Garland v. Consumers’ Gas Co., [1998] 3 S.C.R. 112

Gordon Garland Appellant

v.

The Consumers’ Gas Company Limited Respondent

Indexed as: Garland v. Consumers’ Gas Co.

File No.: 25644.

1998: March 23; 1998: October 30.

Present: L’Heureux‑Dubé, Cory, McLachlin, Iacobucci, Major, Bastarache and Binnie JJ.

on appeal from the court of appeal for ontario

Criminal law ‑‑ Criminal interest rate ‑‑ Late payment penalty ‑‑ Gas utility charging late payment penalty of five percent on accounts not paid by due date ‑‑ Whether late payment penalty constitutes “interest at a criminal rate” ‑‑ Criminal Code, R.S.C., 1985, c. C‑46, s. 347.

Costs ‑‑ Class actions ‑‑ Class proceedings fund ‑‑ Costs of procedural motion awarded against class representative in his personal capacity ‑‑ Whether costs award should be set aside -- Law Society Act, R.S.O. 1990, c. L.8, s. 59.4 -- Class Proceedings Act, 1992, S.O. 1992, c. 6.

The respondent gas utility, whose rates and payment policies are governed by the Ontario Energy Board, bills its customers on a monthly basis, and each bill includes a “due date” for the payment of current charges. Customers who do not pay by the due date incur a late payment penalty (“LPP”) calculated at five percent of the unpaid charges for that month. The LPP is a one‑time penalty which does not compound or increase over time. It was implemented in 1975 following a series of rate hearings conducted by the Board. In granting the respondent’s application to impose the penalty, the Board noted that the primary purpose of the LPP is to encourage customers to pay their bills promptly, thereby reducing the cost to the respondent of carrying accounts receivable. The Board recognized that if a bill is paid very soon after the due date, the penalty can be shown to represent a very high rate of interest, but it noted that customers could avoid such a charge by paying their bills on time. The appellant commenced an action on behalf of a large number of the respondent’s customers alleging that the LPP violates s. 347 of the Criminal Code because ‑‑ for a significant number of customers each month ‑‑ it constitutes interest at a rate exceeding 60 percent per year. He submitted actuarial evidence showing that under the normal billing plan, the LPP gives rise to an interest rate exceeding 60 percent per annum for customers who pay within 37 days after the due date. Under the equal billing plan, the point at which the interest rate falls below 60 percent is between 24 and 90 days after the due date, depending on the month. The appellant also submitted statistical evidence indicating that while many of the respondent’s customers pay late, most pay only a few days late. In support of this action, the appellant applied for and received financial assistance from the Ontario Class Proceedings Committee. He also moved for certification of a class proceeding on behalf of all customers who paid LPP charges after April 1, 1981, when s. 347 of the Code came into force. Prior to the disposition of that motion both the appellant and the respondent moved for summary judgment on various grounds. A judge of the Ontario Court (General Division) granted summary judgment in favour of the respondent and dismissed the action. The respondent moved for an order amending the judge’s formal judgment. The appellant refused to consent to the motion. The motion was granted and the judge assessed costs to be payable by the appellant personally. The Court of Appeal dismissed the appellant’s appeal of the dismissal of his action.

Held (Bastarache J. dissenting): The appeal should be allowed and the matter remitted to the Ontario Court (General Division).

Per L’Heureux‑Dubé, Cory, McLachlin, Iacobucci, Major and Binnie JJ.: Section 347 of the Code applies to the LPP imposed by the respondent. For the purposes of s. 347, “interest” is an extremely comprehensive term which expressly includes charges or expenses “in the form of a . . . penalty”. However, not every charge or expense will be subject to the criminal interest rate provision. In order to constitute “interest” under s. 347, a charge ‑‑ whatever its form ‑‑ must be “paid or payable for the advancing of credit under an agreement or arrangement”. Under s. 347(2), “credit advanced” encompasses not only “the money” advanced under an agreement or arrangement, but also “the monetary value of any goods, services or benefits” which may be so advanced. The most plausible interpretation of s. 347(2) is that an “advance” of “the monetary value of any goods, services or benefits” means a deferral of payment for such items. The respondent provides goods and services to its customers, for which a specified amount of money is payable each month on a certain date. The deferral of that payment past the due date constitutes “credit advanced” within the meaning of s. 347(2), assuming that such deferral is permitted under the payment relationship which exists between the parties. Moreover, the credit is advanced by the respondent to its customers “under an agreement or arrangement”. The arrangement between the parties creates two payment options: a short‑term option, which costs nothing, and a longer‑term option, which involves an additional charge. While it is clear that the respondent neither encourages late payments nor seeks to profit from them, under the terms prevailing between the parties customers are permitted to defer their payment, albeit for a price. That is an arrangement for the advancing of credit under the broad language adopted in s. 347. On the facts of this case, a penalty incurred, pursuant to the terms of a standing arrangement between the parties, for the deferral of payment of a specified amount of money owing for goods, services or benefits is an “interest” charge within the meaning of s. 347 and is subject to that law’s prohibitions against requiring or receiving interest at a criminal rate.

Section 347 creates two separate offences. Section 347(1)(a) makes it illegal to enter into an agreement or arrangement to receive interest at a criminal rate, while s. 347(1)(b) makes it illegal to receive a payment or partial payment of interest at a criminal rate. Section 347(1)(a) should be narrowly construed. Whether an agreement or arrangement for credit violates the provision is determined as of the time the transaction is entered into. If the agreement or arrangement permits the payment of interest at a criminal rate but does not require it, there is no violation of s. 347(1)(a), although s. 347(1)(b) might be engaged. It is clear that there is no violation of s. 347(1)(a) in this case. The arrangement between the respondent and its customers does not, on its face, require the payment of interest at a criminal rate. Section 347(1)(b) should be broadly construed. Whether an interest payment violates the provision is determined as of the time the payment is received. For the purposes of s. 347(1)(b), the effective annual rate of interest arising from a payment is calculated over the period during which credit is actually outstanding. Pursuant to the decision in Nelson, there is no violation of s. 347(1)(b) where a payment of interest at a criminal rate arises from a voluntary act of the debtor, that is, an act wholly within the control of the debtor and not compelled by the lender or by the occurrence of a determining event set out in the agreement. The actuarial evidence submitted in this case shows that if a regular billing customer waits 38 days or longer to pay, the annual interest rate represented by the five percent charge drops below the criminal threshold of 60 percent per annum. It cannot be said, however, that payment of the LPP within 38 days is a “voluntary” act within the meaning of Nelson. While strictly speaking, it is true that customers may delay their payment of the LPP beyond 38 days, there is clearly no invitation to do so, and it would be disingenuous to conclude that customers actually perceive themselves to be at liberty to wait that long. Statistical evidence submitted by the appellant strongly supports the opposite conclusion.

The motions judge erred in awarding costs against the appellant in his personal capacity. The purpose of s. 59.4 of the Law Society Act is to protect class representatives from personal exposure to costs in actions where financial support has been granted by the Class Proceedings Fund. Since the appellant has successfully applied for support from the Class Proceedings Fund, he should not be exposed to personal liability for any costs arising in this action, including costs incurred in the context of procedural motions.

Per Bastarache J. (dissenting): While the definition of “interest” includes the notion of “penalty”, the application of s. 347 is also predicated upon the existence of an “agreement or arrangement” for the advancement of credit. On the facts of this case, the respondent has not entered into an agreement or arrangement to give credit to the appellant or to any other customers who have paid the LPP. Far from being a consensual extension of credit, the respondent’s LPP represents an effort to prevent or deter customers from unilaterally taking credit. The decisions of the Ontario Energy Board approving the LPP confirm that the penalty is not “paid or payable for the advancing of credit”, but is an incentive for timely payment. Further indicia supporting this view are the fact that the penalty is not compounded, the fact that it is a one‑time payment which does not increase over time, the fact that there is no sanction for the non‑payment of the penalty, and the fact that the penalty triggers contemporaneously with the account becoming overdue. Since s. 347 of the Code is not applicable, the action should be dismissed. A contract for the extension of credit should not be implied in every case where there is late payment pursuant to a sale of goods. This case involves a regulated industry and a rate approval scheme has been established with the specific purpose of protecting consumer interests. To limit the choice of means of the regulator by resorting to the criminal law power is inappropriate and unwarranted.

Cases Cited

By Major J.

Distinguished: Nelson v. C.T.C. Mortgage Corp. (1984), 1984 572 (BC CA), 16 D.L.R. (4th) 139, aff’d 1986 14 (SCC), [1986] 1 S.C.R. 749; referred to: William E. Thomson Associates Inc. v. Carpenter (1989), 1989 185 (ON CA), 69 O.R. (2d) 545; Tomell Investments Ltd. v. East Marstock Lands Ltd., 1977 33 (SCC), [1978] 1 S.C.R. 974; Immeubles Fournier Inc. v. Construction St‑Hilaire Ltée, 1974 155 (SCC), [1975] 2 S.C.R. 2; Attorney‑General for Ontario v. Barfried Enterprises Ltd., 1963 15 (SCC), [1963] S.C.R. 570; Delta v. Active Chemicals Ltd. (1984), 1984 299 (BC CA), 57 B.C.L.R. 213; Mira Design Co. v. Seascape Holdings Ltd. (1981), 1981 721 (BC SC), 34 B.C.L.R. 55; Aectra Refining & Marketing Inc. v. Lincoln Capital Funding Corp. (1991), 1991 7140 (ON SC), 6 O.R. (3d) 146; Degelder Construction Co. v. Dancorp Developments Ltd., 1998 765 (SCC), [1998] 3 S.C.R. 90.

