Imagine a Brampton landscaper who invoices a customer for $18,000 and waits two years for payment. How much is actually owing by the time a judge rules? The answer may be several thousand dollars higher than the invoice, or almost nothing above it, depending on what the paperwork said and on whether anyone asked for interest in the claim.
Interest is one of those topics people tend to leave until the end of a dispute, and that is a mistake. The rate you can claim is often fixed by a line in a contract or by the date a lawsuit began. On a larger or longer dispute, the amount can influence settlement talks a great deal, for both sides.
This post offers general information, not legal advice. Interest calculations depend on your documents and on the court’s discretion, so check any figure before you rely on it.
Three Questions to Ask First
Most interest disputes come down to three points:
- Is there a contractual or statutory right to a specific rate? A signed agreement, or a statute covering the type of debt, usually comes first.
- Is the debt covered by the general rules in the Courts of Justice Act? If nothing else sets a rate, this is the default.
- Which stage are you in? Interest before judgment and interest after judgment are treated separately, and each has its own rate and rules.
Ontario’s published guidance sets out this same order: use a rate fixed by contract or by a specific law if there is one, and otherwise go to the government’s tables.
Interest Set by Contract
Parties are generally free to agree on interest. Loan agreements, mortgages, leases, credit applications and many supply contracts include a clause. If yours does, and the clause is enforceable, it normally governs instead of the statutory rate. In fact, the Courts of Justice Act says interest is not awarded under its general sections where interest is payable by another right. The wording of the clause matters. Does the rate continue after judgment, or does it stop? Courts often expect clear language if a contract rate is to carry on after judgment, so ask your lawyer to include this in your claim and in the draft judgment.
The invoice problem. Many businesses print “2% per month on overdue accounts” at the bottom of an invoice. Whether that binds the customer depends on whether it became part of their agreement. If the customer agreed to the term up front, say in a signed credit application, you are in a strong position. If it appeared only on an invoice after the work was done, the customer may argue they never agreed. A long course of dealing, in which earlier invoices with the same term were paid without objection, may help, but it is not guaranteed.
Monthly rates and the Interest Act. The federal Interest Act has rules that matter for how a rate is stated. If a written contract sets interest for a period shorter than a year, such as a monthly rate, and does not state the yearly equivalent, section 4 generally limits recovery to 5 per cent a year. There are exceptions, including mortgages on real property, which have their own rules in the Act. So “2% per month” on its own may not produce the result that a business expects, while “2% per month (24% per year)” is much safer. Business owners would do well to have their standard forms reviewed for this reason.
Criminal rate limits. Section 347 of the Criminal Code makes it an offence to receive interest at a criminal rate. The rules set out in that section and its regulations include specific exemptions for certain commercial loans. The limits are tighter than many people assume and apply on an annual percentage rate basis. Fees and charges can count as interest. Anyone charging high rates on private loans should get advice on the current limit before lending, and borrowers who think they have been charged too much should get advice as well.
Prejudgment Interest Under the Courts of Justice Act
Where no other right to interest applies, section 128 of the Courts of Justice Act gives a person entitled to a money order the right to claim prejudgment interest. It runs from the date the cause of action arose until the date of the order.
The rate is set by a formula based on the Bank of Canada’s bank rate, published quarterly. For prejudgment interest, you look up the quarter in which the proceeding was commenced, and that rate usually applies for the whole period. So the rate is fixed at the start of the lawsuit, even if rates go up or down later. If you sue in a quarter of low rates and the case takes three years, the published rate does not change.
Keep these limits in mind:
- You have to ask. Prejudgment interest is not added on its own initiative. It should be claimed in your statement of claim, notice of application or Small Claims plaintiff’s claim.
- Some items are excluded. Interest is not awarded on punitive or exemplary damages, on interest itself, on costs, on future losses identified by the court, or on the amount of an advance payment for the period after it was made. It is also not awarded on a consent order, unless the debtor agrees.
- Date of the cause of action. For an invoice, this might be its due date, not the date it was issued. The start date can be disputed, so keep records of due dates and demands.
- Losses that build up over time. Where the order includes past financial losses, interest is worked out on the total at the end of each six-month period and at the date of the order, so it does not all run from day one.
Personal injury claims have a separate rate for non-pecuniary damages under the rules of court.
Postjudgment Interest
Once a court makes an order, section 129 says money owing under it bears interest at the postjudgment rate, starting from the date of the order. This includes costs fixed by the court. The rate is also published each quarter, using the quarter in which the order is made, and it tends to differ from the prejudgment rate for that same quarter because the formula is different.
Ontario’s guidance states that postjudgment interest also applies to costs and prejudgment interest, and that partial payments reduce the amount that earns interest. Where an order sets out periodic payments, each missed payment bears interest only from the date it was missed.
An order will usually state the rate. If you are enforcing a judgment, you will need to state it in your enforcement forms, such as a Small Claims affidavit for enforcement request. If a contract rate properly applies after judgment, the order should say so, because the default statutory rate would apply otherwise.
A Worked Example
Here is a simplified, hypothetical illustration of the method on the Ontario tables page: multiply the amount by the rate, divide by 365, and multiply by the number of days.
Suppose a $20,000 invoice fell due, with no contract rate. The plaintiff sued, and the published prejudgment rate for that quarter was 4 per cent. The judgment comes exactly 500 days after the due date.
- Daily interest is $20,000 x 0.04 / 365, or about $2.19.
- Prejudgment interest for 500 days is about $1,096.
- The judgment is for $21,096, plus costs.
Now suppose $5,000 in costs is awarded and the postjudgment rate is 5 per cent. On the $26,096 total, each day of further non-payment adds about $3.57. The rates here are made up for the example, so always use the actual figures in the government’s table for your quarter. Note that this is simple interest, not compound interest, unless a contract or the court says otherwise.
The Court Can Change It
Section 130 gives a court discretion to disallow interest, change the rate or change the period, where it considers that just. It looks at factors such as changes in market interest rates, the circumstances of the case, any advance payment, the amount claimed compared to the amount recovered, and whether a party’s conduct unnecessarily lengthened or shortened the proceeding.
Practically, this means a plaintiff who sat on a claim for years might see the interest period cut, while a defendant who stonewalled could find that it cost more than expected. A court might also depart from the default where a low published rate would be unfair given what the money would actually have earned, but that takes evidence and a good reason. Do not count on it.
Interest in Construction and Small Claims Cases
Some statutes have their own interest rules. Under the Construction Act’s prompt payment part, interest begins to accrue on amounts not paid when due. The rate is the prejudgment interest rate or, if the contract specifies a different rate, the greater of the two. Trades should check this when calculating what they are owed.
Small Claims Court applies the same Courts of Justice Act sections. Interest is excluded from the court’s $50,000 monetary limit, so a claim at the limit can earn interest on top. A plaintiff with a higher rate under a contract should claim that rate and attach the contract, and should expect to have to prove it. If you are looking at a default judgment, the clerk or judge will generally look for this support, and an unsupported rate may not be allowed.
Interest and Settlement
Interest is often the swing factor in settlement talks. If you are owed money, include it as a calculated line in your demand letter, with the basis. If you are defending a claim, ask for the calculation and check the start date, the rate and whether payments were credited. And when you settle, say in writing whether the number includes interest and costs, and what happens if a payment is late. Vague terms can lead to a second dispute.
Being clear about interest early helps both sides see what the case is truly worth. To talk through an unpaid account, the firm’s pages on small claim matters and contractual litigation offer a starting point. Sawan Law House LLP can review the contract terms, invoices and payment history you have, which are the key documents for working out what interest may be available.