We recently ran across an interesting decision of Mr. Justice Frank Newbould, dealing with the issue of whether prejudgment interest should be compounded. In Enbridge Gas. v. Michael Marinaccio et al, 2011 ONSC 4962 (CanLII), he held that it should be. What was intriguing though, was his implicit suggestion that compound interest should be the rule, not the exception, where the plaintiff is a business.
Justice Newbould had granted summary judgment to the plaintiff Enbridge Gas for some $6.5 million, which was then reduced by about $1 million to take into account a partial recovery that Enbridge had been able to effect. It sought prejudgment interest of 4.3% on the award, compounded monthly. (In its statement of claim, Enbridge had only claimed interest “pursuant to the Courts of Justice Act”.) Justice Newbould awarded compound prejudgment interest at 4.3% per annum, on $6,542,928.63 from February 1, 2008 to April 14, 2009 and on $5,723,339.60 from April 15, 2009 to April 14, 2011.
For some reason, not explained, he awarded only simple postjudgment interest, at the rate of 3% per annum.
By our reckoning, the compound prejudgment interest totalled $896,022.65, while simple interest on the same amounts for the same periods would have been $829,920.22, a difference of $66,102.44.
As we all know, prejudgment interest is dealt with in s. 128 of the Courts of Justice Act. Subsection 128(1) provides that “A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order.”
“Prejudgment interest rate” is defined, in s. 127, to mean, “the bank rate at the end of the first day of the last month of the quarter preceding the quarter in which the proceeding was commenced, rounded to the nearest tenth of a percentage point”.
Paragraph 128(4)(b) is the provision that is usually raised in opposition to a claim for compound interest. It says that “interest shall not be awarded under subsection (1) on interest accruing under this section”.
However, s. 130 gives the court a wide discretion to calculate interest differently than the formula set out in subsection 128(1). The discretion applies to the rate, the period and whether to award interest at all. (There is also discretion with respect to postjudgment interest.)
Here, the key factor for Justice Newbould was this:
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.
His Honour cited two Supreme Court of Canada decisions in support of his conclusion: Air Canada v. Ontario (Liquor Control Board), 1997 CanLII 361 (SCC),  2 S.C.R. 581 at para. 85 per Iacobucci J. and Bank of America Canada v. Mutual Trust, 2002 SCC 43 (CanLII),  2 S.C.R. 601 at para. 41 per Major J.
The passage cited from Air Canada v. Ontario was actually a quotation from the Ontario Court of Appeal’s ruling in Brock v. Cole (1983), 40 O.R. (2d) 97 (C.A.), at p. 103, which was, itself, quoting from the opinion of Lord Denning in Wallersteiner v. Moir (No. 2),  Q.B. 373,  1 All E.R. 849 at 856.
In Brock v. Cole, the plaintiff who was seeking compound interest was suing to recover an amount of money that he had given to the defendants to be invested on his behalf. So, it was clear on the facts of that case, that maximizing the return on the principal was very much within the plaintiff’s contemplation. And even on those facts, the interest ordered by the Court of Appeal was only compounded annually.
In Claiborne Industries Ltd. v. National Bank of Canada, 1989 CarswellOnt 1425 34 O.A.C. 241, 69 O.R. (2d) 65, 59 D.L.R. (4th) 533,  C.L.D. 1073, the Ontario Court of Appeal again had occasion to consider the issue of compound interest. Justice Carthy said that Brock stood for the proposition that there is a “general jurisdiction of the court to award compound interest where there is a wrongful detention of money which ought to have been paid. This is on the theory that it is reasonable to assume that the wrongdoer made the most beneficial use of the money and is accountable for the profits.” The Court went on to award interest, compounded monthly, on monies that it found to have been stolen, but only simple interest on other monies that were found to be owing by the defendant to the plaintiff (legal and accounting expenses) but which did not amount to a “wrongful application of funds”.
Then we come to the second decision of the Supreme Court of Canada that was cited by Justice Newbould: Bank of America Canada v. Mutual Trust Co. Interestingly, counsel for the winning appellant in that case was…Frank J.C. Newbould, Q.C., now Mr. Justice Newbould. The Supreme Court accepted the appellant’s argument (which the Court of Appeal had rejected), that it was entitled to compound prejudgment and postjudgment interest.