By Bastarache J. (dissenting)

Coffelt v. Arkansas Power & Light Co., 451 S.W.2d 881 (1970); State ex rel. Utilities Commission v. North Carolina Consumers Council, Inc., 198 S.E.2d 98 (1973).

Statutes and Regulations Cited

Class Proceedings Act, 1992, S.O. 1992, c. 6.

Commercial Concentration Tax Act, R.S.O. 1990, c. C.16, s. 15(10).

Criminal Code, R.S.C. 1970, c. C‑34, s. 305.1.

Criminal Code, R.S.C., 1985, c. C‑46, s. 347(1), (2).

Excise Tax Act, R.S.C., 1985, c. E‑15, s. 7(1).

Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), ss. 163.1, 227(9).

Interest Act, R.S.C., 1985, c. I‑15 [formerly R.S.C. 1970, c. I‑18].

Law Society Act, R.S.O. 1990, c. L.8, ss. 59.2 [ad. 1992, c. 7, s. 3], 59.4 [idem].

Law Society Amendment Act (Class Proceedings Funding), 1992, S.O. 1992, c. 7, s. 3.

Municipal Franchises Act, R.S.O. 1990, c. M.55.

Ontario Energy Board Act, R.S.O. 1990, c. O.13.

Small Loans Act, R.S.C. 1970, c. S‑11, ss. 2 “cost”, 3.

Authors Cited

Antle, Stephen. “A Practical Guide to Section 347 of the Criminal Code ‑‑ Criminal Rates of Interest” (1994), 23 C.B.L.J. 323.

Canada. House of Commons Debates, 1st Sess., 32nd Parl., vol. III, July 21, 1980, p. 3146.

Feldman, Michael. “Criminal Interest Rates in the Context of Early Payment of a Debt Obligation” (1985), 2 Bus. & L. 70.

Goode, Royston Miles. Consumer Credit Law. London: Butterworths, 1989.

Keest, Kathleen E. The Cost of Credit: Regulation and Legal Challenges. Boston: National Consumer Law Center, 1995.

Oxford English Dictionary, 2nd ed. Oxford: Clarendon Press, 1989, “agreement”, “arrangement”.

Ziegel, Jacob S. “Section 347 of the Criminal Code” (1994), 23 C.B.L.J. 321.

Ziegel, Jacob S. “The Usury Provisions in the Criminal Code: The Chickens Come Home to Roost” (1986), 11 C.B.L.J. 233.

APPEAL from a judgment of the Ontario Court of Appeal (1996), 1996 1022 (ON CA), 30 O.R. (3d) 414, 93 O.A.C. 155, 28 B.L.R. (2d) 278, [1996] O.J. No. 3162 (QL), affirming a decision of the Ontario Court (General Division) (1995), 1995 7164 (ON SC), 22 O.R. (3d) 451, 122 D.L.R. (4th) 377, 17 B.L.R. (2d) 239, [1995] O.J. No. 302 (QL), dismissing the appellant’s action. Appeal allowed, Bastarache J. dissenting.

Barbara L. Grossman, Michael L. McGowan, Christopher D. Woodbury and Dorothy Fong, for the appellant.

Fred D. Cass, John J. Longo, Daniel Boivin and Janet Clark, for the respondent.

The judgment of L’Heureux-Dubé, Cory, McLachlin, Iacobucci, Major and Binnie JJ. was delivered by

1 Major J. -- This appeal concerns the interpretation and application of s. 347 of the Criminal Code, R.S.C., 1985, c. C-46 -- the “Criminal Interest Rate” provision. Section 347 makes it an offence to enter into an agreement for, or to receive, interest at a rate exceeding 60 percent per year. The respondent sells natural gas to Ontario residents. Customers who do not pay their bills on or before a specified date each month are subject to a five percent penalty for late payment. The main issue is whether that penalty, depending on when it is paid, may be said to constitute “interest at a criminal rate” within the meaning of s. 347 of the Code.

2 A subsidiary issue is whether the trial judge erred in awarding $500 in costs against the appellant personally in connection with a procedural motion. The appellant submits that because this putative class action has been approved for support by the Ontario Class Proceedings Committee, any award of costs must be assessed against the Class Proceedings Fund and may not be awarded against him in his personal capacity.

I. Facts

3 The respondent, Consumers’ Gas Company Limited (“Consumers’ Gas” or “CG”), is a regulated utility which provides natural gas to commercial and residential customers throughout Ontario. Its rates and payment policies are governed by the Ontario Energy Board (“OEB” or “Board”) pursuant to the Ontario Energy Board Act, R.S.O. 1990, c. O.13, and the Municipal Franchises Act, R.S.O. 1990, c. M.55. The respondent cannot sell gas or charge for gas-related services except in accordance with rate orders issued by the Board.

4 Consumers’ Gas bills its customers on a monthly basis, and each bill includes a “due date” for the payment of current charges. The due date normally falls on the 10th day (for commercial customers) or the 16th day (for residential customers) after the bill is issued. Customers who do not pay by the due date incur a late payment penalty (“LPP”) calculated at five percent of the unpaid charges for that month. The LPP is a one-time penalty, and does not compound or increase over time. Customers can avoid the LPP by participating in a pre-authorized payment system, whereby the amount of their monthly bill is deducted automatically on the due date from a designated bank account.

5 Consumers’ Gas offers its customers two billing plans. Under the normal plan, customers are simply billed for the cost of goods and services which they consume each month. Under the “Equal Billing Plan”, CG estimates the customer’s yearly consumption, bills an equal amount each month for 10 months, settles any balance in the 11th month, and bills for actual use in the 12th. About half of CG’s customers subscribe to each type of plan. Late-paying customers are subject to the LPP regardless of which plan is used.

6 The LPP was implemented in 1975 following a series of rate hearings conducted by the OEB. In granting CG’s application to impose the penalty, the Board noted that the primary purpose of the LPP is to encourage customers to pay their bills promptly, thereby reducing the cost to CG of carrying accounts receivable. The Board also held that such costs, along with any special collection costs arising from late payments, should be borne by the customers who cause them to be incurred, rather than by the customer base as a whole. In approving a flat penalty of five percent, the OEB rejected the alternative course of imposing a daily interest charge on overdue accounts. The Board reasoned that an interest charge would not provide sufficient incentive to pay by a named date, would give little weight to collection costs, and might seem overly complicated. The Board recognized that if a bill is paid very soon after the due date, the penalty can, if calculated as an interest charge, be shown to represent a very high rate of interest. However, it noted that customers could avoid such a charge by paying their bills on time, and that in any event in the case of the average bill the dollar amount of the penalty would not be very large.

7 On several occasions since its adoption, the LPP has been reviewed and re-approved by the OEB in essentially the same form. From 1981 until 1989, rate orders issued by the Board with regard to Consumers’ Gas incorporated the following provision (applicable to residential customers):

PENALTY FOR LATE PAYMENT:

When payment in full is not made within sixteen (16) days of the date of mailing, or the hand delivery of the bill, a penalty of five per cent (5%) of the current amount billed shall be levied....

Beginning in 1989, CG rate orders incorporated this statement from the respondent’s Handbook of Rates and Distribution Services (applicable to all customers):

SECTION F - PAYMENT CONDITIONS

Payment in full should be received by the Company ... on or before the due date specified in the monthly bill, which date is at least ten (10) days (sixteen (16) days in the case of Rates 1, 2, 6 and 9), after the date of rendering the bill. A penalty of five (5) percent of the unpaid portion of the current amount billed shall be added to the amount due if payment is not received as outlined above....

The record indicates that every rate order of the OEB regarding the respondent issued between 1981 and the filing of this action has incorporated the LPP as a component of the respondent’s rate structure.

8 Customers are made aware of the LPP in several ways. The due date for payment of current charges appears at the top of every residential bill, and is defined on the reverse as “the date that your account must be paid to avoid a late payment penalty”. The significance of the due date is also conveyed by the fact that two different amounts payable appear on the face of the bill: one amount is “payable by due date” while the other, somewhat higher, is “payable after due date”. In addition, a variety of informational brochures are provided by CG to its customers. The pamphlet entitled “Getting to Know Us” includes the following definitions of terms contained in the monthly bill:

6. Payable by due date -- This is the total amount payable on or before the due date in order to avoid a late payment penalty charge....

7. Due date -- The date on which your account must be paid in full in order to avoid a late payment penalty charge.

8. Payable after due date -- The total amount payable after the due date. This amount includes the late payment penalty charge.

