Transport North American Express Inc. v. New Solutions Financial Corp., (2004) 183 O.A.C. 342 (SCC)

• Judge: Iacobucci, Major, Bastarache, Arbour, LeBel, Deschamps and Fish, JJ.
• Court: Supreme Court (Canada)
• Case Date: October 16, 2003
• Jurisdiction: Canada (Federal)
• Citations: (2004), 183 O.A.C. 342 (SCC);2004 SCC 7;70 OR (3d) 255;[2004] SCJ No 9 (QL);235 DLR (4th) 385;18 CR (6th) 1;183 OAC 342;17 RPR (4th) 1;[2004] CarswellOnt 512;[2004] 1 SCR 249;40 BLR (3d) 18;316 NR 84

Transport North Am. v. New Solutions (2004), 183 O.A.C. 342 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

....................

Temp. Cite: [2004] O.A.C. TBEd. FE.069

New Solutions Financial Corporation (appellant) v. Transport North American Express Inc. (respondent)

(29355; 2004 SCC 7; 2004 CSC 7)

Indexed As: Transport North American Express Inc. v. New Solutions Financial Corp.

Supreme Court of Canada

Iacobucci, Major, Bastarache, Arbour, LeBel, Deschamps and Fish, JJ.

February 12, 2004.

Summary:

The parties negotiated a loan agreement. The interest rate, without consideration of the royalties and other fees, represented an effective annual rate of 60.1 percent. The royalties and other fees totalled 30.8%, resulting in a total rate of 90.9%. The borrower applied for a declaration that the agreement provided for a criminal interest rate contrary to s. 347(1)(a) of the Criminal Code.

The Ontario Superior Court, in a decision reported at [2001] O.T.C. 397, held that the contract violated s. 347(1)(a) and granted a "notional severance" to reduce the annual rate to 60 percent to comply with s. 347(1)(a). The borrower appealed.

The Ontario Court of Appeal, Sharpe, J.A., dissenting, in a decision reported at 160 O.A.C. 381, allowed the appeal, set aside the order for a "notional severance" and ordered severance of the interest provision that represented an effective annual rate of 60.1 percent. The lender appealed.

The Supreme Court of Canada, Bastarache, Deschamps and Fish, JJ., dissenting, allowed the appeal, set aside the order of the Court of Appeal and restored the order of the trial judge.

Contracts - Topic 6504

Illegal contracts - General - Enforcement of illegal contracts - [See second Criminal Law - Topic 1745 ].

Criminal Law - Topic 1745

Offences against property - Criminal interest rate - Severability - Section 347 of the Criminal Code made it an offence to charge an interest rate in excess of 60% per annum - The Supreme Court of Canada stated that "Given the desirability of remedial flexibility in cases of statutory illegality arising in connection with s. 347 of the Code, the evolving nature of the law regarding statutory illegality generally and the sound policy basis in which the concept is rooted, I find that notional severance is available as a matter of law as a remedy in cases arising under s. 347." - See paragraph 5.

Criminal Law - Topic 1745

Offences against property - Criminal interest rate - Severability - Section 347 of the Criminal Code made it an offence to charge an interest rate in excess of 60% per annum - The Supreme Court of Canada stated that "A spectrum of remedies is available to judges in dealing with contracts that violate s. 347 of the Code. The remedial discretion this spectrum affords is necessary to cope with the various contexts in which s. 347 illegality can arise. At one end of the spectrum are contracts so objectionable that their illegality will taint the entire contract. For example, exploitive loan-sharking arrangements and contracts that have a criminal object should be declared void ab initio. At the other end of the spectrum are contracts that, although they do contravene a statutory enactment, are otherwise unobjectionable. Contracts of this nature will often attract the application of the doctrine of severance. ... In each case, the determination of where along the spectrum a given case lies, and the remedial consequences flowing therefrom, will hinge on a careful consideration of the specific contractual context and the illegality involved." - See paragraph 6.

Criminal Law - Topic 1745

Offences against property - Criminal interest rate - Severability - The Supreme Court of Canada stated that in criminal interest rate cases, severance laid along a spectrum of available remedies - Depending on the circumstances, the court might find the whole agreement unenforceable or sever only the provision(s) that put the effective interest rate over 60% - In the latter case, the court had to determine whether a notional severance or "blue-pencil severance" (severance simpliciter) was appropriate - The preferred technique was the one that, in light of the particular contractual context, would most appropriately cure the illegality while remaining otherwise as close as possible to the parties' intentions expressed in the agreement - In determining where along the spectrum a particular contract lay, a court should consider (1) whether severance would subvert s. 347's purpose or policy; (2) whether the agreement was entered into for an illegal purpose or with an evil intention; (3) the parties' relative bargaining position and their conduct in reaching the agreement; and (4) the potential for the debtor to enjoy an unjustified windfall - In addition to being relevant to determining the desirability of severing illegal interest from principal, these considerations were relevant to determining whether to reduce illegal interest to a legal level - See paragraphs 20 to 40.

