2016 ONSC 4199

Court File and Parties

Court File No.: 50057/08 (St. Catharines) Date: 20160718

Superior Court of Justice – Ontario

Re: Lundy’s Regency Arms Corp., 1498611 Ontario Inc. and 1519481 Ontario Inc. (Plaintiffs) v. Niagara Hospitality Hotels Inc. and Kerrio Corporation (Defendants)

Before: The Honourable Mr. Justice R.A. Lococo

Counsel: Peter A. Mahoney, for the Plaintiffs Clark Peddle, for the Defendants

Heard: By written submissions dated April 21 to May 12, 2016

Endorsement – Interest & Costs

[1] As set out in Reasons for Judgment dated April 4, 2016, Lundy’s Regency Arms Corp. v. Niagara Hospitality Hotels Inc., 2016 ONSC 2256, the plaintiffs (landlords of leased commercial property) were successful in recovering damages of $1,734,107 from the defendants for breach of their obligation as tenants to repair and maintain the leased property during the currency of the lease. Two matters were left to be determined following written submissions: (i) pre-judgment and post-judgment interest; and (ii) costs.

I. Pre-judgment and post-judgment interest

(a) Matter to be determined

[2] As set out in the Reasons for Judgment, I found that the plaintiffs are entitled to pre-judgment interest and post-judgment interest to the extent to be determined following written submissions. I also set a commencement date for pre-judgment interest of July 1, 2008.

[3] By way of explanation for the interest commencement date, the damages award of $1,734,107 was calculated based on amounts the plaintiffs actually expended to rectify the consequences of the defendants’ breach of their obligation to repair and maintain the leased property to the standard required by the lease. Those expenditures commenced in early 2008 and continued through the summer of that year. I set a single commencement date of July 1, 2008 for calculation of pre-judgment interest as being fair to both sides, given the plaintiffs’ expenditure pattern for the required repairs during that period.

[4] The matter left to be determined is whether interest should be awarded at the “lease rate” of 18 per cent per annum, or the “statutory rate” prescribed under the Courts of Justice Act. The statutory rate in this case would be 4.8 per cent per annum for pre-judgment interest and two per cent per annum for post-judgment interest. The plaintiffs seek the lease rate. The defendants favour the statutory rate.

[5] Using the lease rate of 18 per cent, the plaintiffs calculate pre-judgment interest on the $1,734,107 award of damages at $2,423,569 (or $855.18 per day from July 1, 2008 to the judgment date of April 4, 2016). Using the statutory rate of 4.8 per cent, they calculate pre-judgment interest at $646,285 (or $228.05 per day). The defendants do not dispute these calculations.

[6] The “lease rate” that the plaintiffs rely on is set out in paragraph 6(r) of the lease, as follows:

Default of Lessee – if the Lessee defaults in payment of any sum required to be paid to under the provisions of the Lease, the Lessor shall have the right, but not the obligation, to pay any sum in default and to recover such sum with interest on it at 18% per annum in the same manner as if it were rent in arrears and the Lessor shall be entitled to take any action which it may be entitled to take with respect to rent in arrears under the Lease;

[7] The statutory rates for pre-judgment and post-judgment interest are prescribed under sections 128 and 129 of the Courts of Justice Act. Under section 128, a person to whom money is payable under an order is entitled to prejudgment interest at the prescribed rate, with certain exceptions. One of those exceptions (set out in section 128(4)(g)) is “where interest is payable by a right other than under this section.” Similarly, section 129 provides for the payment of post-judgment interest at the prescribed rate, calculated from the date of the order. As with pre-judgment interest, section 129(5) provides that post-judgment interest shall not be awarded under section 129 “where interest is payable by a right other than under this section.”

[8] As well, under section 130 of the Courts of Justice Act, the court may, where it considers it just to do so, disallow or vary all or part of any amount of pre-judgment interest or post-judgment interest otherwise payable under section 128 or 129. In doing so, the court is directed by section 130(2) to take into account any relevant consideration, including (i) changes in market interest rates, (ii) the circumstances of the case, (iii) the conduct of any party that tended to shorten or lengthen unnecessarily the duration of the proceeding, and (iv) the amount claimed and recovered in the proceeding.