Elsewhere in the same brochure, it is explained that:

You should pay your gas bill on or before the due date shown on the bill, in order to avoid late payment charges. These charges are designed to encourage late-paying customers to pay their accounts promptly, thus minimizing the cost of carrying outstanding accounts....

If you do not pay your account by the due date, you must pay the amount “payable after due date” that includes a late payment penalty.

9 The appellant, Gordon Garland, is a resident of Ontario and has been a Consumers’ Gas customer since 1983. He and his wife paid approximately $75 in LPP charges between 1983 and 1995. Garland asserts that the LPP violates s. 347 of the Criminal Code because -- for a significant number of customers each month -- it constitutes interest at a rate exceeding 60 percent per year. He commenced an action on behalf of over 500,000 Consumers’ Gas customers seeking restitution of LPP charges received by the respondent in violation of s. 347 of the Code.

10 Garland contends that because the LPP is a one-time charge, the effective rate of interest arising from it depends on when a customer actually pays his or her overdue bill. Actuarial evidence submitted by Garland shows that, under the normal billing plan, the LPP gives rise to an interest rate exceeding 60 percent per annum for customers who pay within 37 days after the due date. It is only on the 38th day after the due date that the interest rate falls below 60 percent and so within the legal limit. It thereafter decreases gradually from 60 percent until paid. Under the Equal Billing Plan, the calculation is more complex -- Garland’s actuarial evidence indicates that for such customers, the point at which the interest rate falls below 60 percent is between 24 and 90 days after the due date, depending on the month. For the purpose of this appeal, these calculations are presumed to be accurate.

11 Garland has also submitted statistical evidence indicating that while many of the respondent’s customers pay late, most pay only a few days late. Specifically, the evidence shows that between 1981 and 1991, an average of 34.3 percent of customers failed to pay by the due date on at least one of their bills, but 81 percent of those customers paid within 10 days thereafter. Thus, overall during that period, 27.9 percent of CG’s customers paid an LPP charge within 10 days after the due date, i.e., well within the time period during which the rate of interest arising from that charge is alleged to have exceeded 60 percent. Again, these figures are presumed to be true for the purposes of this appeal.

12 Finally, Garland has submitted documentary evidence showing that for budgeting purposes, Consumers’ Gas makes and relies on forecasts of the revenue it will receive from LPP charges each year. For 1994, the estimate was $7.1 million, and for 1995, the budget forecast was $7.4 million. Garland has also submitted evidence showing that the total of LPP charges received by CG between 1981 and 1993 was $71.2 million.

13 In support of this action, Garland applied for and received financial assistance from the Ontario Class Proceedings Committee, pursuant to s. 59.2 of the Law Society Act, R.S.O 1990, c. L.8. Garland also moved, pursuant to the Class Proceedings Act, 1992, S.O. 1992, c. 6, for certification of a class proceeding on behalf of all customers who paid LPP charges after April 1, 1981, when s. 347 of the Code came into force. Prior to the disposition of that motion, both Garland and Consumers’ Gas moved for summary judgment on various grounds. Summary judgment was granted in favour of Consumers’ Gas and the action was dismissed. Garland’s appeal was dismissed by the Ontario Court of Appeal. This appeal follows.

II. Relevant Statutory Provisions

14 Criminal Code, R.S.C., 1985, c. C-46

Criminal Interest Rate

347. (1) Notwithstanding any Act of Parliament, every one who

(a) enters into an agreement or arrangement to receive interest at a criminal rate, or

(b) receives a payment or partial payment of interest at a criminal rate,

is guilty of

(c) an indictable offence and is liable to imprisonment for a term not exceeding five years, or

(d) an offence punishable on summary conviction and is liable to a fine not exceeding twenty‑five thousand dollars or to imprisonment for a term not exceeding six months or to both.

(2) In this section,

“credit advanced” means the aggregate of the money and the monetary value of any goods, services or benefits actually advanced or to be advanced under an agreement or arrangement minus the aggregate of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense directly or indirectly incurred under the original or any collateral agreement or arrangement;

“criminal rate” means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement;

“interest” means the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement, by or on behalf of the person to whom the credit is or is to be advanced, irrespective of the person to whom any such charges and expenses are or are to be paid or payable, but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes;

(3) Where a person receives a payment or partial payment of interest at a criminal rate, he shall, in the absence of evidence to the contrary, be deemed to have knowledge of the nature of the payment and that it was received at a criminal rate.

(4) In any proceedings under this section, a certificate of a Fellow of the Canadian Institute of Actuaries stating that he has calculated the effective annual rate of interest on any credit advanced under an agreement or arrangement and setting out the calculations and the information on which they are based is, in the absence of evidence to the contrary, proof of the effective annual rate without proof of the signature or official character of the person appearing to have signed the certificate.

III. Judicial History

A. Ontario Court (General Division) (1995), [1995 7164 (ON SC)](https://www.canlii.org/en/on/onsc/doc/1995/1995canlii7164/1995canlii7164.html), 22 O.R. (3d) 451

15 As noted, cross-motions for summary judgment were filed by Garland and Consumers’ Gas before this action was certified as a class proceeding. By agreement of the parties, a hearing was held before Winkler J. on the threshold question raised in CG’s motion, i.e., whether s. 347 has any application to the circumstances of this case.

16 Consumers’ Gas raised three arguments to support its contention that s. 347 does not apply and that Garland’s action should be dismissed. First, it asserted that the purpose of the LPP is to encourage timely payment, not to achieve a rate of return on an advancement of credit, and therefore the LPP is not “interest” within the meaning of s. 347. In particular, CG pointed out that unlike an interest charge, the LPP is a one-time penalty which does not increase over time. Second, CG argued that s. 347 is intended to cover loans of money, and does not apply where, as here, the alleged “credit” consists solely of the value of goods, services or benefits advanced. Finally, CG relied on the decision in Nelson v. C.T.C. Mortgage Corp. (1984), 1984 572 (BC CA), 16 D.L.R. (4th) 139 (B.C.C.A), aff’d 1986 14 (SCC), [1986] 1 S.C.R. 749, to argue that even if the LPP is a charge for the advancement of credit, it cannot violate s. 347 because the payment of the penalty and the interest rate arising from it are determined by voluntary acts of the customer, not by any agreement between the parties.

17 In response, Garland argued that “credit advanced” need not involve a loan of money. He asserted that the arrangement between CG and its customers, which allows for the deferral of payment for goods and services, is a credit arrangement within the meaning of s. 347. Garland further contended that the LPP is, in substance, an interest charge payable for the advancement of such credit. Finally, Garland asserted that the decision in Nelson is distinguishable from this action, because incurring and paying the LPP are not “voluntary” acts of the customer within the meaning of Nelson. In his submission, the actual receipt of interest at a criminal rate by CG constitutes a violation of para. (b) of s. 347(1), even if such an interest rate is not necessarily required on the face of the arrangement between the parties.

18 Winkler J. focused his analysis largely on the significance of the Nelson decision. In his view, Nelson established three principles applicable to the case at bar (at p. 467):

[F]irst, that whether an agreement or arrangement violates s. 347 must be determined at the time the agreement is entered into; second, that whether the lender is in breach of s. 347 cannot turn on the voluntary conduct of the borrower, and third, that there is no violation of s. 347 where the payment of a criminal interest is not required by the agreement or arrangement.

Applying these principles, Winkler J. concluded that the LPP could never give rise to an offence under s. 347 because the payment of the penalty at a criminal rate of interest turns on the voluntary conduct of the customer. Winkler J. found that, as in Nelson, no payment of illegal interest is required under the arrangement between Consumers’ Gas and its customers, at the time that arrangement is entered into. If the customer pays on time, no LPP will be levied. Likewise, if the customer misses the due date but then further delays payment of the LPP for a sufficient amount of time (e.g., 38 days), the resulting rate of interest falls below 60 percent. Winkler J. gave no weight to statistical evidence indicating that a consistent percentage of CG’s customers every month do in fact pay an LPP at an illegal interest rate. He held that in any given case, it is always the customer who determines whether or not to incur the LPP and whether to pay it during the window of time when it may be considered a criminal rate.

19 Despite this conclusion, Winkler J. went on to consider whether the LPP may be said to constitute “interest” payable for the “advancing of credit under an agreement or arrangement” within the meaning of s. 347. He noted that s. 347 is broadly written and covers a wide range of transactions. In particular, he rejected the contention that the provision applies only to lenders and borrowers of money, and held that “credit advanced” can also refer to the deferral of payment for goods or services. However, he did not agree that any late payment is necessarily a deferral of payment or an advancement of credit, particularly where, as here, substantial efforts have been made to encourage the customer to pay on time. He stressed the distinction between the situation where a customer simply fails to pay by a stipulated time -- which he held to be the case on the facts before him -- and the situation where a lender agrees to delay its demand for payment in exchange for consideration. He found that s. 347 applies only to the latter situation. Winkler J. emphasized that the LPP is a one-time payment which does not compound over time, and that there are no immediate consequences for failing to pay it by a given date once it has been incurred. He concluded that the LPP is not levied in order to allow customers to take more time in paying their bills, but rather to discourage them from so doing. Accordingly, he found that the LPP is not an interest charge within the scope of s. 347.

