CITATION: Loans Till Payday v. Brereton, 2010 ONSC 6610 DIVISIONAL COURT FILE NO.: 309/10 DATE: 2010/12/01
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
B E T W E E N: )
Loans Till Payday ) ) ) )
Plaintiff/Appellant )
- and - ) ) ) ) )
David Charles Scott Brereton ) ) ) )
Defendant/Respondent )
David J. Rose, for the Plaintiff/Appellant
No one appearing for the Defendant/Respondent
) ) ) HEARD: October 13, 2010
REASONS FOR DECISION
HERMAN J.:
[1] The appellant, Loans Till Payday, appeals from a judgment of the Small Claims Court, dated May 28, 2010.
[2] This matter arises from a loan that Mr. Brereton received from Loans Till Payday for $450. Loans Till Payday claims that Mr. Brereton defaulted on that loan.
[3] Loans Till Payday submits that the judge made three errors when he concluded that: the interest rate offended the Criminal Code; the $500 claim for liquidated damages was not a genuine pre-estimate of loss and was not reasonable; and Loans Till Payday was not entitled to receive the post-default interest rate set out in the promissory note.
Background
[4] Loans Till Payday advanced Mr. Brereton $450 on July 22, 2009. Mr. Brereton signed a promissory note agreeing to pay Loans Till Payday $562.50 a week later, on July 29, 2009. The loan that Mr. Brereton received is commonly referred to as a payday loan.
[5] The promissory note set out additional liabilities in the event of default: $95.00 if any of Mr. Brereton’s cheques or electronic payments were not honoured; $500.00 if the matter was turned over for collection or legal action; $450.00 plus GST as a locate fee if any mail addressed to him was returned for any reason; and 59% interest on any amounts owing as of July 29.
[6] Mr. Brereton did not pay the money and Loans Till Payday initiated an action in Small Claims Court. Loans Till Payday seeks: the amount that Mr. Brereton agreed to pay back ($562.50); prejudgment interest at 59% ($51.82); and liquidated damages ($500), for a total of $1,114.32. It also seeks post-judgment interest at 59%.
[7] Mr. Brereton did not defend the action and Loans Till Payday obtained default judgment. The matter was referred to a judge for an assessment of damages. The judge awarded: $450 (the amount that Mr. Brereton received); prejudgment interest and post-judgment interest at 18% from the date of default; and court costs of $185.00.
[8] Loans Till Payday appeals from that decision. Does the interest rate offend the Criminal Code?
[9] Mr. Brereton received $450 and agreed to pay Loans Till Payday $562.50 seven days later. The judge calculated that this amounted to an annual interest rate of 1,303%. He concluded that the interest rate was contrary to s. 347 of the Criminal Code and was therefore not enforceable.
[10] Loans Till Payday claims that the agreement is exempt from s. 347 of the Criminal Code and is subject, instead, to the Payday Loans Act, 2008, S.O. 2008, c. 9. Counsel acknowledged that the agreement actually stipulates an amount greater than that permitted by the Payday Loans Act – $25 per $100 borrowed instead of the permitted $21 per $100 borrowed – but submits that the agreement with Mr. Brereton otherwise complies with the Act.
The [Criminal Code](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-46/latest/rsc-1985-c-c-46.html)
[11] Section 347 (1) of the Criminal Code, R.S.C. 1985, Chap. C-46 provides that it is an offence to charge an annual rate of interest that exceeds 60 per cent.
[12] There is, however, an exemption for certain payday loans. Section 347.1 provides that s. 347 does not apply to payday loan agreements if:
(i) the amount of money advanced is $1,500 or less;
(ii) the term of the agreement is 62 days or less;
(iii) the person or company is licensed or authorized by provincial law to enter into the agreement; and
(iv) the province is designated.
[13] The Governor in Council will designate a province if the province has legislative measures that protect recipients of payday loans and provide for limits on the total cost of borrowing (347.1 (3)).
