Court File and Parties

COURT FILE NO.: CV-16-550811 DATE: 2018 0919 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Jesse Galal and Galal Entertainment Inc., Plaintiffs AND: Mark Hale, Defendant

BEFORE: Nishikawa J.

COUNSEL: Iris Graham, for the Plaintiff No one appearing for the Defendant

HEARD: September 17, 2018

Endorsement

Overview

[1] The Plaintiffs, Jesse Galal and Galal Entertainment Inc. (the “Plaintiffs”), bring this motion for summary judgment on a loan agreement entered into between the Plaintiffs and the Defendant, Mark Hale.

[2] Mr. Hale was personally served with the motion record and, on a separate occasion, with the factum and book of authorities, but failed to file any motion materials or appear at the hearing. The Defendant has been aware of the hearing date since May 2018. Counsel for the Plaintiffs has not heard from him. Under the circumstances, I determined it appropriate to hear the motion in the Defendant’s absence. In his Statement of Defence, Mr. Hale largely admits the underlying facts, and the Plaintiffs have been seeking repayment for over four years. A prompt determination of this matter is also in the Defendant’s interest, since the outstanding debt could potentially continue to accrue interest at a high rate.

Factual Background

[3] On or about July 6, 2014 the Plaintiffs and the Defendant entered into an agreement pursuant to which Galal Entertainment loaned Mr. Hale $30,000.00 (the “Agreement”). The Agreement provided that on August 15, 2014 Mr. Hale would repay Galal Entertainment the amount of $35,000.00. This would be an interest rate of approximately 16.667 percent for 40 days. If the Defendant failed to repay the amount, he would be charged $1,000.00 per week until the loan and any interest were repaid in full (the “Penalty Clause”). The Agreement was drafted by Mr. Hale’s colleague. The Plaintiffs agreed to the terms of the Agreement without requesting any revisions.

[4] The purpose of the loan was to enable Mr. Hale to pay staff for an upcoming pay period. He promised Mr. Galal that he would repay the loan within a few weeks with money that he would receive from the sale of a business.

[5] Mr. Hale failed to repay the loan when it became due on August 15, 2014. On that day, Mr. Galal sent Mr. Hale an email with an invoice attached, requesting payment of $35,000.00 in accordance with the Agreement.

[6] In October 2014, Mr. Galal sent an email message to Mr. Hale to confirm his intent to continue to be bound by the terms of the Agreement, given that by that time, $10,000.00 in late fees had accrued. At that time, Mr. Hale confirmed that he owed $45,000.00.

[7] Mr. Hale did not make any payments, until September 16, 2015, when he made a partial payment of $10,000.00.

[8] The Plaintiffs sent weekly email messages, with invoices, to the Defendant seeking repayment and inquiring when repayment would be made. In response, Mr. Hale repeatedly confirmed his indebtedness and his intent to pay the Plaintiffs in the near future. His main reason for not repaying the loan appears to have been not receiving money that was owed to him or that he was expecting. At no time in the parties’ numerous email exchanges did Mr. Hale dispute the Agreement or that he had to repay the loan.

The Parties’ Positions

[9] The Plaintiffs submit that the Defendant breached the Agreement and that he is liable to them for the outstanding principal and interest. The Plaintiffs acknowledge that the Penalty Clause contravenes s. 347 of the Criminal Code, R.S.C. 1985, c. C-46, which makes it an offence to enter into an agreement for, or to receive, interest at a rate exceeding 60 percent per year. The Plaintiffs request that this court exercise notional severance, and revise the interest rate to the maximum legal limit.

[10] In his Statement of Defence, Mr. Hale acknowledges the Agreement and his indebtedness to Galal Entertainment. He states that he repaid $10,000 of the principal, and objects to the Penalty Clause as contrary to s. 347 of the Criminal Code.

Analysis

Principles Applicable to Summary Judgment

[11] Rule 20.04(2)(a) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, states that a court shall grant summary judgment if the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.

[12] The Supreme Court of Canada has held that “summary judgment must be interpreted broadly, favouring proportionality and fair access to the affordable, timely and just adjudication of claims” Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 5. An issue should be resolved on a motion for summary judgment if: (i) the motion affords a process that allows the judge to make the necessary findings of fact, (ii) apply the law to those facts, and (iii) is a proportionate, more expeditious, and less expensive process to achieve a just result than going to trial: Hryniak, at para. 49.

[13] On a motion for summary judgment, the judge must first determine whether there is a genuine issue requiring a trial based only on the evidence before him or her, without using their fact-finding powers. If there appears to be a genuine issue requiring a trial, the judge should then determine if the need for a trial can be avoided by using the powers under rr. 20.04(2.1) and (2.2): Hryniak, at para. 66.