20 Winkler J. granted summary judgment in favour of Consumers’ Gas and dismissed the action.

B. Ontario Court of Appeal (1996), 30 O.R. (3d) 4l4

21 The Ontario Court of Appeal (Doherty, Abella and Charron JJ.A.) agreed with the conclusion of Winkler J. that Nelson is dispositive, and noted in particular that the reasons in Nelson were substantially affirmed by this Court. In obiter dictum, the Court of Appeal also agreed that s. 347 applies to transactions where the alleged “credit advanced” consists entirely of the value of goods, services, or benefits. However, the court expressed no opinion on the question of whether the LPP can be characterized as “interest” payable for the “advancing of credit under an agreement or arrangement” within the meaning of s. 347. The appeal was dismissed.

IV. Issues

22 (1) Does the late payment penalty charged by Consumers’ Gas come within the scope of s. 347 of the Criminal Code?

(2) Did the motions judge err in awarding costs against Garland in his personal capacity?

V. Analysis

A. Does the late payment penalty charged by Consumers’ Gas come within the scope of [s. 347](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-46/latest/rsc-1985-c-c-46.html) of the [Criminal Code](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-46/latest/rsc-1985-c-c-46.html)?

23 Section 347 (formerly s. 305.1) of the Criminal Code, which came into effect on April 1, 1981, created Canada’s first general anti-usury provision since Confederation. Prior to the adoption of s. 347, lenders and borrowers enjoyed absolute freedom under federal law to agree upon any rate of interest, subject only to the contractual restraints imposed at common or civil law and the special disclosure requirements arising under the Interest Act, R.S.C., 1985, c. I-15 (formerly R.S.C. 1970, c. I-18). The main exception to that rule was the Small Loans Act, R.S.C. 1970, c. S-11, s. 3, which limited the imposition of interest and other charges on loans of $1,500 or less. That Act, which was designed to protect borrowers seeking small personal loans, was repealed by the bill which created s. 347. See William E. Thomson Associates Inc. v. Carpenter (1989), 1989 185 (ON CA), 69 O.R. (2d) 545 (C.A.), at pp. 548-49. The current provision goes far beyond the scope of the Small Loans Act, both by criminalizing a particular interest rate for the first time, and by imposing a generally applicable ceiling on all types of credit arrangements without regard to the sophistication of the parties or the amount in issue.

24 Under s. 347, an effective annual rate of interest which exceeds 60 percent of the credit advanced under an agreement or arrangement is a criminal interest rate. The statute creates two offences with regard to such interest. Section 347(1)(a) makes it illegal to enter into an agreement or arrangement to receive interest at a criminal rate. Section 347(1)(b) makes it illegal to receive a payment or partial payment of interest at a criminal rate. The scope of the language in s. 347 is extremely broad. Interest is defined, with the exception of six specific items, as the aggregate of all charges and expenses, in any form, that are paid or payable for the advancing of credit under an agreement or arrangement. The definition of credit is similarly expansive. It includes the aggregate of the money and the monetary value of any goods, services or benefits advanced under an agreement or arrangement, minus any fees, commissions or similar charges incurred by the creditor.

25 The ostensible purpose of s. 347 was to aid in the prosecution of loan sharks. See House of Commons Debates, 1st Sess., 32nd Parl., vol. III, July 21, 1980, at p. 3146; Thomson, supra, at p. 549. However, it is clear from the language of the statute -- e.g., its reference to insurance and overdraft charges, official fees, and property taxes in mortgage transactions -- that s. 347 was designed to have a much wider reach, and in fact the section has most often been applied to commercial transactions which bear no relation to traditional loan-sharking arrangements. Although s. 347 is a criminal provision, the great majority of cases in which it arises are not criminal prosecutions. Rather, like the case at bar, they are civil actions in which a borrower has asserted the common-law doctrine of illegality in an effort to avoid or recover an interest payment, or to render an agreement unenforceable. For this reason, the provision has attracted criticism from some commercial lawyers and academics, and calls have repeatedly been made for its amendment or repeal. See, e.g., J. S. Ziegel, “The Usury Provisions in the Criminal Code: The Chickens Come Home to Roost” (1986), 11 C.B.L.J. 233; “Section 347 of the Criminal Code” (1994), 23 C.B.L.J. 321. Nevertheless, it is now well settled that s. 347 applies to a very broad range of commercial and consumer transactions involving the advancement of credit, including secured and unsecured loans, mortgages and commercial financing agreements.

26 The extent of s. 347’s scope is the subject of this appeal. At issue is whether the section applies to penalties for late payment, and in particular the five percent LPP imposed by Consumers’ Gas on customers who fail to pay their bills by a prescribed due date. The question has two parts. The first is whether the LPP can be said to constitute “interest” under s. 347, as opposed to being simply an incentive for timely payment. The second is whether the principles set forth in the Nelson case preclude the application of s. 347 here on the ground that any interest rate arising from the LPP depends on the voluntary conduct of the customer. These issues will be addressed in turn.

1. Is the LPP “interest” within the meaning of s. 347?

27 Pursuant to s. 347(2), “interest” is defined as:

... the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement ... but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes;

It is apparent from this definition that for the purposes of s. 347 “interest” is an extremely comprehensive term, encompassing many types of fixed payments which would not be considered interest proper at common law or under general accounting principles. In particular, charges or expenses “in the form of a ... penalty” are expressly included as interest under s. 347. At common law, interest is a charge for the use or retention of money which accrues day by day; it does not include penalties. See Tomell Investments Ltd. v. East Marstock Lands Ltd., 1977 33 (SCC), [1978] 1 S.C.R. 974, at p. 983; Immeubles Fournier Inc. v. Construction St-Hilaire Ltée, 1974 155 (SCC), [1975] 2 S.C.R. 2, at pp. 10-11; Attorney-General for Ontario v. Barfried Enterprises Ltd., 1963 15 (SCC), [1963] S.C.R. 570.

28 In adopting s. 347, Parliament opted for the more inclusive “cost of the loan” concept derived from the Small Loans Act, which s. 347 replaced. Section 2 of that Act provided:

2. ...

“cost” of a loan means the whole of the cost of the loan to the borrower whether the cost is called interest or is claimed as discount, deduction from an advance, commission, brokerage, chattel mortgage and recording fees, fines, penalties or charges for inquiries, defaults or renewals or otherwise....

The broad language of s. 347 was presumably intended (as it was in the Small Loans Act) to prevent creditors from avoiding the statute simply by manipulating the form of payment exacted from their debtors -- a practice which has historically undermined the effectiveness of anti-usury laws applying a strict definition of interest: Thomson, supra, at pp. 548-49; see also K. Keest, The Cost of Credit (1995), at p. 38. It is the substance, and not merely the form, of a charge or expense which determines whether it is governed by s. 347.

29 The LPP at issue in this appeal is a fixed payment, rather than a charge which accrues day by day. The motions judge emphasized that point in concluding that the LPP does not come within the scope of s. 347. At p. 473, he stated in part:

First, the penalty is not compounded. Although it is expressed as a percentage of the amount owing, it is in fact a lump sum which is charged only if payment is not made by the due date. Second, the penalty is a one-time payment which does not increase over time.

The same argument has been advanced by the respondent in this appeal. To distinguish between fixed and time-sensitive charges is inconsistent with the plain language of s. 347, and to the extent the motions judge relied on such a distinction, such reliance was unfounded. As noted, Parliament expressly expanded the meaning of interest under s. 347 to include one-time charges, whether payable at the outset of a transaction (e.g., fees and commissions) or after repayment is due (e.g., fines and penalties). A time factor, while essential to the definition of common-law interest, is not necessary to bring a payment within the ambit of s. 347, and the LPP cannot be excluded on that ground.

30 It is equally clear, however, that not every charge or expense will be subject to the criminal interest rate provision. In order to constitute “interest” under s. 347, a charge -- whatever its form -- must be “paid or payable for the advancing of credit under an agreement or arrangement” (emphasis added). To contend that the LPP comes within the scope of s. 347 simply because it is a “penalty” is a formalistic and unpersuasive argument. The issue is whether that penalty constitutes, in substance, a cost incurred by customers to receive credit under an arrangement with Consumers’ Gas.

31 There is a basic disagreement in this case about how the LPP should properly be characterized for the purposes of s. 347. The appellant asserts that the LPP is a price paid by customers for the privilege of retaining money that is owed to Consumers’ Gas beyond a certain date. As such, he submits, it is in essence a charge for credit under a standing arrangement between the parties. The respondent submits that the LPP is merely an incentive for timely payment and has nothing to do with credit. It asserts that because it lends no money to its customers, but merely bills them for goods and services, there is no extension of credit within the meaning of s. 347. Furthermore, it submits that even if the deferral of payment for those goods and services is in fact a form of credit, such credit is unilaterally taken by late-paying customers, not advanced under any agreement or arrangement between the parties.

