Krayzel Corp. v. Equitable Trust Co., [2016] 1 S.C.R. 273, is an excellent example of how a classic credit situation, when put on paper, becomes vulnerable to s.8 of the Interest Act.
Section 8 of the Interest act prohibits a higher interest rate on arrears than upon money not in arrears.
The problem arises when the creditor, fearing the degrading creditworthiness of the borrower, properly protects himself with an increased interest rate.
Whenever the interest rate changes as between the same creditor and borrower, the risk of triggering s.8 will be there. Why? Because the borrower entered into new agreements as his creditworthiness deteriorated. Each time he entered into a new contract, the interest rate was higher.
The Supreme Court announced ‘Gotcha!’ by the simple fact that, on the second new round of credit-extension, the lender did the stupid thing of back-dating the contract to a month before the expiry of the first extension agreement.
Is Brown really saying: I would have upheld the 25% if the second extension agreement had been dated at the expiry of the first extension agreement.
Or is this merely a convenient (though trivial) way of disposing of a case, the main rule of which is: don’t change the interest rate on the borrower.
How much damage has the SCC in Kyayzel done to creditor freedom to re-finance at higher rates?
Answer: A great deal.
The proper interpretation of this entire affair was that of the Alberta Superior Court. The Court of Appeal mindlessly crushed the ‘sophisticated parties’ interpretation of s.8. An interpretation inadvertently supported by Brown’s reference to the likely original purpose of s.8 to protect ‘trapped’ farmers. (para. 19)
Brown endorsed this purpose (para 21) and likewise endorsed PARCEL Inc. v. Acquaviva, 2015 ONCA 331.
The essence of Brown’s reasoning is a message to creditors: don’t give interest discounts for good borrower-behavior (paying on time).
take-away: even a major credit market player like equitable trust gets the wording of its interest rates wrong.
rules to live by: as between the creditor and borrower, in relation to any tranche of money, don’t ever change interest rates applicable to that money.