Bank of America was a breach of contract case (and this fact was significant). The Bank of America had agreed to provide construction financing of $33 million for a condominium development. The defendant, Mutual Trust, had agreed to provide mortgage financing for investors, in the amount of $36.5 million. Both parties had provided for themselves to receive compound interest from those to whom they were lending.
Because of the downturn in the real estate market in the early 1990’s, Mutual Trust ultimately refused to advance the mortgage funds. The condominium was ultimately sold at a significant loss.
The Supreme Court discussed concepts of “time value” of money and looked at the history of interest in Canadian law. It concluded that the common law now countenances awards of compound interest in contract cases: “To keep the common law current with the evolution of society and to resolve the inconsistency between awarding expectation damages and the courts’ past unwillingness to award compound interest, that unwillingness should be discarded in cases requiring that remedy for the plaintiff to realize the benefit of his or her contract.”
In addition, it held that equity also allows courts to award compound interest: “Equity has been recognized as one right by which interest may be awarded other than as specifically stated in ss. 128 and 129 CJA, including an award of compound interest. However, later in the decision, the Court appeared to sound a note of restraint with respect to awarding compound interest:
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.
Here, the Court was satisfied that compound interest was within the contemplation of both parties and upheld that trial judge’s award of compound prejudgment and postjudgment interest.
While there is no doubt that courts can award compound interest, it is much less clear when they will do so. The more recent cases suggest that the courts are moving in a more liberal direction. For example, in Royal Bank of Canada v. Slopen, 2011 ONCA 516 (CanLII), the Court of Appeal said that its own refusal to award compound interest in a lawyer’s negligence case (Confederation Life Insurance Co. v. Shepherd, McKenzie, Plaxton, Little & Jenkins 1996 CanLII 3206 (ON CA), (1996), 88 O.A.C. 398 (C.A.) had been “overtaken” by Bank of America, such that, in another lawyer’s negligence case, decided this year, an award of compound interest was upheld, with the Court saying, “We can see no difference in principle between awarding compound interest in a breach of contract case and in a solicitor’s negligence case where, as here, the negligence is rooted in a mortgage transaction. Different considerations might well apply in other types of negligence cases.”
It seems to us that the courts have struggled unnecessarily with the notion of compound interest in commercial cases. Compounding is a fact of everyday life, in mortgages, loans and financial transactions of every sort. The fact that both plaintiff and defendant in the Bank of America case had each provided, in their own contracts, for payment of compound interest, should have left little more to say on the subject.
Cases that do not involve contracts or even commercial dealings between the parties are more challenging. If prejudgment and postjudgment interest under the Courts of Justice Act is to compensate plaintiffs for the loss of use (or the “time value”) of money, why is it not assumed that individual plaintiffs would have invested the funds prudently, if they had had their damages when the cause of action arose? Justice Newbould said in Enbridge, “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.” But in any case in which a plaintiff is awarded damages, can that plaintiff not be said to have been notionally”deprived” of money that he or she would use in his or her life? What, exactly, is the difference?
In Enbridge, the claim was one based on breach of fiduciary duty, bribery and unjust enrichment. While the plaintiff was a business, this was not a contractual case, such as Bank of America. Although the nature of the defendants’ wrongdoing in Enbridge might have justified an award of compound interest, that was not the rationale given by Justice Newbould. Rather, the award was based solely on the “presumption”, that Enbridge would have maximized the use of the money, if it had had it, or that the defendants had used the money in that manner. The question we are left with is, if such a presumption can be made in this case (with, apparently, no evidence on the issue), when should it not be made?
For those of you who are now going to go out and claim compound interest in all of your claims, you can calculate it in Excel. The formula we use to compound interest monthly is:
((Principal*(1+(Annual interest rate/12))^(Elapsed time in months))-Principal )
Or, if you’re really ambitious, use this formula to calculate the elapsed time in months as well (rounded down):
((Principal*(1+(Annual interest rate/12))^((YEAR(LDate)-YEAR(EDate))*12+MONTH(LDate)-MONTH(EDate)))-Principal )
Where “LDate” is the “Later date” and “EDate” is the “Earlier date”.
Just don’t use this in any cases against us.
Of course, we make no guarantee or warranty of its accuracy: you’ll have to satisfy yourself that you’re getting the correct results.