Garland v. Consumers' Gas Co.

Garland v. Consumers' Gas Co.
Collection
Supreme Court Judgments
Date
1998-10-30
Report
[1998] 3 SCR 112
Case number
25644
Judges
L'Heureux-Dubé, Claire; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.; Bastarache, Michel; Binnie, William Ian Corneil
On appeal from
Ontario
Subjects
Civil procedure
Criminal law
Notes
SCC Case Information: 25644
Decision Content
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), 16 D.L.R. (4th) 139, aff’d [1986] 1 S.C.R. 749; referred to: William E. Thomson Associates Inc. v. Carpenter (1989), 69 O.R. (2d) 545; Tomell Investments Ltd. v. East Marstock Lands Ltd., [1978] 1 S.C.R. 974; Immeubles Fournier Inc. v. Construction St‑Hilaire Ltée, [1975] 2 S.C.R. 2; Attorney‑General for Ontario v. Barfried Enterprises Ltd., [1963] S.C.R. 570; Delta v. Active Chemicals Ltd. (1984), 57 B.C.L.R. 213; Mira Design Co. v. Seascape Holdings Ltd. (1981), 34 B.C.L.R. 55; Aectra Refining & Marketing Inc. v. Lincoln Capital Funding Corp. (1991), 6 O.R. (3d) 146; Degelder Construction Co. v. Dancorp Developments Ltd., [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), 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), 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), 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), 16 D.L.R. (4th) 139 (B.C.C.A), aff’d [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 of the Criminal Code ?
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), 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., [1978] 1 S.C.R. 974, at p. 983; Immeubles Fournier Inc. v. Construction St-Hilaire Ltée, [1975] 2 S.C.R. 2, at pp. 10-11; Attorney-General for Ontario v. Barfried Enterprises Ltd., [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 accrue