Court File and Parties

COURT FILE NO.: CV-16-558075 DATE: 2018-07-04 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Majid Rasi Etemadi, Plaintiff AND: Soraya Emami, a.k.a. Sheila Emami, Defendant

BEFORE: Copeland J.

COUNSEL: Adetayo G. Akinyemi, for the Plaintiff Rajiv Joshi, for the Defendant

HEARD: July 3, 2018

ENDORSEMENT

Introduction

[1] The plaintiff brings a motion for summary judgment in relation to three loan agreements. The defendant does not dispute that $74,000.00 was advanced to her under the loans. The sole issue in dispute is the interpretation of the loan agreements with respect to the interest payable on the loans, and in particular, whether the third loan agreement was a consolidation of the first two loan agreements.

[2] The plaintiff argues that the first loan agreement provides for interest in the amount of $6,000.00 on the loan of $64,000.00, plus $1,000.00 per day, indefinitely, if the money is not repaid by the due date. The plaintiff argues that the second loan agreement provides for $3,000.00 interest on the $10,000.00 loan. And the plaintiff argues that the third loan agreement provides more time for the defendant to pay the first two loans, and provides for more interest, but is not a consolidation or novation, and does not remove the $1,000.00 per day interest due under the first loan.

[3] The defendant does not really dispute the terms of the first two loan agreements, although the defendant argues that the $1,000.00 per day on the first agreement could not have been meant to run indefinitely. However, the defendant argues that the third loan agreement, by its terms is a consolidation or novation of the first two loan agreements, as well as providing for more time to pay and additional interest payable for that extra time.

[4] The parties agree that the defendant made one payment on the loans, a payment of $20,000.00 on July 22, 2016.

[5] A further issue arises if the plaintiff’s interpretation of the interest payable on the loan agreements prevails, which is that the interest rate under the loan agreements exceed the criminal interest rate of 60% set out in s. 347 of the Criminal Code. The plaintiff argues that the court should reduce the interest rate payable under the first loan agreement to 60% per annum, relying on Transport North American Express Inc. v. New Solutions Financial Corporation, 2004 SCC 7, [2004] 1 S.C.R. 249. The defendant argues that I do not need to reach this issue, if I accept the defendant’s interpretation of the loan agreements.

Summary judgment

[6] The defendant does not take issue that I can determine the motion on summary judgment, but argues that the plaintiff’s evidence is not sufficient to prove the plaintiff’s claim in relation to the interest payable under the loan agreements, particularly in the face of the language of the written agreements.

[7] I am satisfied that the record before the court is sufficient for me assess whether there are no genuine issues requiring a trial, and in particular: (1) to make the necessary findings of fact, including any necessary findings of credibility; (2) to apply the law to the facts; and, (3) to assess whether summary judgment is a proportionate, more expeditious and less expensive means to achieve a just result: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87.

The Interpretation of the loan agreements

[8] Both parties filed affidavit evidence regarding the circumstances surrounding the entering into of the loan agreements.

[9] The Supreme Court of Canada has held that evidence of surrounding circumstances can be admissible as relevant to understanding the mutual objective intentions of the parties as expressed by the words in the contract: Sattva Capital Corporation v. Creston Moly Corporation, 2014 SCC 53, [2014] 2 S.C.R. 633 at paras. 56-61. However, I am conscious that the Supreme Court cautioned in Sattva that: “while the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement.” The Court further cautioned that the evidence of surrounding circumstances that is admissible consists only of the background that was or reasonably ought to have been within the knowledge of both parties at or before the date the contract was entered into. It does not permit evidence of the subjective intentions of the parties.

[10] Ultimately, I find that the three written loan agreements taken together are sufficiently clear that I can decide this motion based on their content. Although I have considered the evidence of both parties regarding the surrounding circumstances, I find that it does not persuade me to interpret the loan agreements differently than the content of the written agreements dictates.

[11] Reading the three loan agreements, both individually, and together, I find that they do not support the plaintiff’s interpretation of the agreements. Rather, I agree with the defendant’s submission that the third agreement consolidated the earlier two agreements, and gave further time to pay, or in other words, was a novation.

[12] I will not set out the terms of each of the written loan agreements. They are found at tabs 2 A, B, and C of the plaintiff’s motion record. I observe that they are not sophisticated contracts. They are hand-scrawled documents of one page each. They are signed by the plaintiff and defendant, and witnessed by a third party. I do not take from either the content of the agreements, or the evidence of the surrounding circumstances, that either party to the loan agreements was a sophisticated lender or borrower. These are not sophisticated commercial agreements.

[13] The first agreement was entered into on May 14, 2015. It provides for the plaintiff to loan the defendant $64,000.00. The defendant promises to pay the defendant the full amount of the loan plus interest of $6,000.00 on May 27, 2015 (13 days later). It then adds: “If any delay I have to pay $1,000 per day.”