[14] On a motion for summary judgment, the court is entitled to assume that the record contains all the evidence that the parties would present if the matter proceeded to trial: Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200, [2014] O.J. No. 851, at paras. 26-27, aff’d 2014 ONCA 878, [2014] O.J. No. 5815, leave to appeal to SCC refused, [2015] S.C.C.A. No. 97. Each party must “put their best foot forward” with respect to the existence or non-existence of material issues to be tried: Sweda, at para. 26.

Did the Defendant Breach the Agreement?

[15] There is no genuine issue requiring a trial as to the Defendant’s breach. The evidence, and the Statement of Defence, leave no doubt that the Defendant acknowledged the fact that the parties entered into the Agreement and that he owes money to Galal Entertainment.

What is the Applicable Interest Rate?

During the Loan Term

[16] Pursuant to s. 4 of the Interest Act, R.S.C. 1985, c. I-15, where, in a written contract, interest is payable at a rate for any period less than a year, no interest rate exceeding five percent per annum is recoverable unless the contract contains an express statement of the yearly rate. The Plaintiffs admit that since the Agreement does not set out an annual interest rate, s. 4 of the Interest Act applies. The interest on the $30,000 loan over the 40-day period until maturity is therefore five percent.

[17] The total amount owed by the Defendant when the loan matured on August 15, 2014 was thus $30,164.38, and not $35,000 as provided for under the Agreement.

After Maturity

[18] Pursuant to s. 128(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43, a person who is entitled to an order for the payment of money is entitled to have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order. Paragraph 128(4)(g) states that interest shall not be awarded under s. 128 where interest is payable by a right other than under this section.

[19] The court must thus determine whether, after the loan matured on August 15, 2014, interest is payable by a right under the Agreement, and what rate of interest applies.

Notional Severance

[20] The Plaintiffs submit that while the Penalty Clause falls within the broad definition of “interest” under s. 347(2) of the Criminal Code, it is not interest for the purposes of the Interest Act and s. 4 does not apply. The Plaintiff relies upon the principle of notional severance to argue that the Penalty Clause can be read down to comply with s. 347 of the Criminal Code, so that the applicable rate of interest after maturity is 60 percent: see Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 S.C.R. 249, at para. 40.

[21] In Transport North American, at para. 42, the Supreme Court of Canada identified the factors to be applied to determine whether notional severance is appropriate:

(i) Whether the purpose or policy of s. 347 would be subverted by severance; ((ii) Whether the parties entered into the agreement for an illegal purpose or with an evil intention; (iii) The relative bargaining position of the parties and their conduct in reaching the agreement; and (iv) The potential for the debtor to enjoy an unjustified windfall.

[22] According to the Supreme Court of Canada’s decision in Garland v. Consumers’ Gas Co., [1998] 3 S.C.R. 112, at para. 25, the purpose of s. 347 is to prevent loan-sharking arrangements. Other violations, such as agreements freely entered into by commercial parties, should be approached cautiously. Severance would not subvert the purpose of s. 347 and there is no basis on which I could find that the Agreement was entered into for an illegal purpose. The parties appear to have been of similar bargaining power and sophistication, and it was the Defendant’s colleague who drafted the Agreement and included a significant penalty in the event that he failed to repay.

[23] Despite the factors that favour severance, in my view, this is not an appropriate case for notional severance. In Transport North American, notional severance was applied in order to excise the provisions that put the effective annual interest rate over 60 percent. In this case, it is not a matter of simply reducing a post-maturity interest rate. The Penalty Clause, which is more in the nature of a weekly fine, is not characterized in the Agreement as interest, and does not provide an interest rate in relation to the principal. Indeed, the Plaintiffs maintain that the Penalty Clause is not “interest” for the purposes of the Interest Act. As a result, it is not possible to simply read down the Penalty Clause to a lower percentage; it would have to be substantially revised.

[24] In addition, in Niagara Air Bus Inc. v. Cameraman (1991), 3 O.R. (3d) 108 (C.A.), at pp. 114-115, the Court of Appeal found that, in respect of a loan for which no post-maturity interest rate was specified, upon maturity, the principal and interest merge to become a single liquidated debt. From that point, the loan agreement was no longer relevant other than as proof of the debt. In this case as well, once the loan matured on August 15, 2014 the principal and interest merged into a single debt. At this stage, there is little reason to resort to the Agreement, particularly since the Penalty Clause is illegal, or to engage in an exercise of notional severance to save it.

[25] If the Penalty Clause is not a provision relating to interest, then it does not preclude the application of s. 128 of the Courts of Justice Act. Since the Defendant failed to repay the loan at maturity, the cause of action arose on August 15, 2014 and prejudgment interest is calculated from that date. Pursuant to s. 130 of the Courts of Justice Act, the court has discretion to, among other things, allow interest at a lower or higher rate where it considers it just to do so. The factors that the court should take into account include the circumstances of the case, the amount claimed and recovered in the proceeding, and any other relevant consideration.