(b) Position of the parties

[9] To support their position favouring the lease rate, the plaintiffs relied on the 2002 Supreme Court of Canada decision Bank of America Canada v. Mutual Trust Co. According to the plaintiffs, that decision (consistent with other case law) stands for the principle that the court should uphold contractually agreed terms absent special circumstances that do not apply in this case. As discussed further below, plaintiffs’ counsel distinguished on its facts the 2004 decision of the Ontario Court of Appeal in Stellarbridge Management Inc. v. Magna International (Canada) Inc., a decision that I referred to in my Reasons for Judgment.

[10] In support of their argument in favour of the statutory rate, the defendants cited two decisions of the Ontario Court of Appeal as providing the rationale for awarding pre-judgment and post-judgment interest. According to Somers v. Fournier, awards of pre-judgment and post-judgment interest are designed to take away from the debtor the financial advantage of delaying payment or judgment, thereby encouraging the timely payment of debts and early settlements. As well, as indicated in Hislop v. Canada (Attorney General), pre-judgment and post-judgment interest are intended to compensate the plaintiff for loss of use of the amount the court ordered, and put the plaintiff in the position it would have been had the amount been paid when due.

[11] According to defendants’ counsel, awarding the contractual lease rate in this case would be inconsistent with the rationale for awarding pre-judgment and post-judgment interest indicated by the foregoing cases, resulting in an unreasonable windfall for the plaintiffs that would be prejudicial to the defendants. In that regard, defendants’ counsel noted that interest rates in the last ten years have been at historical lows, and that the average return on investments has been nowhere close to 18 per cent, putting the plaintiffs in a much better position if awarded interest at the lease rate than if the amount awarded had been paid in advance of the claim.

(c) Analysis and conclusion

[12] Having considered the defendants’ submissions, I have decided to award pre-judgment interest and post-judgment interest on the damages award at the lease rate of 18 per cent per annum, with pre-judgment interest commencing July 1, 2008.

[13] I consider that result to be consistent with the principles set out in the Supreme Court of Canada’s Bank of America Canada decision, as the plaintiffs argued. In that decision, like the matter before me, the issue before the Court related to pre-judgment and post-judgment interest on an award of damages for breach of contract. The specific matter in issue in that case (that is, whether simple interest or compound interest should be awarded) differed factually from the matter before me. However, the underlying issue was essentially the same. Should the court award interest at the statutory rate, or at a rate derived from the underlying contractual arrangements? The Court affirmed the trial decision to award pre-judgment and post-judgment interest at the contractual rate, stating that it was appropriate for the contractual rate to govern in the absence of special circumstances. In doing so, the Court gave effect to the following general principle relating to the primacy of contractual commitments:

Contract law is not the enemy of parties to an agreement but, rather, their servant. It should not frustrate their mutually agreed intentions but, instead, absent overriding policy concerns, should permit those parties to obtain the benefit of their intended agreement.

[14] The type of “special circumstances” or “overriding policy concerns” that may cause the court to override the contractual interest rate and apply the statutory rate for pre-judgment and post-judgment interest have been considered in other cases, including the decision of Justice Wein of this court in Citi Cards Canada Inc. v. Ross, as follows:

Exceptional circumstances that would cause a court to decline to apply a contractual interest rate must be more than just financial hardship for the borrower: vague or unclear terms, overriding policy concerns such as a criminal interest rate, unconscionable conduct on the part of the lender, or commercially unsophisticated parties. None of these apply here.

[15] Similarly, there is no suggestion that any considerations of a similar nature apply in the matter before me. In particular, defendants’ counsel did not argue that there was any doubt about the application of paragraph 6(r) of the lease because it was vague or unclear, or that the lease rate of 18 per cent was unlawful or otherwise contrary to public policy. As well, there is no suggestion that the parties on either side were commercially unsophisticated or acted in an unconscionable manner.

[16] As previously noted, defendants’ counsel argued that awarding interest at the lease rate would result in an unreasonable windfall for the plaintiffs given that interest rates in the last ten years have been at historical lows, putting the plaintiffs in a much better position if the amount awarded had been paid in advance of the claim. In this case, the combination of an above-market interest rate and the passage of time would result in an interest award in excess of the amount awarded for damages.