[14] There is an order that designates Ontario for the purpose of s. 347.1 (SOR/2009-277). However, that order did not come into effect until both of the following were in force: (a) the Payday Loans Act, except for ss. 52, 62 and 66 to 74; and (b) Ontario Regulation 98/09, except for ss. 37 and 38. Section 32 of the Act, which requires that the cost of borrowing not exceed prescribed limits, and s. 23 of the Regulation, which prescribes the limits, did not come into force until December 15, 2009. That is several months after the agreement between Loans Till Payday and Mr. Brereton.
Payday Loans Act
[15] Payday loans in Ontario are governed by the Payday Loans Act. The purpose of the Act is to protect recipients of payday loans and provide limits on the cost of borrowing. Various sections came into force on different dates: April 1, 2009; July 1, 2009; and December 15, 2009. Some provisions have not yet been proclaimed.
[16] The press release accompanying the introduction of the Bill described a payday loan as “a short-term high-interest loan, typically marketed as easy cash to cover costs until the borrower’s next payday”. It noted that the purpose of the Bill was “to enhance consumer protection” 1.
[17] The press release included information on the industry: There are between 600 and 700 payday loan operators in Ontario.
Payday loan users are younger than the general population and have average incomes ranging from $35,000 to $41,000.
On an average day, payday lenders make 16 loans of $300 a piece. That’s about $1.5 million in loans over an entire year.
[18] The legislation creates a licensing regime, prohibits certain practices, provides for enforcement, allows borrowers to cancel agreements during a cooling-off period and establishes an education fund.
1 Ministry of Government Services, News Release “It’s about fairness: new payday lending law to regulate industry – McGuinty Government Protecting Most Vulnerable Consumers” (31 March 2008).
[19] Section 32 is of particular relevance. That provision did not come into force until December 15, 2009. It provides:
- This section applies to a payday loan agreement if,
(a) the advance under the agreement is $1,500 or less or, if another amount is prescribed, that amount or less; and
(b) the term of the agreement is 62 days or less or, if another number of days is prescribed, that number of days or less.
Duty of lender
(2) The lender under a payday loan agreement shall ensure that the cost of borrowing under the agreement does not exceed the prescribed limits.
Duty of loan broker
(3) No loan broker shall facilitate a contravention of subsection (2).
Consequence
(4) If the cost of borrowing under a payday loan agreement exceeds the prescribed limits, the borrower is only required to repay the advance to the lender and is not liable to pay the cost of borrowing.
[20] The prescribed limit of the cost of borrowing is set out in the regulation: it cannot exceed $21 per $100 advanced (s. 23 O. Reg. 98/09).
Application to this case
[21] I turn now to the case at hand. The effective interest rate charged under the agreement – 1,303% - is clearly in excess of the amount under the Criminal Code. The exemption from the Criminal Code provision for payday loan agreements did not come into effect in Ontario until December 15, 2009, that is, after the agreement was entered into. As a result, Loans Till Payday cannot claim the benefit of the exemption. The judge therefore did not err when he concluded that the rate of interest contravened s. 347 of the Code and was unenforceable.
[22] I would note that even had the exemption been in place at the time of the agreement, the rate would still have been unenforceable. The agreement charged a rate of $25 per $100, $4 in excess of the prescribed limit under the Payday Loans Act.
[23] Loans Till Payday concedes that it charged more than the prescribed amount and proposes that the amount it receives be adjusted to reflect $21 per $100, instead of $25.
However, s. 20 (4) of the Payday Loans Act provides that if the cost of borrowing exceeds the prescribed limit, the borrower is liable only for the amount of the advance, in this case, $450.
Was the $500 claim a legitimate claim for liquidated damages?
[24] The appellant claims $500 in liquidated damages.
[25] The respondent signed a promissory note in which he agreed as follows:
Upon failure to make full payment by the specified date, and should this note be turned over for collection or legal action, I understand and hereby agree to pay an additional $500.00 in costs as liquidated damages and not as penalty.
[26] The judge did not allow the claim because he was not satisfied that it was a genuine pre-estimate of loss or reasonable in the circumstances. He awarded $185 in court costs.
[27] In reaching his conclusion, the judge referred to an exhibit that the appellant put forward in support of its claim for liquidated damages. The exhibit is a one-page document listing 12 items: correspondence; telephone conversations; file preparation; computer program costs; drafting statement and informations; considering evidence, preparing investigation report, finalizing; electronic monitoring, confirmation of service; pleadings and filing; written motion, research, review; miscellaneous fees – mileage, copies, materials; affidavits, motions, factum; and commissioning of affidavits. Each of those twelve items has a cost estimate associated with it. The estimates total $507.05.