[14] For reasons, I will explain, I find that the third loan agreement consolidated the first two agreements, such that the $1,000.00 per day term of the first loan did not continue. But even reading the first loan agreement standing on its own, I do not accept that the parties intended the $1,000.00 per day term to continue indefinitely. It amounts to an interest rate in the range of 600% per year, if continued indefinitely (365 days x $1,000.00 per day is $365,000.00, on a loan with principal of $64,000.00). This is so commercially outrageous that I do not accept that it was intended by the parties.

[15] The second loan agreement was entered into on May 26, 2015. It provides for the plaintiff to loan the defendant $10,000.00. The defendant promises to pay back the $10,000.00 plus $3,000.00 interest on June 1, 2015 (6 days later).

[16] I will set out the terms in full of the third loan agreement. It was entered into on June 7, 2015. It provides as follows (spelling and grammar as in original):

I supposed to pay off the total amount $70,000.00 + 13000 including intrest 1st of June. From 1st of June till 8th of June $1000 intrest and because I couldn’t pay on time. I promise to pay $3000.00 till 30th of June 2015. If one day past intrest it will be $10,000.

It is signed by the plaintiff and defendant and a witness.

[17] Reading the three agreements together, I find that neither the defendant nor the plaintiff considered the issue of interest over the longer term. From the terms of the contracts, each party expected the money loaned to be paid back in a relatively brief time. Apart from the $1,000 per day language in the first agreement, none of the contracts provided for an ongoing interest rate beyond the date the money was due to be repaid in each agreement. Rather, the contracts stated the interest payable in a flat fee dollar amount. Further, the date horizons for repayment on each of the three agreements were very short.

[18] I note that reading the first agreement in the context of the second and third agreement supports the interpretation that the parties were only considering interest for the relatively short term, and did not intend the $1,000.00 per day interest in the first agreement to continue indefinitely. Neither the second nor the third agreement provides for any interest after its final due date (June 1, 2015 in the case of the second agreement, and June 30, 2015 in the case of the third agreement).

[19] The question then is whether by its terms the third agreement was intended to consolidate the first two agreements.

[20] Whether there has been a novation or consolidation is a question of fact depending on all of the circumstances of a case: National Trust v. Mead, 1990 CanLII 73 (SCC), [1990] 2 S.C.R. 410 at pp. 426-428. The parties agree that the three part test for novation set out in National Trust is appropriate to consider in this case if the third loan agreement was a consolidation of the first two agreements, with the proviso that both parties agree that the second branch of the test is not applicable, since that deals with a situation where a new party is being accepted as the debtor, which is not present in this case. Thus, I must consider whether the defendant accepted the complete liability in the third loan agreement, and whether the plaintiff accepted the third loan agreement in substitution for the first two loan agreements.

[21] In the circumstances of this case, I find that the third loan agreement was a consolidation or novation of the first two agreements (plus additional time to pay and additional interest). I make this finding for three reasons:

(i) The third loan agreement begins by referencing the amounts of the first two loans, including the flat interest payments: “$70,000.00 + 13000 including intrest 1st of June”. I find that this is clearly a reference to the $64,000 principal plus $6,000 interest under the first loan agreement, and the $10,000 principal plus $3,000 interest under the second loan agreement. Thus, the third loan agreement incorporates the interest that was payable under the first and second loan agreements.

(ii) The reference to the first two loans as “$70,000.00 + 13000 including intrest 1st of June” includes only the flat interest payments (i.e., the $70,000 is the first loan of $64,000 plus $6,000 interest, and the $13,000 is the second loan of $10,000 plus $3,000 interest). It does not include the $1,000 per day from the first agreement. I find that this is an acknowledgement that neither party intended the $1,000 per day to run for a lengthy period of time.

(iii) The third agreement provides fully for interest to cover the time period of June 1 to June 30, 2015. It provides for $1,000 interest if payment is made by June 8th. It provides for $3,000 interest if payment is made by June 30, 2015. And it provides for $10,000 interest if payment is made after June 30, 2015. This additional interest is the consideration paid by the defendant for additional time to pay the amounts due under the first two loan agreements.

[22] If the third agreement is not interpreted as a consolidation, it results in what I find is a commercial absurdity of the defendant paying an additional $10,000.00 interest from June 1 to June 30 under the third loan agreement, on top of paying $1,000 per day under the first loan agreement. Put differently, if they defendant was required under the first agreement to pay $1,000 per day indefinitely, why would the third loan agreement even be necessary?

