion, however, the common law provides the mechanism to fix the rate. In Bank of America Canada v. Mutual Trust Co., [2002] 2 S.C.R. 601, 2002 SCC 43, the court was dealing with a loan that provided for compound interest prior to maturity and the issue was whether compound interest should apply after maturity. The court held, at para. 49:

With respect to the failure to repay the loan in this appeal when due, it cannot be said that the cost of such delay was not in the contemplation of both parties at the time they made the contract . . . . A loan agreement with a specified interest rate is an agreement between parties on the cost of borrowing money over a period of time. Absent exceptional circumstances, the interest rate which had governed the loan prior to breach would be the appropriate rate to govern the post-breach loan. The application of a lower interest rate would be unjust to the lender.

(Emphasis added)

47In holding as it did, the Supreme Court rejected the traditional approach that the rate of interest on a loan after maturity had to be stipulated. Further, absent exceptional circumstances, [page320] the rate of interest that was fair and equitable was the rate that governed the loan beforehand and should govern the loan after default.

48In Toronto Dominion Bank v. Mr. Klean Enterprises Ltd. (1987), 1987 4893 (SK CA), 37 D.L.R. 717, 55 Sask. R. 93 (C.A.), Bayda C.J.S. drew a distinction between interest payable when there had been default on a loan and when there had been default in payment of a promissory note. In the former, he acknowledged that the court fixes a rate that it thinks is fair and equitable. In the latter, he held the combined operation of s. 134 of the Bills of Exchange Act and s. 3 of the Interest Act prevent anything other than the statutory rate of five per cent being imposed.

49We respectfully disagree with Mr. Klean Enterprises. In his reasons, Laskin J.A. gives two reasons why there should be no distinction in principle with respect to post-default interest payable on a loan and post-maturity interest on a promissory note. The first is that such a distinction ignores modern provincial prejudgment interest legislation such as the Courts of Justice Act. The Courts of Justice Act then becomes the focus of his judgment.

50The second reason derives from the same considerations that underlie the Bank of America Canada decision. Simply, if a lesser rate of interest is imposed after maturity than before maturity this does not accord with commercial reality and a defaulting party would gain an advantage as a result of his or her default. That is unfair and does not provide a principled basis for distinguishing default on a loan from a promissory note that has matured and remains unpaid.

51Adopting this second reason as the basis for my alternative conclusion, I would apply Bank of America Canada to the promissory note in question and hold that, based on the evolution of the common law, the rate of interest after maturity is the same as that before maturity, namely, ten per cent, as no exceptional circumstances have been shown. Accordingly s. 3 of the Interest Act would not apply.

52For these reasons, I would also dispose of the appeal as Laskin J.A. has.

Order accordingly. [page321]

Notes

Note 1: Under s. 127(1), the Courts of Justice Act defines the "prejudgment interest rate" to mean "the bank rate at the end of the first day of the last month of the quarter preceding the quarter in which the proceeding was commenced, rounded to the nearest tenth of a percentage point".