32 The dispositive question, therefore, is whether the LPP may be said to constitute a charge or expense “paid or payable for the advancing of credit under an agreement or arrangement”. In answering that question, the Court should look to the substance, not merely the form, of the payment relationship which exists between Consumers’ Gas and its customers. The basic features of that relationship are not in dispute and may be briefly stated: Consumers’ Gas provides goods and services to its customers, but does not bill them immediately upon delivery or performance. Instead, it issues a bill each month for the total charges incurred in the preceding service period. The amount owing on the bill is due by a specified date. Customers who do not pay by that date must pay the amount owing plus an additional five percent penalty.

“Credit Advanced”

33 As a first step, it is necessary to determine whether the relationship between Consumers’ Gas and its customers involves any advancement of credit within the meaning of s. 347. Although s. 347 is not confined to loan-sharking, in general the section arises in transactions which involve an advance of money in some form, whether in a conventional loan, a mortgage, a commercial financing agreement or otherwise. This case presents a more unusual situation, since it is clear that Consumers’ Gas does not actually lend any money to its customers.

34 In keeping with the thrust of the section in general, “credit advanced” is broadly defined in s. 347(2):

“credit advanced” means the aggregate of the money and the monetary value of any goods, services or benefits actually advanced or to be advanced under an agreement or arrangement minus the aggregate of any required deposit balance and any fee, fine, penalty, commission and other similar charge or expense directly or indirectly incurred under the original or any collateral agreement or arrangement;

Notably, this definition encompasses not only “the money” advanced under an agreement or arrangement, but also “the monetary value of any goods, services or benefits” which may be so advanced. The scope of s. 347 therefore is not confined exclusively to loans of money. The respondent submits, however, that the reach of s. 347 is limited to cases in which at least some money has been advanced. This argument is based on a grammatical analysis of s. 347(2), since “money” is preceded by the definite article “the”, whereas the phrase “goods, services or benefits” is modified by the indefinite article “any”. Both the motions judge and the Court of Appeal rejected that contention as overly formalistic, and I agree. Section 347 applies to arrangements involving the monetary value of goods, services or benefits even in the absence of an outright advance of money.

35 The most plausible interpretation of s. 347(2) is that an “advance” of “the monetary value of any goods, services or benefits” means a deferral of payment for such items. A debt is deferred -- and credit extended -- when an agreement or arrangement permits a debtor to pay later than the time at which payment would otherwise have been due. See R. M. Goode, Consumer Credit Law (1989), at p. 109. The substance of such “credit” is a determined amount of money which is payable over time. Unlike the principal of a loan, however, such credit is not initially paid out to the debtor in the form of money, but arises when a debt is incurred for goods, services or benefits, and that debt is then deferred in full or in part by agreement of the parties.

36 An example is a credit sale. Such transactions are analogous to loans even though no money actually changes hands. In place of borrowing funds to pay for goods or services which have been provided, the debtor retains possession of his or her own money and the vendor assumes the position of a creditor by virtue of deferring the debt. Ordinarily in such circumstances, a premium is charged on the deferred amount, reflecting the value of the money which is now owed to the creditor but remains in the control of the party who has been permitted to delay payment. Under this interpretation of s. 347, the retailer who provides financing on a sale at an interest rate exceeding 60 percent per year is subject to the same criminal sanctions as the loan shark who lends money directly at such a rate.

37 It is crucial to bear in mind that the “credit advanced” in such situations consists of “monetary value” -- a specific amount of money that is owed for goods, services or benefits pursuant to an agreement or arrangement -- and not the goods, services or benefits themselves. If every sale, performance of services or conveyance of benefits were understood to be an advance of “credit”, there would be virtually no limit to the application of s. 347. That section, despite its broad scope, is essentially concerned with regulating the relationship between creditors and debtors, not the relationship between commercial actors in the ordinary course of business.

38 This distinction can be illustrated with an example. Assume the purchase of a car for $1,000. Payment of the purchase price will normally be due at a date specified in the sale agreement or when the car is tendered. No credit exists in such a situation, regardless of whether the seller is in fact paid on time, because the car is not advanced to the purchaser as “credit”. However, if the seller and purchaser enter into an arrangement to delay payment of the purchase price for one month, then credit has been advanced and any premium charged by the seller for that extension of time must comply with the requirements of s. 347. The “monetary value” of the car is now a fixed amount -- $1,000 -- under their agreement, and the advancement of that credit begins at the moment when payment would otherwise have been due.

39 The car itself, which may in reality be worth more or less than $1,000, is not the “credit advanced” and is not relevant for the purposes of s. 347. If the opposite were true, it would be virtually impossible to calculate an interest rate arising from such a transaction, since the value of the credit would be undefined. In addition, and more importantly, any transaction involving an “advance” of goods, services or benefits -- such as a rental or leasing agreement -- would be swept within the ambit of s. 347, and many such transactions would undoubtedly give rise to “interest” exceeding the legal limit. Assume that instead of being purchased, the car is rented for a day at a price of $50. If the car were to constitute credit advanced under s. 347(2), then the return of the car to the rental agency would presumably be a repayment of principal, and the charge paid for the advancing of that credit -- $50 for one day -- would give rise to an astronomical interest rate based on the value of the car. Such an absurd result could not have been intended by Parliament when it adopted s. 347. For the deferral of a debt to constitute “credit advanced” under s. 347, there must be a specified amount owing, and that amount must actually be due in the absence of an arrangement permitting later payment.

40 In the case at bar, Consumers’ Gas provides goods and services to its customers, for which a specified amount of money is payable each month on a certain date. In light of the principles stated above, the deferral of that payment past the due date constitutes “credit advanced” within the meaning of s. 347(2), assuming that such deferral is permitted under the payment relationship which exists between the parties. The remaining question, therefore, is whether credit is advanced by Consumers’ Gas to its customers “under an agreement or arrangement”.

“Agreement or Arrangement”

41 As noted at the outset, “interest” under s. 347 is a charge which is “paid or payable for the advancing of credit under an agreement or arrangement”. Consumers’ Gas contends that even if credit may be said to include the deferral of payment for goods or services, no “agreement or arrangement” for the advancing of such credit exists where a customer simply fails or refuses to pay a bill on time and thereby takes such “credit” unilaterally. In the respondent’s view, an agreement or arrangement for credit only arises when the creditor agrees to delay its demand for payment, normally in exchange for some form of consideration.

42 The respondent submits that in the case at bar there is no such consensual arrangement -- the LPP is imposed not as compensation for credit but as a means to deter customers from paying late. The respondent emphasized, as it did in the courts below, that the LPP does not have the “characteristics which one would expect” of a charge for credit, since it is a one-time payment which does not repeat, compound or increase over time, and no additional penalties accrue if a customer fails to pay it by any particular date. It is contended that the LPP is more akin to the late payment penalties which are authorized under federal and provincial statutes, such as the Excise Tax Act, R.S.C., 1985, c. E-15, s. 7(1), the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), ss. 163.1 and 227(9), and the Commercial Concentration Tax Act, R.S.O. 1990, c. C.16, s. 15(10). The respondent submits that Parliament could not have intended for those provisions to constitute agreements or arrangements for the advancing of credit within the meaning of s. 347.

43 The respondent also relies on decisions of the OEB to support its argument regarding the purpose of the LPP. In particular, it cites the original order of the OEB approving the implementation of the penalty. In that decision, the Board emphasized the deterrent effect of such penalties, and specifically rejected the option of imposing a conventional interest charge on overdue accounts. See Reasons for Decision, E.B.R.O. 302-II (September 4, 1975). The Board held at pp. 116-18:

The primary objective of this charge is to encourage customers to pay promptly and thus minimize the growing cost of carrying accounts receivable.... The Applicant [Consumers’ Gas] submits that these costs as well as extraordinary collection costs should be borne by customers who cause them to be incurred.

The late payment penalty charge is a well established and practical device in widespread use in Ontario and elsewhere to encourage prompt payment of utility bills....

The Board recognizes that a few regulatory Boards and text-book writers have been critical of a penalty charge of the kind used by the Applicant. However, the Board does not think that a monetary incentive for prompt payment is wrong in principle. Interest charged on over-due accounts on a daily basis has an appeal on theoretical grounds, but it gives little incentive to pay by a named date, gives little weight to collection costs and seems complicated.

Similarly, in 1988 the OEB reviewed the fairness of the LPP and concluded that it should be maintained in its existing form. See Reasons for Decision, E.B.R.O. 452 (December 21, 1988). In so finding, the Board noted at p. 330 that “the late payment penalty should be large enough to deter those customers who otherwise might be tempted to defer payment”. Consumers’ Gas submits that the Board’s characterization of the LPP should be accorded curial deference by this Court.

44 The respondent’s arguments on this point were accepted by the motions judge, who held as follows at pp. 469-71:

From the foregoing [OEB] decisions, it is apparent that the OEB does not view the LPP charged by Consumers’ Gas as an interest charge for the advancing of credit. Instead, as the defendant submits, the OEB considers it to be an incentive for timely payment....

