Court of Appeal for Ontario

Date: 2019-01-17 Docket: C65417

Judges: Rouleau, van Rensburg and Zarnett JJ.A.

Between

TFS RT Inc. and TFP International Inc. Plaintiffs (Respondents)

and

Kenneth Dyck, Shaun Dyck and GPEC Holdings Ltd. Defendants (Appellants)

Counsel

Caleb Edwards, for the appellants

Mark S. Shapiro and Michael J. Brzezinski, for the respondents

Heard

January 7, 2019

On Appeal

On appeal from the judgment of Justice Kenneth G. Hood of the Superior Court of Justice, dated April 23, 2018, with reasons reported at 2018 ONSC 2617.

Reasons for Decision

[1] The appellants appeal the summary judgment which was granted against them to enforce guarantees dated August 24, 2015 in favour of the respondents. The guarantees were of obligations of Green Patch Environmental Consulting Ltd. (the borrower). The individual appellants were at the relevant times the officers, directors, shareholders and directing minds of the borrower and of the corporate appellant, GPEC Holdings Ltd.

[2] The borrower incurred obligations to the respondents under a Loan Agreement dated August 24, 2015. The Loan Agreement provided that advances under it would bear interest before maturity at the rate of 2.5% per 30 days, and after maturity at an additional rate of 0.416% per 30 days (5% per annum). It also provided that the respondents would deliver monthly loan statements to the borrower showing advances, interest accrual and payments, which would be deemed conclusive and binding unless disputed in writing by the borrower.

[3] The borrower was provided with loan statements during the currency of the loan and after maturity. They showed that interest was calculated at 30% prior to maturity, which the motion judge interpreted to describe a per annum rate, and at 35% per annum after maturity. He found that the borrower never disputed the loan statements.

[4] The borrower defaulted under the Loan Agreement. After demands by the respondents under the Loan Agreement and the guarantees, a Forbearance Agreement was entered into among the appellants, the borrower and the respondents on March 17, 2016. As later extended, it provided for a period of forbearance by the respondents until May 14, 2016. The Forbearance Agreement stated the amount then owing for principal and interest, which the motion judge found was clearly calculated at the rate of 30% per annum pre-maturity and 35% per annum afterwards. It also contained covenants by the borrower and the appellants that there were no defences to the amount owed, that the Loan Agreement and guarantees were binding, and that there were no defences thereunder.

[5] The borrower did not make the payments the Forbearance Agreement required. The respondents commenced proceedings for the appointment of a receiver over the assets of the borrower.

[6] The motion judge found that by June 1, 2016 counsel for the borrower, who were also counsel for the appellants, were aware of a potential argument that the interest payable by the borrower under the Loan Agreement should be reduced and limited by virtue of s. 4 of the Interest Act, R.S.C. 1985, c. I-15. That section provides:

Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, 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 five 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 the other rate or percentage is equivalent.

[7] On June 6, 2016, in the pending receivership proceedings, Penny J. made an endorsement recording certain agreements between the borrower and the respondents, including the agreement of the borrower to:

[F]orego any further argument, defence, counterclaim, etc. regarding the quantum of the outstanding obligations owing to [the respondents], including any dispute as to the principal, accrued and accruing interest, default interest, legal fees and other professional fees.

[8] Subsequently a receiver was appointed and realizations were made from the borrower's assets and distributed to the respondents under court order. The payments to the respondents were not reduced by virtue of the Interest Act.

[9] The respondents commenced this action under the guarantees in July 2016, as the amounts realized from the borrower's assets were less than the full amount owed, as calculated under the Loan Agreement, the Forbearance Agreement and the orders in the receivership proceeding.

[10] Before the motion judge, the appellants argued that as the Loan Agreement specified a pre-maturity rate of interest of 2.5% per 30 days, and lacked an express statement of its yearly equivalent, the claim against them could not include interest on the borrower's obligations at a rate of more than 5% per annum as provided for by s. 4 of the Interest Act. The appellants argued that this adjustment meant they owed nothing, as the respondents' recoveries from the borrower's payments and the receivership realizations satisfied all obligations once interest was thus recalculated.

[11] The motion judge rejected this argument. He held that he did not have to determine whether the Loan Agreement violated the Interest Act, because the combined effect of the Forbearance Agreement and the orders consented to or made in the receivership, including the June 6, 2016 agreement, foreclosed any such argument.

[12] Before us, the appellants renew their argument of an Interest Act violation. They argue that the Forbearance Agreement could not have the effect the motion judge gave it as that would constitute an impermissible contracting out of the Interest Act's protections. And they argue they were not themselves parties to the June 6, 2016 agreement, which they concede meant that the borrower gave up any Interest Act argument it might have had.

[13] We would not give effect to the appellants' submissions, for the following reasons:

a) Similar to the motion judge we do not consider it necessary to determine whether the Interest Act was violated or whether, as the respondents argued, the Loan Agreement and the loan statements under it could together be taken as containing the required disclosure of a yearly equivalent rate in light of the sophistication of the parties and the comments of this court in Solar Power Network Inc. v. ClearFlow Energy, 2018 ONCA 727 at para. 53 about interpreting section 4 of the Interest Act to accord with "modern commercial reality".

b) Whatever the restrictions that may exist on contracting out of Interest Act protections, the parties here did not dispute that potential Interest Act arguments can be consensually resolved and such a resolution would be binding. That is exactly what the agreement of June 6, 2016 was. The appellants expressly conceded before us that the borrower's obligations would not be reduced by the Interest Act, because under the June 6, 2016 agreement the borrower agreed to forego and not raise any argument, defence or dispute regarding, among other things, accrued or accruing interest.

c) There is no merit to the argument that only the borrower, and not the appellants, were affected by the June 6, 2016 agreement. The appellants were the borrower's directing minds and were represented by the same counsel. When they directed the borrower to make the June 6, 2016 agreement, they had knowledge of the potential Interest Act issue and must be taken to have consented to the waiver by the borrower of any defence or dispute based on it, thereby confirming the borrower's obligations which they had guaranteed. The appellants cannot maintain that what the borrower owes for interest is to be determined giving effect to the June 6, 2016 agreement, while what they owe as guarantors of those same obligations is to be determined a different way. The guarantees were of all obligations of the borrower in connection with the Loan Agreement, and the Forbearance Agreement and the June 6, 2016 agreement defined and settled the amount of those obligations. The guarantees expressly bound the appellants to any account "settled or stated between the Lender and the Borrower or admitted by or on behalf of the Borrower".

Disposition

[14] The appeal is therefore dismissed with costs payable to the respondents in the amount of $14,000, inclusive of disbursements and applicable taxes, an amount agreed to between the parties.

"Paul Rouleau J.A."

"K. van Rensburg J.A."

"B. Zarnett J.A."