Are You Paying Enough Interest to Interest?
A common issue in construction-related disputes is the issue of contractual interest or “finance charges” billed by many subcontractors and suppliers to their customers.
In my experience, it’s more common than not that subcontractors include some language on their invoices to the effect that “Interest is payable at 2% per month on overdue invoices.” This line usually appears near the bottom of each invoice or, in some cases on the reverse side in fine print. Normally nobody pays much attention to that line. That is, of course, until the bill goes unpaid for several months. When the subcontractor runs out of patience and launches a lawsuit to collect the debt, inevitably the amount the client instructs the lawyer to claim includes the claim for interest at the rate set out on the invoice, often calculated as compounded monthly on the account statements. Depending on the base amount claimed, the interest can amount to several thousand, or even tens of thousands of dollars. This raises the question: Does the interest claim form a valid part of the overall claim? The client will often say “well, it’s right there on my invoice, so it’s payable, right?” Unfortunately for the client, the answer is often “no.”
It’s important to understand the 2 different types of interest claims. The first, claims for statutory interest, arise under Alberta’s Judgment Interest Act. Put in an overly-simplified way, we can say that this claim is available to anyone with a debt claim. It provides for interest to be payable at the rates set by the provincial cabinet for each calendar year. Those rates are typically quite low (the rate for 2017 is 0.53% per year). This rate will apply when the contracting parties haven’t turned their minds to a rate of interest and their agreement remains silent on the issue. The second type of claim is a claim for contractual interest – an amount that the parties have agreed will be charged on late payments. The key word there, of course, is “agreed.”
Like other terms of an agreement, the agreement on interest (or lack thereof) is a question of fact which may need to be determined by a judge. The ultimate question that needs to be answered is this: “Did this defendant agree to pay interest at a certain rate on a certain amount from a certain time?” If the answer is “yes,” judgment for interest should be granted in accordance with the facts found to exist. If the answer is “no,” the only remaining claim is for statutory interest.
In 1469753 Alberta Ltd. v. Luxen, 2015 ABQB 282 (at para 49), the Court discussed the analysis as follows:
The general rule is that a claim for interest cannot be grounded on a unilateral term in an invoice (Alex Gair & Sons Ltd. v. Marr Holdings Ltd.,  B.C.J. No. 329 (B.C. S.C. [In Chambers]) (QL)), though agreement to pay interest may be inferred from the manner in which the parties interact and address outstanding debts (N.B.C. Mechanical Inc. v. A.H. Lundberg Equipment Ltd., 1999 BCCA 775 (B.C. C.A.) at paras 39-45, (1999), 132 B.C.A.C. 84 (B.C. C.A.)).
In other words, just because you demand that I pay 2% interest per month doesn’t mean that I’m required to pay it unless I’ve agreed to. In the absence of a clear, comprehensive written contract the courts will look for other evidence of agreement, including oral statements and conduct of the parties. This is where some hope lives for a plaintiff who claims interest based on its invoices but hasn’t reduced the agreement to writing. As noted in the passage above, the courts are prepared to look at the conduct of the parties – specifically the payment history – to make an inference about whether there was an agreement to pay a certain rate of interest. It seems that to support an inferred agreement on a contractual interest rate, the defendant probably must receive at least one invoice which claims that interest rate and actually make payment of that interest. The result is presumably based either on the principle of part-performance as indication of an agreement or on the doctrine of estoppel. I would suggest that there remains room to argue on behalf of such a defendant, however, that any such payment of interest was inadvertent (i.e. the result of inattention to the invoice details) rather than an unequivocal acceptance of the claimed interest rate.
The best evidence of any agreement is a carefully-written contract that is properly executed by all parties. As a matter of practice, it’s recommended that a party which plans to claim interest on any late payments should specifically discuss the rate that is to be paid and document that in a contract before any work or materials are provided. If you are relying entirely on a line on your invoices to establish your claim to contractual interest, odds are you won’t be happy with the result if the dispute goes to court. My usual advice to clients who use that practice is to abandon any claim for contractual interest because the chances of proving entitlement is slim and likely not worth the additional legal costs. Needless to say, if you’ve agreed to a certain interest rate at the outset you should ensure that any invoices and statements issued on the account reflect that rate.
There are other issues that can arise around interest claims, including whether the rate exceeds the maximum allowed by the Criminal Code, the proper date from which to calculate interest, and whether it is compound interest or simple interest, but those questions only arise once an agreement is established. Some attention to interest terms at the outset can go a long way if payment is later delayed.