I accept the plaintiff’s argument that a deferral of payment constitutes credit. However, I do not agree that just because a customer does not pay on time means that there has been a deferral of payment or that credit has been advanced, particularly where the company has done what it could to encourage the customer to pay on time. A distinction must be drawn between the situation in which a customer fails to pay within a stipulated time, because of inadvertence, choice or because he does not have the money, and the situation in which an agreement is entered into whereby the lender of money or issuer of goods agrees to delay its demand for payment, in exchange for the consideration of an additional charge. In my view, s. 347 is applicable only to the latter situation. The facts before me reveal the former situation.

The Court of Appeal dismissed Garland’s appeal on separate grounds and declined to reach the issue of whether the LPP is a charge “payable for the advancing of credit under an agreement or arrangement”.

45 It is true that there is an important difference between the consensual granting of credit and the unilateral taking of it. See, e.g., Goode, supra, at p. 108. As noted, s. 347 does not apply to situations in which a buyer or consumer fails to pay on time, without the consent of the other party, for goods, services or benefits provided. The facts in this case, however, present a different situation. The payment relationship which exists between Consumers’ Gas and its customers is defined by a standing arrangement. The terms of that arrangement are imposed by Consumers’ Gas, after approval by the OEB. They are clearly conveyed to every customer and do not change from month to month. Those terms provide, in plain language, that a customer’s gas bill may be paid either before or after the due date. As the motions judge observed at p. 466:

[T]he bill received by the customer states the amount “payable by due date”, the “due date” and the amount “payable after due date”. The bill does not indicate that payment must be made by the due date and I question the ability of Consumers’ to sue as soon as the due date has passed.

It is also made clear, however, that Consumers’ Gas prefers to receive payment by the due date, and that customers who, for whatever reason, fail to meet that deadline must pay a price of five percent on top of the amount owing for that month.

46 In short, the arrangement between the parties creates two payment options: a short-term option, which costs nothing, and a longer-term option, which involves an additional charge. The motions judge recognized this as well in the closing words of his decision, when he observed (at pp. 473-74) that the transaction between the parties “is a two-price system by which customers can opt to pay one price by the due date or another price thereafter”. He concluded that such an arrangement “represents a discount which is forfeited if payment is not made by the due date” (p. 474). It can just as easily be said that the LPP represents a premium imposed when payment is made over the longer period. Customers who do not like these terms presumably may end their relationship with the respondent; by continuing to subscribe to its services they accept the terms of the prevailing arrangement, including the imposition of the LPP. It cannot properly be contended that Consumers’ Gas, having designed those terms itself, does not consent to the customer acting in accordance with them.

47 The respondent does not deny that the LPP is imposed under an arrangement, but disputes the nature of that arrangement. As noted, it argues that the intended purpose of the LPP is not to exact a price for credit but to discourage the taking of credit in the first place. That assertion is not entirely supported by the record. The OEB found that deterrence of late payments is the “primary objective” of the LPP. However, it also held that when such deterrence is not effective, another purpose of the penalty is to ensure that the “cost of carrying accounts receivable” is recovered from customers who, by delaying payment, cause such costs to be incurred (Reasons for Decision, E.B.R.O. 302-II, supra, at p. 116). Before approving the respondent’s request to implement the LPP in 1975, the OEB held a series of hearings, during which the Associate Comptroller of the respondent was examined with regard to the purpose of the LPP. He stated in part:

Q: The cost of money is a real problem is it?

A: Yes, sir.

Q: You don’t want the customers to be sitting with lots of the company’s money for long periods of time. You require cash flow. Is that fair?

A: Yes, sir, that is correct.

Q: It costs the company money to borrow money?

A: Yes, sir.

Q: Isn’t this late payment charge then a charge to the customer for keeping the money past a certain time period, for keeping the money for a certain length of time?

A: Partly that and partly to recover our collection costs.

Transcript of Examination of D. C. Morton, January 24, 1975 (Case on Appeal, at pp. 376-77). Similarly, in one of its informational brochures (“Some special billing charges”), Consumers’ Gas explains the purpose of the LPP to its customers as follows (Case on Appeal, at p. 680):

The primary purpose of this charge is to encourage our customers to pay on or before the due date and thereby maintain the company’s cash flow. Revenue from this penalty helps to offset our costs of carrying outstanding gas accounts receivable and collecting delinquent accounts.

Compensation for the cost of payment deferred is the hallmark of a credit arrangement.

48 Even if deterrence were the only intended purpose of the LPP, that would not be determinative of the issue before the Court. The nature of the arrangement between Consumers’ Gas and its customers is a question of law. That question turns on how the LPP operates in substance, not on what the respondent hopes to achieve by imposing it. Nor does the Court owe curial deference to the OEB with regard to the characterization of the penalty. It is clear that Consumers’ Gas neither encourages late payments nor seeks to profit from them. The issue, however, is not what the company would prefer but what it has consented to. Under the terms prevailing between the parties, customers are permitted to defer their payment, albeit for a price. That is an arrangement for the advancing of credit under the broad language adopted in s. 347. As the OEB recognized, a five percent penalty is an effective deterrent precisely because it constitutes a high cost, in economic terms, for the retention of money. It is the severity of that cost which, in the view of the appellant, runs afoul of s. 347.

49 This conclusion is not affected by the fact that late payment penalties exist in certain federal and provincial statutes. Such penalties are readily distinguishable from the LPP at issue here. The contractual relationship between a public utility and its customers regarding the payment of monthly charges is not comparable to the political relationship between a government and its citizens regarding the payment of taxes. There is no agreement or arrangement between the latter parties governing the imposition of taxes, let alone permitting the payment of one amount by a due date and another amount thereafter. In any event, for the purposes of s. 347, tax is not the monetary value of goods, services, or benefits provided by the government, and the deferral of tax, even if such deferral were permitted, would not constitute “credit” within the meaning of s. 347(2). See Delta v. Active Chemicals Ltd. (1984), 1984 299 (BC CA), 57 B.C.L.R. 213 (C.A.), at p. 217.

50 For these reasons, I conclude that the LPP imposed by Consumers’ Gas is a “charg[e] ... in the form of a ... penalty ... payable for the advancing of credit under an agreement or arrangement”. As such it is an interest charge for the purposes of s. 347.

51 The conclusions reached in this appeal may not follow intuitively from the concepts of “credit” and “interest” as those terms are employed at common law and in everyday life. The result here is mandated by the extremely broad compass given to those terms by Parliament under s. 347. As Huddart L.J.S.C. observed in Mira Design Co. v. Seascape Holdings Ltd. (1981), 1981 721 (BC SC), 34 B.C.L.R. 55, at p. 60:

The thrust of the definitions of “credit advanced” and “interest” is to cover all possible aspects of any transaction to ensure that the cost of using someone else’s money never exceeds the criminal rate. Thus, they focus on the actual benefit given to the borrower and the real cost of borrowing. The actual benefit is the real amount in the borrower’s hands minus all the penalties, commissions and other costs incurred. The cost of borrowing is also widely defined. Clearly the intention of the legislature was to concentrate on the substance of the transaction, not on its mechanics or form.

52 It should be noted however that s. 347 is a deeply problematic law. Some of its terms are most comfortably understood in the narrow context of street-level loan sharking, while others compel a much broader application. The two facets of the statute do not comfortably co-exist. The Court is aware that the present decision may have the effect of increasing the importance of s. 347 in some consumer and commercial transactions. Given the interpretive difficulties inherent in the provision and the volume of civil litigation which it has already spawned, it is with some reluctance that we are legally driven to this conclusion. However, the plain terms of s. 347 must govern its application. If the section is to be given a more directed focus, it lies with Parliament, not the courts, to take the required remedial action.

53 In any event, the result reached in this appeal is limited. On the facts of this case, a penalty incurred, pursuant to the terms of a standing arrangement between the parties, for the deferral of payment of a specified amount of money owing for goods, services or benefits is an “interest” charge within the meaning of s. 347 and is subject to that law’s prohibitions against requiring or receiving interest at a criminal rate.

2. Is the Application of s. 347 Precluded by the Principles Set Forth in Nelson v. C.T.C. Mortgage Corp.?

54 As noted, s. 347 creates two separate offences. Section 347(1)(a) makes it illegal to enter into an agreement or arrangement to receive interest at a criminal rate. Section 347(1)(b) makes it illegal to receive a payment or partial payment of interest at a criminal rate. The relationship between these two provisions has been the subject of much comment in the courts below and in academic writings. In particular, controversy exists about whether an agreement which does not expressly require the payment of criminal interest at the time it is entered into may nevertheless give rise to an actual payment of interest at an illegal rate. Such cases can arise if an additional charge is incurred while credit is outstanding, or if the actual period for repayment is shortened by the occurrence of a determining event or an act by one of the parties. See, e.g., Mira Design, supra; Aectra Refining & Marketing Inc. v. Lincoln Capital Funding Corp. (1991), 1991 7140 (ON SC), 6 O.R. (3d) 146 (Gen. Div.); S. Antle, “A Practical Guide to Section 347 of the Criminal Code -- Criminal Rates of Interest” (1994), 23 C.B.L.J. 323, at p. 334; Ziegel, “The Usury Provisions in the Criminal Code: The Chickens Come Home to Roost”, supra, at p. 240; M. Feldman, “Criminal Interest Rates in the Context of Early Payment of a Debt Obligation” (1985), 2 Bus. & L. 70.