[28] The judge did not accept that the figures in the document reflected a genuine pre-estimate of the costs of collection. In his opinion, the document was too general in nature in the absence of supporting dockets. He offered the appellant an opportunity to adjourn in order to obtain the dockets but the appellant chose not to do so.
[29] The judge noted, as well, that the appellant had relied on the same exhibit in two other actions that had been before him for an assessment of damages. He said that it was beyond credibility that two other assessments would have exactly the same figures when the basis for the exhibit was supposedly time spent on each action by the appellant’s staff.
[30] Loans Till Payday submits that the judge erred in applying the “genuine pre-estimate of loss” test to this case. It points to Rule 19.01 (1) of the Small Claims Court Rules O. Reg. 258/98 which provides that reasonableness is the only standard for calculating costs for disbursements. The appellant contends that, in the circumstances, the amount is reasonable.
[31] In my opinion, Rule 19.01 (1) does not assist the appellant. It merely provides that a party is entitled to reasonable disbursements. It does not exempt a party from providing proof of actual disbursements paid nor does it exempt a claimant from the law with respect to liquidated damages.
[32] It is the task of the court to determine whether, in the circumstances, the amount claimed is, in fact, liquidated damages or is, instead, a penalty. The fact that the promissory note indicates that the amount is liquidated damages and not a penalty is not conclusive.
[33] The essence of liquidated damages is that it is, indeed, a genuine pre-estimate of damages (Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd., [1915] A.C. 79 (H.L.). The principle is articulated in Federal Business Development Bank v. Eldridge (1985), 1985 4275 (NB QB), 67 N.B.R. (2d) 93; 172 A.P. R. 93 (C.A.) at para 25 as follows:
The law is clear that parties may as part of their agreement undertake that in the event of default of one or the other the measure of damages will be a certain sum of money. Parties are free to enter into contracts of this nature. Where however the agreement is not an agreement to estimate loss in advance but rather a penalty intended to secure performance of the contract then it is not liquidated damages but rather a penalty and as such is not recoverable.
[34] The determination of whether the stipulated amount was a genuine pre-estimate of damages depends on the circumstances of each case.
[35] I was referred to the case of Capital One Bank v. Matovska, [2007] O.J. No. 3368 (Div. Ct.) as authority for the proposition that the pre-proceeding collection expenses claimed are a liquidated demand for money. In that case, the Divisional Court overturned the decision of the trial judge in which he declined to award the pre-proceeding expenses. That case is, in my opinion, clearly distinguishable in that the lender was liable to pay its counsel for debt collection services on a contingent percentage of the outstanding debt. The expenses, therefore, could be ascertained from the contract between the lender and its counsel. In the case at bar, the expenses that are claimed are unsupported by anything other than the lender’s statement of estimated costs.
[36] Even if I were to agree with Loans Till Payday – which I do not – that a determination of its claim for liquidated damages should be restricted to a consideration of the reasonableness of disbursements under Small Claims Court Rule 19.01 (1), Loans Till Payday has not provided evidence in support of its contention that the disbursements are reasonable. It is not an error for a judge assessing damages to require evidence that the costs are, indeed, reasonable, rather than accept the lender’s estimate at face value.
[37] The Payday Loans Act restricts default charges to “reasonable charges in respect of legal costs” involved in collecting payment (s. 33(1)). This provision came into force on July 1, 2009 and therefore applies to this agreement. As with the Small Claims Court Rules, the lender is restricted to “reasonable” costs and should expect to have to prove that such costs are, indeed, reasonable.
[38] Given the lack of evidence in support of the claim, the judge did not err when he concluded that Loans Till Payday did not establish that the amount claimed was, indeed, a genuine pre-estimate or was reasonable. In the result, the judge properly denied the claim for $500 in liquidated damages and replaced it with a lower amount for costs.
Did the judge err with respect to prejudgment and post-judgment interest?
