Compound interest: must entitlement be proved or disproved?

In a 2011 post, I commented on a decision of Justice Newbould, Enbridge Gas. v. Michael Marinaccio et al, 2011 ONSC 4962 (CanLII), in which the court suggested that where a plaintiff is a commercial business, compound interest ought to be the rule rather than the exception.

Since that time, the Court of Appeal, in 2012, upheld the decision here and, in particular, agreed with the following passage from the reasons of Justice Newbould:

Courts of equity have always exercised the power to award compound interest whenever a wrongdoer deprives a company of money which it uses in its business. On general principles it should be presumed that had the business not been deprived of the money, it would have made the most beneficial use of it available to it. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. [Emphasis added, internal citations omitted.]

I am somewhat surprised that the Enbridge case has not received more attention during the ensuing two years. It was referred to in a British Columbia case, Bronson v. Hewitt, 2013 BCCA 367 (CanLII), decided last year but does not seem to have been mentioned in any Ontario case, at least on the issue of compound interest.

However, there was a decision released last month that considered the issue again. The case was decided by Justice James McNamara (soon to be Regional Senior Justice McNamara). Unfortunately, it does not appear that Enbridge was cited to His Honour, as it was not mentioned in the reasons. Justice McNamara’s ruling indicates that before compound interest will be awarded, it is up to the plaintiff to establish a basis for such an award.

The case is Colautti Construction Ltd. v. Ashcroft Homes Inc. et al., 2014 ONSC 2715 (CanLII). The plaintiff, having recovered judgment of $495,111.38, sought prejudgment and postjudgment interest at a rate of 10 percent per annum, compounded. (The frequency of the requested compounding was not specified in the reasons.)

The rate of prejudgment interest that would have been payable under s. 128 of the Courts of Justice Act was 4.8 percent, so the plaintiff’s argument included not only compounding but also varying the applicable rate. A rate of ten percent was allegedly chosen because it reflected the plaintiff’s cost of borrowing.

The defendants also asked His Honour to adjust the s. 128 rate but they wanted the court to use the average rate over the period from commencement of the action to the final confirmation of a reference on damages (which would have been 2.52% percent).

Justice McNamara accepted that, by virtue of s. 130 of the Courts of Justice Act, he had the discretion to depart from the statutory provisions regarding interest, as set out in ss. 128 and 129 of the Act. However, he was not satisfied that the evidence established that a rate of 10% per annum reflected the plaintiff’s actual cost of borrowing. And, more generally, he did not feel that, having regard to the factors listed in s. 130(2) of the Act, either party had made out a case for a departure from the rate of 4.8%, which he said was “entirely just and reasonable in the overall circumstances of this case”.

On the issue of compounding, the submissions made to Justice McNamara seem to have been focused on a 2002 decision of the Supreme Court of Canada, Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 (CanLII), 2002 SCC 43, [2002] 2 S.C.R 601, in which the Supreme Court had recognized the court’s power to award compound interest “as has traditionally been done in cases of, inter alia, wrongful retention of funds”.

However, Justice McNamara distinguished Bank of America on the basis that in that case, both parties were lending institutions and the litigation “involved breach of an agreement that specifically provided for compound interest”. He interpreted that case to have limited awards of compound interest “in reference to the principle that expectation damages are grounded in the parties’ reasonable expectation”. He quoted the following passage from the decision in Bank of America:

An award of compound pre- and post-judgment interest will generally be limited to breach of contract cases where there is evidence that the parties agreed, knew, or should have known, that the money which is the subject of the dispute would bear compound interest as damages. It may be awarded as consequential damages in other cases but there would be the usual requirement of proving that damage component.

Applying those principles, His Honour concluded that compound interest should not be awarded. He noted that there had been no claim advanced by Colautti for equitable relief. Further, there was no evidence that the parties had either agreed or should have expected that the amounts in dispute would bear compound interest as damages.

In the result, he awarded only simple interest, at 4.8% per annum.

In Enbridge, the defendant had argued against compound interest on the basis that, unlike the Bank of America case, there was no agreement providing for compound interest. However, the Court of Appeal rejected that argument.

Thus, it remains somewhat unclear where the burden of proof lies on the issue of compound interest. Colautti and Bank of America suggest that in cases that do not involve contractual provisions for compound interest, entitlement to compounding depends upon there being evidence that the parties knew or should have known that an award of damages would attract compound interest. But Enbridge indicates that in commercial cases, at least, there is actually a presumption, that “had the business not been deprived of the money, it would have made the most beneficial use of it available to it”, warranting an award of compound interest.

It is to be hoped that a future decision will attempt to reconcile these two approaches.



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