55 The leading decision on this issue is Nelson, supra. The facts and judgments in Nelson are set forth in detail in the companion case to this appeal, Degelder Construction Co. v. Dancorp Developments Ltd., 1998 765 (SCC), [1998] 3 S.C.R. 90, and need not be fully repeated. Briefly, the Nelsons were guarantors of a mortgage on which a number of fixed fees were payable in addition to conventional interest. Had the mortgage been repaid when it was due, the fees and interest would have produced an effective interest rate of 52.49 percent per annum. However, the mortgage contained a right of prepayment which was exercised by the debtor early in the life of the agreement. When the interest rate was calculated over the term during which the mortgage was actually outstanding, it was 84.1 percent per annum. The Nelsons sued the lender alleging that the mortgage agreement was void and unenforceable under s. 305.1 (now s. 347).

56 The issue at trial and on appeal was whether the rate of interest should be calculated over the full term of the mortgage as stated in the agreement, or over the shorter period that the mortgage was actually outstanding. The British Columbia Court of Appeal split on the question. Hutcheon J.A., dissenting, held that the case turned on the distinction between ss. 347(1)(a) and 347(1)(b). In his view, subs. (1)(a) prohibits entering into an agreement which, on its face, requires the payment of illegal interest; he found that such a situation was not before him. However, he held that subs. (1)(b) prohibits the actual receipt of an illegal interest payment, and the rate in such situations must be based on the time elapsed since the money was advanced, even if that period differs from the term foreseen in the agreement. The majority, per Seaton J.A., found that such an approach would produce an absurd result in a situation where the period of repayment is within the exclusive control of the debtor. As Seaton J.A. held at pp. 144-45, Parliament cannot have intended that “an innocent mortgagee who has entered into a perfectly lawful agreement should as the result of the voluntary act of the mortgagor in prepaying the mortgage become guilty of an offence under [s. 347(1)(b)]”. The majority recognized that the same might not be true if a mortgage were payable on the demand of the creditor rather than at the debtor’s option. The reasons of the majority were agreed to in substance by this Court.

57 The gravamen of Nelson is that an agreement or arrangement for credit which is legal on its face cannot become illegal under s. 347 through the voluntary act of the debtor. Consumers’ Gas contends that this principle precludes the application of s. 347 in the case at bar, because incurring and paying the LPP are voluntary acts of the customer. The motions judge accepted the argument that Nelson is dispositive of this case and dismissed the action on that basis. The Ontario Court of Appeal agreed. In particular, the Court of Appeal noted that the decision in Nelson was affirmed by this Court.

58 The reasons in Dancorp, which are being released simultaneously with this decision, revisit Nelson and set forth the following general principles governing the interpretation of s. 347 (at para. 34):

(1) Section 347(1)(a) should be narrowly construed. Whether an agreement or arrangement for credit violates s. 347(1)(a) is determined as of the time the transaction is entered into. If the agreement or arrangement permits the payment of interest at a criminal rate but does not require it, there is no violation of s. 347(1)(a), although s. 374(1)(b) might be engaged.

(2) Section 347(1)(b) should be broadly construed. Whether an interest payment violates s. 347(1)(b) is determined as of the time the payment is received. For the purposes of s. 347(1)(b), the effective annual rate of interest arising from a payment is calculated over the period during which credit is actually outstanding.

(3) There is no violation of s. 347(1)(b) where a payment of interest at a criminal rate arises from a voluntary act of the debtor, that is, an act wholly within the control of the debtor and not compelled by the lender or by the occurrence of a determining event set out in the agreement. [Emphasis in original.]

59 Applying the first principle stated above, it is clear that there is no violation of s. 347(1)(a) in this case. The arrangement between Consumers’ Gas and its customers does not, on its face, require the payment of interest at a criminal rate. The payment of such interest depends on the occurrence of subsequent events.

60 With regard to s. 347(1)(b), Consumers’ Gas makes two arguments. First, it contends that a customer can avoid the LPP entirely by paying on time, and therefore any customer who incurs the penalty does so voluntarily. Second, it contends that the amount of time which passes between the due date and the actual payment of the LPP -- and therefore the effective rate of interest arising from the penalty -- is entirely within the control of the customer. Consumers’ Gas submits that under the third principle stated above, receipt of the LPP cannot constitute a violation of s. 347(1)(b).

61 The respondent’s assertion that customers “voluntarily” pay the LPP is unpersuasive. The prepayment of the mortgage in Nelson was a voluntary act because it was wholly at the debtor’s initiative and was not compelled by the lender’s demand or by a determining event set out in the agreement. A customer’s failure to pay the LPP by a named date is not voluntary in the same sense. The LPP is automatically triggered by an event specified in the arrangement between the parties, i.e. the passage of time. The fact that the respondent consents to the possibility of late payment, and thereby presents its customers with the option of paying before or after the due date, does not mean that a customer “voluntarily” incurs the LPP when he or she fails to pay on time. A penalty is not “voluntary” simply because it could conceivably be avoided through prompt payment. If that were the case, then all penalties could be considered voluntary, and the inclusion of the term “penalty” in s. 347(2) would become meaningless. When a penalty is specified in an agreement or arrangement for credit, the lender bears the risk that the payment of that penalty might give rise to a violation of s. 347(1)(b).

62 It is unnecessary, in the context of this appeal, to create a general rule regarding which kinds of payments are “voluntary” within the meaning of Nelson. It bears noting in particular that the “voluntariness” of certain automatic payment terms, such as acceleration clauses triggered by the debtor’s default or insolvency, remains an open question. Some writers have suggested that a distinction should be drawn between clauses which accelerate repayment automatically, and those which give the lender the option of demanding repayment upon the occurrence of a stated event. In the latter case, it would be the lender’s demand which attracts s. 347, and the lender could avoid liability by declining to accelerate repayment. See, e.g., Antle, supra, at p. 327. In my view, such a distinction is not required in this case, since the issue presented here concerns a penalty -- which is provided for explicitly in s. 347 -- and not an acceleration clause.

63 The respondent’s second argument with regard to “voluntariness” presents a closer question. The actuarial evidence submitted in this case shows that if a regular billing customer pays the LPP within 38 days of incurring it, the five percent charge represents an annual interest rate exceeding 60 percent per annum. If the customer waits 38 days or longer to pay, the rate drops below the criminal threshold. The respondent submits that because the LPP does not compound or increase over time, and because no further sanctions are imposed by the company for late payment once the due date has passed, it is open to the customer to pay the LPP at any time after it has been incurred, including after the date when the interest rate arising from the penalty would no longer be illegal. It is claimed that to find liability under s. 347 in such circumstances would offend the principle of “voluntariness” set forth in Nelson.

64 This case is unlike Nelson in several important respects. In Nelson, the mortgage was not yet due when the debtor chose to repay it and he was presumably under no pressure from the lender to pay early. Here, by contrast, payment of the monthly bill is overdue and the LPP is already owing at the time the customer actually pays Consumers’ Gas; the question is not whether to pay early, but rather how late is too late. Because there is no specific contractual term governing the time for payment after the imposition of the LPP, technically it may be argued that there is an indefinite extension of credit. It is obvious, however, that that is not really the case -- the customer does not have the option of never paying his or her bill. There is an implied limit to the term for which credit is extended, after which the respondent will undertake to recover the money that is owed to it. The record does not disclose if or when Consumers’ Gas would actually sue a customer for non-payment or discontinue service. However, in one of its informational brochures (“To Your Credit”), the respondent explains to its customers the procedures which it employs for “collecting past due bills” (Case on Appeal, at p. 687):

We send out a broad range of bill messages and notices to remind customers to pay past due bills. The sequence of bill messages and notices depends upon a customer’s credit rating and the particular circumstances surrounding the account.

The respondent gives examples of “what happens if bills are not paid on time”, including the following (Case on Appeal, at p. 688):

Probability of the gas supply being cut-off to severely overdue accounts. This will result in personal inconvenience, a service reconnection charge and a security deposit payment.

65 Strictly speaking, it is true that customers may delay their payment of the LPP beyond 38 days, but there is clearly no invitation to do so, and it would be disingenuous to conclude that customers actually perceive themselves to be at liberty to wait that long. Statistical evidence submitted by the appellant strongly supports the opposite conclusion. Approximately 81 percent of late payers pay the penalty within 10 days of incurring it, that is, at an effective rate of interest far beyond the criminal limit. Consumers’ Gas and the OEB have been aware of such statistics since at least 1988. See E.B.R.O. 452, at pp. 325-26. Indeed, the respondent tracks such statistics carefully for the purpose of budgeting revenue collected under the LPP as a component of its cash flow. In light of these facts, it cannot be said that payment of the LPP within 38 days is a “voluntary” act within the meaning of Nelson.

66 For the foregoing reasons, the LPP charged by Consumers’ Gas comes within the scope of s. 347 of the Criminal Code.

B. Did the motions judge err in awarding costs against Garland in his personal capacity?

67 On September 13, 1995, Consumers’ Gas moved for an order amending the formal judgment of the motions judge. Garland refused to consent to that motion. The motion was granted, and the judge assessed $500 in costs “payable to the defendant ... by the plaintiff personally, forthwith”. Garland asserted that that award contravenes s. 59.4 of the Law Society Act, which was added by s. 3 of the Law Society Amendment Act (Class Proceedings Funding), 1992, S.O. 1992, c. 7.