[39] The appellant claimed prejudgment and post-judgment interest in the amount of 59%. The promissory note that the respondent signed provides:
Any amounts owing after the specified date will be subject to interest charged at 59.0% per annum.
[40] The judge refused to apply this amount and instead ordered a rate of 18% per annum, which he said was a more commercial rate of interest. In reaching his conclusion, the judge referred to the case of Milani v. Banks 1997 1765 (ON CA), [1997] O.J. No. 1171; 32 O.R. (3d) 557 (C.A.) in which the court recognized the discretion of the court to consider s. 2 of the Unconscionable Transactions Relief Act, R.S.O. 1990, c.U.2.
[41] Section 2 of the Unconscionable Transactions Relief Act applies where the court finds that, “having regard to the risk and to all the circumstances, the cost of the loan is excessive and that the transaction is harsh and unconscionable”.
[42] McKinlay J.A. noted in Milani v. Banks at para. 22 that the purpose of the Act is “to relieve a party to a contract from his obligations where the contract was made absent his informed consent or in circumstances of unequal bargaining power”.
[43] In deciding whether the cost of the loan is excessive and the transaction is harsh and unconscionable, the court is required to examine the risk and circumstances of the particular case (Milani v. Banks at para. 21). The court is required to consider not only the cost of the loan but whether the transaction as a whole is harsh and unconscionable.
[44] The judge noted that the agreement did not disclose the annualized rate of interest, without which the defendant could not determine that he was paying an annualized rate of 1,303%, an amount that was contrary to the Criminal Code. In his opinion, this lack of disclosure constituted an unfair advantage taken by the plaintiff.
[45] The 59% interest charged by Loans Till Payday falls short of the Criminal Code limit by a mere 1%. While this amount was disclosed to the respondent, the amount of interest that applied to the principal on repayment was not. That amount was contrary to the Criminal Code. A rate of interest that contravenes the Criminal Code limit of 60% (and to which an exemption does not apply) is prima facie excessive.
[46] It may well be that Loans Till Payday mistakenly believed that the Criminal Code provision did not apply to the loan and it was only bound by the Payday Loans Act. However, the agreement did not comply with that Act either. The permissible rate of interest under the Payday Loans Act is $21 per $100, not the $25 per $100 under the agreement.
[47] The “Initial Disclosure Statement” that was provided to Mr. Brereton incorrectly stated that the “Maximum Allowable Cost per $100 Borrowed” was 25%. This is troublesome for two reasons. Firstly, it incorrectly states what was legally permissible. Secondly, even assuming that Loans Till Payday mistakenly thought that the permissible limit was $25 per $100, it states the figure in percentage terms instead of what is required by the regulation, that is, an amount per $100 borrowed (s. 18 (1), O. Reg. 98/09). The use of a percentage could well lead a borrower to believe that 25% was the interest rate for the loan, which was clearly not the case.
[48] While there was no evidence with respect to Mr. Brereton’s situation, it can be inferred from the nature of the loan that there was inequality of borrowing power. A person who enters into a payday loan is often in a difficult financial situation – otherwise, they would not agree to pay the rate of interest that such a loan entails. The borrower signs a standard form; there does not appear to be any room for negotiation. This is the reality that underlies the Payday Loans Act.
[49] It is also useful to view the transaction as a whole: it involves an advance of $450 for which Loans Till Payday now claims $1,114.32, plus 59% ongoing interest.
[50] In these circumstances, the trial judge did not err when he concluded that the cost of the loan was excessive and the transaction was harsh and unconscionable.
[51] Having made this determination, it was left to the trial judge to determine the appropriate remedy. Section 2 provides a broad range of options. The judge is required to exercise his or her discretion under that section on a rational basis (Milani v. Banks at para. 21). In the circumstances, it was reasonable of the judge to replace the 59% interest rate with a commercial rate of 18%.
Conclusion
[52] For the reasons set out above, I conclude that the judge did not err in his assessment of damages. The appeal is therefore dismissed.
Herman J.
DIVISIONAL COURT FILE NO.: 309/10
DATE: 2010/12/01
ONTARIO
SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
B E T W E E N:
Loans Till Payday
Plaintiff/Appellant
- and –
David Charles Scott Brereton
Defendant/Respondent
REASONS FOR DECISION