[26] In Elcano Acceptance Ltd. v. Richmond, Richmond, Stambler & Mills (1991), 3 O.R. (3d) 123 (C.A.), at p. 125, where the post-maturity interest rate was specified but contrary to s. 4 of the Interest Act, the court reduced the interest rate to five percent. Similarly, in TNT Canada Inc. v. Parmalat Dairy & Bakery Inc, the clause at issue provided for a late payment charge of 1.5 percent per month. The Court held that the provision was governed by s. 4 of the Interest Act and reduced the interest rate to five percent per month.

[27] By contrast, in Niagara Air Bus, the promissory notes specified no post-maturity interest rate. The Court of Appeal used the pre-maturity interest rate agreed to between the parties (two percent per month) and awarded a prejudgment interest rate of 24 percent per year. Unlike this case, however, the pre-maturity interest rate did not run afoul of the Interest Act. In this case, the pre-maturity interest rate agreed upon by the parties for the loan term does not assist in determining the rate of interest to be applied, because it was not in compliance with s. 4 of the Interest Act.

[28] Based on the case law, and the circumstances of this case, I exercise my discretion to award a prejudgment interest rate of five percent per year. A rate higher than the statutory rate for prejudgment interest (which was 1.3 percent in 2014) is justified because the Defendant had agreed to a higher cost for a short term loan. A lower rate of interest would provide a windfall to the Defendant, who stalled and evaded the Plaintiffs’ attempts at obtaining repayment. This also reflects the value of money to the Plaintiffs and the repeated efforts required to collect on a relatively low amount, which was nonetheless significant to the Plaintiffs.

How Much Does the Defendant Owe?

August 16, 2014 to September 15, 2015

[29] On August 15, 2014, the principal and interest was $30,164.38. Applying an interest rate of five percent, compounding, until September 15, 2015, the total amount due on that date was $31,804.57.

[30] On September 16, 2015, the Defendant made a payment of $10,000.00, which reduced the total debt to $21,804.57.

September 17, 2015 to September 19, 2018

[31] The interest rate of five percent is applied to $21,804.57, for a period of three years and four days, compounding annually, to the date of judgment. The total is $25,255.35.

Conclusion

[32] Based on the issues and the evidence before me, I find that a summary judgment motion affords a process that allows the court to make the necessary findings of fact and apply the law to those facts. I also find that a summary judgment motion is a proportionate, more expeditious, and less expensive process to achieve a just result than going to trial in this case. There is no genuine issue requiring a trial as to the Defendant’s breach of the Agreement, and to the Plaintiffs’ entitlement to the damages.

[33] The Plaintiffs are granted judgment in the amount of $25,255.35, including pre-judgment interest.

Costs

[34] The Plaintiffs submitted a costs outline and seeks costs of $16,180.06 on a substantial indemnity basis, including disbursements and HST. The Plaintiffs’ partial indemnity costs are $10,786.71 including disbursements and HST.

[35] Substantial indemnity costs may be warranted where a party has engaged in reprehensible, scandalous, or outrageous conduct in the proceeding: Davies v. Clarington (Municipality), 2009 ONCA 722, 100 O.R. (3d) 66, at paras. 28-29. I do not find any reprehensible conduct on the part of the Defendant that it is worthy of sanction. An award of costs on a substantial indemnity basis is not warranted in the circumstances.

[36] Pursuant to s. 131(1) of the Courts of Justice Act, the court has broad discretion when determining the issue of costs. The overall objective of fixing costs is to fix an amount that is fair and reasonable for the unsuccessful party to pay in the circumstances, rather than an amount fixed by actual costs incurred by the successful litigant: Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (C.A.), at para. 26. Rule 57.01(1) of the Rules of Civil Procedure sets out the factors to be considered by the court when determining the costs issue.

[37] I have considered these factors, as well as the proportionality principle in r. 1.01(1.1) of the Rules of Civil Procedure, while keeping in mind that the court should seek to balance the indemnity principle with the fundamental objective of access to justice. The proceeding was commenced under the simplified procedure, and it does not appear that unnecessary procedural steps were taken. Once retained, Plaintiffs’ counsel proceeded promptly to seek a conclusion of the proceeding. The issues on the motion were somewhat novel but the time spent preparing for the motion was on the higher end.

[38] Given the foregoing, I fix costs at $9,000.00, on a partial indemnity basis, inclusive of disbursements and HST, payable by the Defendant to the Plaintiffs.

Nishikawa J. Date: September 19, 2018