68 Section 59.4 provides:

59.4^__(1) A defendant to a proceeding may apply to the board for payment from the Class Proceedings Fund in respect of a costs award made in the proceeding in the defendant’s favour against a plaintiff who has received financial support from the Class Proceedings Fund in respect of the proceeding.

(3) A defendant who has the right to apply for payment from the Class Proceedings Fund in respect of a costs award against a plaintiff may not recover any part of the award from the plaintiff.

The purpose of this provision is to protect class representatives from personal exposure to costs in actions where financial support has been granted by the Class Proceedings Fund. Such protection is important for promoting the purposes of the Class Proceedings Act, 1992. Garland has successfully applied for support from the Class Proceedings Fund. Accordingly, he should not be exposed to personal liability for any costs arising in this action, including costs incurred in the context of procedural motions. The award of personal costs against Garland is set aside.

VI. Conclusions and Disposition

69 The appeal is allowed with costs in the cause. (i) Section 347 of the Criminal Code applies to the LPP imposed by the respondent. The LPP is an interest charge within the meaning of s. 347(2), and the law’s application is not precluded by the principles set forth in the Nelson decision. Summary judgment is set aside, and this action is remitted to the Ontario Court (General Division) for proceedings in accordance with the Class Proceedings Act, 1992. (ii) The award of costs in the amount of $500 against the appellant in his personal capacity is set aside.

The following are the reasons delivered by

70 Bastarache J. (dissenting) -- The late payment policy of the Consumers’ Gas Company Limited provides that bills rendered to residential customers which are not paid on the due date will be subject to a penalty of five (5) percent of the unpaid amount.

71 Between 1981 and 1989, the late payment penalty policy clause contained in Consumers’ rate schedules for residential customers read:

PENALTY FOR LATE PAYMENT:

When payment in full is not made within sixteen (16) days of the date of mailing, or the hand delivery of the bill, a penalty of five per cent (5%) of the current amount billed shall be levied. Where payment is made by mail, payment will be deemed to be made on the date postmarked.

72 Commencing in 1989, the provision for late payment penalties was contained in Consumers’ Handbook of Rates and Distribution Services as follows:

SECTION F - PAYMENT CONDITIONS

Payment in full should be received by the Company, or by an institution authorized by the Company to accept payments on its behalf, on or before the due date specified in the monthly bill, which date is at least ten (10) days (sixteen (16) days in the case of Rates 1, 2, 6 and 9), after the date of rendering the bill. A penalty of five (5) percent of the unpaid portion of the current amount billed shall be added to the amount due if payment is not received as outlined above. When payment is mailed, the penalty will be added if the postmark on the envelope containing such payment is later than the specified due date.

73 It is the appellant’s position that Consumers’ Gas offers two payment options to its customers, the no-credit option and the credit option. By the appellant’s reasoning, all customers who pay their bills on time adhere to the no-credit option. By contrast, customers who do not pay on time receive credit commencing on the due date and ending when the bill is paid. In my view, no such option exists. Customers have only one option, which is to pay on time. The only question remaining is then the characterization of the late payment policy.

74 Section 347(2) of the Criminal Code, R.S.C., 1985, c. C-46, defines “interest” in these terms:

“interest” means the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement, by or on behalf of the person to whom the credit is or is to be advanced, irrespective of the person to whom any such charges and expenses are or are to be paid or payable, but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance or, in the case of a mortgage transaction, any amount required to be paid on account of property taxes;

75 The definition of interest includes the notion of “penalty”. However, the application of s. 347 is also predicated upon the existence of an “agreement or arrangement” for the advancement of credit. The term “agreement” is defined in the Oxford English Dictionary (2nd ed. 1989), as “an arrangement between two or more persons as to a course of action”. The term “arrangement” is defined as a “settlement of mutual relations or claims between parties”.

76 The application of s. 347 is then predicated upon a consensual extension of credit. There is a critical difference between, on the one hand, a unilateral taking of credit and, on the other hand, an extension of credit by mutual consent between the debtor and the creditor. As R. M. Goode, in his book Consumer Credit Law (1989), states, at p. 108:

If a person takes credit without having been granted it — as where he is slow in paying his dentist’s bill or his solicitor’s account — there is no extension of credit within the Consumer Credit Act. . . . [I]f a person allows delay in settlement of a debt without binding himself to grant time to the debtor, there is no agreement for credit. This is so whether the delay in the demand for payment arises from inadvertence or inactivity — as where the supplier is simply dilatory in sending out his accounts — or is an intentional indulgence, as where the supplier agrees to allow further time to pay or to accept payment by instalments. Only where this deferment is not just an indulgence but contractual is there an agreement for credit . . . .

77 On the facts of this case, there is no such consensual extension of credit. I believe that Consumers’ Gas has not entered into an agreement or arrangement to give credit to the appellant or to any other customers who have paid the late payment penalty. Indeed, far from being a consensual extension of credit, the respondent’s late payment penalty represents an effort to prevent or deter customers from unilaterally taking credit. It is simply a penalty exacted by the respondent because the appellant has not paid his bills on a timely basis. To illustrate my view, here is a statement from an American case: Coffelt v. Arkansas Power & Light Co., 451 S.W.2d 881 (Ark. 1970), per Smith J., at p. 884:

The late charge, far from being an exaction of excessive interest for the loan or forbearance of money, is in fact a device by which consumers are automatically classified to avoid discrimination. Its effect is to require delinquent ratepayers to bear, as nearly as can be determined, the exact collection costs that result from their tardiness in paying their bills. The appellant’s argument actually means in substance not that the utility company be prevented from collecting excessive interest but that its customers who pay their bills promptly be penalized by sharing the burden of collecting costs not of their making.

See also State ex rel. Utilities Commission v. North Carolina Consumers Council, Inc., 198 S.E.2d 98 (N.C. Ct. App. 1973).

78 In the present case, there is no agreement whereby the customers of Consumers’ Gas are permitted or even encouraged to pay late. Rather, customers are encouraged to pay on time by the imposition of a penalty to be added to payments which are overdue.

79 The decisions of the Ontario Energy Board approving the late payment penalty confirm that the penalty is not “paid or payable for the advancing of credit”. Instead, the Ontario Energy Board considers it to be an incentive for timely payment. In fact, the Board specifically rejected the credit option in its decision on the rate application in these terms (E.B.R.O. 302-II, September 4, 1975, at pp. 118-19):

. . . the Board does not think that a monetary incentive for prompt payment is wrong in principle. Interest charged on over-due accounts on a daily basis has an appeal on theoretical grounds, but it gives little incentive to pay by a named date, gives little weight to collection costs and seems complicated. If interest is charged on a monthly basis, it is subject to the same criticism. . . .

80 While this is not determinative of the issue, it is one of several indicia to be considered in characterizing the late payment penalty. Winkler J., of the trial court, also considered the fact that the penalty is not compounded; the penalty is a one-time payment which does not increase over time; there is no sanction for the non-payment of the penalty; the penalty triggers contemporaneously with the account becoming overdue.

81 Because in this case there is no consensual extension of credit, it follows that the late payment penalty is not “paid or payable for the advancing of credit under an agreement or arrangement” within the definition of “interest”. Section 347 of the Criminal Code is not applicable and therefore the action should be dismissed. I adopt Winkler J.’s conclusion on this issue, 1995 7164 (ON SC), 22 O.R. (3d) 451, at p. 471:

I accept the plaintiff’s argument that a deferral of payment constitutes credit. However, I do not agree that just because a customer does not pay on time [this] means that there has been a deferral of payment or that credit has been advanced, particularly where the company has done what it could to encourage the customer to pay on time. A distinction must be drawn between the situation in which a customer fails to pay within a stipulated time, because of inadvertence, choice or because he does not have the money, and the situation in which an agreement is entered into whereby the lender of money or issuer of goods agrees to delay its demand for payment, in exchange for the consideration of an additional charge. In my view, s. 347 is applicable only to the latter situation. The facts before me reveal the former situation.

82 Section 347 of the Criminal Code cannot be interpreted as a complete code for consumers. The protection of consumers against such penalty clauses cannot be done by way of an undue extension of these terms. Other options, such as to invalidate abusive penalty clauses, are available to protect consumers. I do not believe that a contract for the extension of credit should be implied in every case where there is late payment pursuant to a sale of goods. This implication, in my view, is an interference with the freedom to contract. I would also note that in the present case, we are dealing with a regulated industry and that a rate approval scheme has been established with the specific purpose of protecting consumer interests. To limit the choice of means of the regulator by resorting to the criminal law power is inappropriate and unwarranted.

83 For the above reasons, I would dismiss the appeal.

Appeal allowed with costs, Bastarache J. dissenting.

Solicitors for the appellant: McGowan & Associates, Toronto.

Solicitors for the respondent: Aird & Berlis, Toronto.