[23] I do not accept that when they entered into the third loan agreement, the parties intended payments of $1,000 per day to continue under the first loan agreement. Rather, reading the third loan agreement as a whole, in the context of the terms of the first and second loan agreements, I find that the third loan agreement was intended to consolidate the first two loan agreements, and to provide the defendant with additional time to pay. In consideration for the additional time to pay, the defendant would pay additional interest. In the third loan agreement, the defendant accepted the complete liability for principal and the flat fee interest under the first and second loan agreements, and both parties agreed to the new provisions for interest after June 1, 2015 in relation to the two loans.

[24] Thus, I find that the third loan agreement was a consolidation of the first two agreements, and also provided for additional time to pay (in return for additional interest).

[25] Under the third agreement, I find that as of July 1, 2015, the defendant owed the plaintiff $93,000.00, which is $74,000 in principal, and $19,000.00 in interest (or, put differently, the $70,000 plus $13,000 referred to in the opening sentence of the third loan agreement, plus the $10,000 additional interest because the money was not repaid by June 30, 2015). The interest is notionally the $6,000.00 from the first loan agreement, plus the $3,000.00 from the second loan agreement, both of which were consolidated in the third loan agreement, plus the $10,000.00 that the third loan agreement provided for in interest if payment was not made by June 30, 2015.

Criminal interest rate issue

[26] As noted above, the criminal interest rate issue under s. 347 of the Criminal Code was more of an issue had the plaintiff’s argument prevailed that $1,000.00 per day was payable in interest under the first loan indefinitely. As I have noted, I do not accept this argument either under the first loan agreement standing alone, or as consolidated in the third loan agreement.

[27] But my rejection of the plaintiff’s interpretation of the interest payable does not entirely remove the criminal interest rate problem. Under the terms of the third loan agreement, as consolidating the first two and adding additional interest for a short period more time to pay, a total of $19,000.00 interest was payable on a loan of $74,000.00, over a time period of just over one month. This would still, for that time period, be in the range of 300% interest on an annual basis. This far exceeds the criminal interest rate under s. 347 of the Criminal Code.

[28] However, as I have noted above, part of the problem in this case is that although the parties contracted for a criminal interest rate over a short period of time in each of the three loan agreements, they made no provision for interest over a longer period of time. As of today, three years later, the defendant has failed to repay the money borrowed or interest, except for the $20,000.00 repaid in July 2016. I find that to reduce the amounts of interest payable at the outset of the loans would result in a windfall for the defendant, since apart from the Courts of Justice Act provisions for pre-judgment and post-judgment interest, there is nothing in the loan agreements for any interest to be payable after July 1, 2015, but clearly it was the intention of the parties that the loans would be repaid quickly, not three years or more later.

[29] Transport North American Express allows a court to exercise remedial discretion in considering a contract that by its terms would contravene the criminal interest rate prohibition in s. 347 of the Criminal Code: at paras. 24, 40-42. The majority held that in some cases a court may find that the contract is void ab initio; in other cases, the court may use the doctrine of notional severance to effectively read down the interest rate to below 60% so it will be under the threshold set in s. 347 of the Criminal Code.

[30] In the circumstances of this case, I find that it is equitable to let the interest payable under the last loan agreement of a total of $19,000.00 stand, and order pre-judgment and post-judgment interest payable after July 1, 2015 (as detailed below). Given the applicable rates for pre-and post-judgment interest, the net effect will be from July 1, 2015 when the money was due under the third loan agreement, to the date of judgment, the $19,000.00 interest under the third loan agreement, plus pre-judgment interest at the Courts of Justice Act rate, will yield and effective interest rate in the range of 10% annually over the time period from July 1, 2015 to the date of judgment.

[31] As noted above, the parties are in agreement that the defendant made one payment towards the loan agreements, of $20,000.00 on July 22, 2016. Thus, the outstanding principle and interest (before the calculation of pre-judgment interest) is $73,000.00.

[32] Prejudgment interest is payable at the rate of 0.8% pursuant to section 128 of the Courts of Justice Act as follows: from July 1, 2015 to July 22, 2016 on the amount of $93,000.00; from July 22, 2016 to the date of this judgment on the amount of $73,000.00. Post-judgment interest is payable from the date of judgment at the rate of 3%.

I grant judgment to the plaintiff as follows:

• in the amount of $73,000.00 still due in principle and interest under the loan agreements;
• plus pre-judgment interest calculated in accordance with paragraph 32 above;
• plus post-judgment interest payable at 3%.

Costs

[33] I did not hear submissions regarding costs during the hearing of the application. If the parties are unable to come to agreement regarding costs, I will receive submissions in writing on the following schedule: The plaintiff may file his cost outline and written submission within 30 days of this decision. The defendant may file her cost outline and submissions within 20 days after the plaintiff’s submission is filed. All costs submissions are limited to a costs outline, and three pages of submissions.

Copeland J.

Date: July 4, 2018