Criminal Law - Topic 1745

Offences against property - Criminal interest rate - Severability - A loan agreement's interest rate, without consideration of royalties and other fees (which totalled 30.8%), represented an effective annual rate of 60.10% contrary to s. 347(1)(a) of the Criminal Code - A trial judge granted the borrower a "notional severance" to reduce the rate to 60% - The Supreme Court of Canada affirmed the decision - The court rejected a severance simpliciter or "blue-pencil severance" of the 60.10% interest provision - Ostensibly, s. 347's policy purpose was to curb loan-sharking activity - There was no need to deter, through the criminal law, effective interest rates of up to 60% - Given that this was a commercial transaction engaged in by experienced and independently advised commercial parties, it was difficult to see why 30.8% rather than 60% better fostered compliance with s. 347(1)(b) - There was no evidence of an illegal purpose or evil intention - Absent a criminal conviction, the lender was presumed innocent - Any potential for an unjustified windfall arose from the borrower not having to repay the principal and interest or a commercially appropriate interest rate - The equities favoured the lender - The lender should be repaid the principal, with the highest interest rate legally allowable - See paragraphs 41 to 48.

Interest - Topic 2146

Agreement to pay interest - Bars to recovery - Exorbitant rate - [See fourth Criminal Law - Topic 1745 ].

Cases Noticed:

Garland v. Consumers' Gas Co., [1998] 3 S.C.R. 112; 231 N.R. 1; 114 O.A.C. 1, refd to. [paras. 19, 63].

Still v. Minister of National Revenue, [1998] 1 F.C. 549; 221 N.R. 127 (F.C.A.), refd to. [paras. 20, 52].

Cope v. Rowlands (1836), 2 M. & W. 150; 150 E.R. 707 (Ex. Ct.), refd to. [paras. 21, 53].

Kocotis v. D'Angelo (1957), 13 D.L.R.(2d) 69 (Ont. C.A.), refd to. [para. 21].

Bank of Toronto v. Perkins (1883), 8 S.C.R. 603, refd to. [paras. 22, 54].

Neider v. Carda of Peace River District Ltd., [1972] S.C.R. 678, refd to. [para. 22].

Mira Design Co. v. Seascape Holdings Ltd., [1982] 4 W.W.R. 97 (B.C.S.C.), refd to. [paras. 22, 58].

Thomson (William E.) Associates Inc. v. Carpenter (1989), 34 O.A.C. 365; 61 D.L.R.(4th) 1 (C.A.), refd to. [paras. 23, 115].

Trillium Computer Resources Inc. v. Taiwan Connection Inc. (1994), 11 B.L.R.(2d) 1 (Ont. Gen. Div.), affd. (1994), 11 B.L.R.(2d) 1 (Ont. Div. Ct.), refd to. [para. 25].

Milani v. Banks (1997), 98 O.A.C. 322; 145 D.L.R.(4th) 55 (C.A.), refd to. [para. 26].

Steinberg v. Cohen, [1930] 2 D.L.R. 916 (Ont. C.A.), refd to. [para. 54].

Hasiuk v. Oshanek, [1936] 1 D.L.R. 232 (Man. C.A.), refd to. [para. 54].

Carney v. Herbert, [1985] 1 All E.R. 438; [1984] 3 W.L.R. 1303 (P.C.), refd to. [para. 55].

McFarlane v. Daniell (1938), 38 S.R.(N.S.W.) 337 (Aus.), refd to. [para. 55].

Attwood v. Lamont, [1920] 3 K.B. 571 (C.A.), refd to. [para. 55].

Canadian American Financial Corp. (Canada) Ltd. v. King (1989), 60 D.L.R.(4th) 293 (B.C.C.A.), refd to. [para. 56].

Friedmann Equity Developments Inc. v. Final Note Ltd. et al., [2000] 1 S.C.R. 842; 255 N.R. 80; 134 O.A.C. 280; 2000 SCC 34, refd to. [para. 65].

Statutes Noticed:

Criminal Code, R.S.C. 1985, c. C-46, s. 347 [para. 1 et seq.].

Authors and Works Noticed:

Fridman, Gerald Henry Louis, The Law of Contract in Canada (4th Ed. 1999), pp. 441, 442 [para. 55]; 443 [para. 55, 57]; 444, 445 [para. 55].

Marsh, Norman S., The Severance of Illegality in Contract (1948), 64 Law Q. Rev. 230 and 347, at pp. 351, 352 [para. 29].

Waddams, Stephen M., The Law of Contracts (4th Ed. 1999), p. 421 [para. 55].

Ziegel, Jacob S., Bill C-44: Repeal of the Small Loans Act and Enactment of a New Usury Law (1981), 59 Can. Bar Rev. 188, p. 188 [paras. 43, 118].

Ziegel, Jacob S., The Usury Provisions in the Criminal Code: The Chickens Come Home to Roost (1986), 11 Can. Bus. L.J. 233, p. 242 [para. 118].

Counsel:

Peter J. Cavanagh and Eric N. Hoffstein, for the appellant;

Robert G. Ackerman, for the respondent.

Solicitors of Record:

Fraser Milner Casgrain, Toronto, Ontario, for the appellant;

Ackerman Law Office, Toronto, Ontario, for the respondent.

This appeal was heard on October 16, 2003, by Iacobucci, Major, Bastarache, Arbour, LeBel, Deschamps and Fish, JJ., of the Supreme Court of Canada. The decision of the court was released in both official languages on February 12, 2004, including the following opinions:

Arbour, J. (Iacobucci, Major and LeBel, JJ., concurring) - see paragraphs 1 to 49;

Bastarache, J., dissenting (Deschamps, J., concurring) - see paragraphs 50 to 76;

Fish, J., dissenting - see paragraphs 77 to 135.