[17] As noted above, under section 130(2) of the Courts of Justice Act, when deciding whether to disallow or vary the amount of pre-judgment or post-judgment interest that would otherwise be awarded under section 128 or 129, the court is directed to take into account changes in market interest rates (clause (a)) as well as the amounts claimed and recovered in the proceeding (clause (e)). On a strict reading, there may be doubt as to whether section 130 has any application in this case in light of sections 128(4)(g) and 129(5), which provide that interest shall not be awarded under section 128 or 129 “where interest is payable by a right other than under this section.” In this case, the plaintiffs’ right to interest arises under section 6(r) of the lease.

[18] As indicated in the Bank of America Canada decision, however, the court’s jurisdiction to award pre-judgment and post-judgment interest also arises at both common law and equity. I therefore accept that when considering an award of pre-judgment or post-judgment interest, the court may properly take into account changes in the market rate of interest as well as the amount recovered in the proceeding, whether interest is payable under the Courts of Justice Act or otherwise. However, in 469804 Ontario Ltd. v. 723146 Ontario Ltd. Justice Cullity of this court indicated in a different context that material changes in interest rates alone were not sufficient to justify a variation in the statutory rate. As well, as previously discussed, the extent to which the court may deviate from the contractual rate of interest is circumscribed, as indicated by the Supreme Court of Canada in Bank of America Canada. In particular, the fact that the defendants as sophisticated business persons agreed to the lease rate of interest is a significant factor in favour of giving effect to the contractual rate notwithstanding the financial burden on the defendants that it involves.

[19] In reaching my decision, I also considered the Ontario Court of Appeal’s Stellarbridge decision referred to above, which arose in a similar factual context to the matter before me. In that case, the landlord recovered damages for the tenant’s breach of its repair and restoration obligations under the lease. The trial judge awarded pre-judgment and post-judgment interest at the rate specified for “additional rent” under the lease. In doing so, the court cited the desirability of giving legal effect to the contractual bargain the parties reached, relying on the principles set out in the Bank of America Canada decision. The Ontario Court of Appeal varied the trial judge’s decision, imposing the higher lease rate for only the small portion of the damages recovered that the landlord actually spent on repair and restoration. Interest on the balance of the damages, which were calculated based on estimates for repair and restoration work that the landlord chose not to undertake, was awarded at the lower statutory rate prescribed under the Courts of Justice Act.

[20] By contrast to the situation in Stellarbridge, the plaintiffs in the current action actually incurred all the amounts that were allowed as damages in the Reasons for Judgment. In order to calculate pre-judgment and post-judgment interest, it was therefore appropriate to apply the contractual lease rate (rather than the statutory rate) to the entire amount, applying the reasoning in the Stellarbridge decision.

[21] Accordingly, an order will issue requiring the defendants to pay pre-judgment interest and post-judgment interest on the damages award of $1,734,107 at the rate of 18 per cent per annum, with pre-judgment interest commencing July 1, 2008.

II. Costs

[22] There is no dispute that the plaintiffs, being the successful parties, should be entitled to their costs of the action. In their costs submission, the plaintiffs requested a costs award fixed at $106,581, including disbursements and tax. The calculation of that amount took into account the plaintiffs’ formal offer to settle served shortly before the trial commenced. The judgment the plaintiffs achieved at trial was more favourable than the terms of the offer to settle. Therefore, as contemplated by rule 49.10(1) of the Rules of Civil Procedure, the solicitors’ fees were calculated on a partial indemnity basis to the date of the offer and on a substantial indemnity basis thereafter.

[23] In response to the plaintiffs’ costs submission, defendants’ counsel indicated that he did not find the requested costs to be unreasonable. The defendants provided no further submissions on costs. I agree that the amount requested was appropriate in the circumstances, having regard to rule 49.10(1) and the factors set out in rule 57.01(1).

[24] Accordingly, the plaintiffs are entitled to their costs, fixed at $106,581 including disbursements and tax, payable by the defendants within 30 days.

The Honourable Mr. Justice R.A. Lococo Released: July 18, 2016