Commercial Litigation and Dispute Resolution Blog

The model Industry Agreements developed by the Canadian oil and gas industry (such as the CAODC-CAPP and PSAC contracts) stipulate that any unpaid contractor invoices shall bear interest at a rate of 18% per annum. This is by no means atypical. In the Canadian oil and gas industry it is very common to find contractual interest rates for late or unpaid invoices ranging from 12% to 24% per annum.

Given the current economic climate, do contractual interest rates in this range, applied to unpaid invoices or late payments, remain enforceable? (Spoiler: Yes)

The typical approach to challenging a contractual interest rate involves considering whether the interest rate constitutes an unenforceable penalty clause and whether relief against under section 10 of the Judicature Act, RSA 2000, c. J-2 may be available. This approach generally involves a determination of the appropriate pre-assessment of damages by the parties (with any quantum of interest exceeding this amount being deemed an unenforceable penalty).

Historically, Alberta Courts have tended to contractual interest rates in debt claims in accordance with the direction from section 2(1)(h) of the Judgment Interest Act, RSA 2000, c. J-1 to respect agreements between the parties on interest rates.

In Precision Drilling Canada Limited Partnership v. Yangarra Resources Ltd., 2015 ABQB 649, for example, the Alberta Court dealt with an 18% interest rate in an industry agreement applied to unpaid invoices (the decision was subsequently overturned on other grounds). The 18% interest rate on the unpaid invoices amounted to approximately $2.4 million by the date of the judgment.

The Court in Precision Drilling enforced the 18% interest rate, making the following observations about the debtor’s argument that the interest rate was extravagant and unconscionable:

[23] … an agreed upon interest rate for payments in arrears saves both litigants’ time and the courts’ time. Otherwise, it would be necessary for an unpaid goods or services supplier, when suing for non-payment, to adduce evidence as to things such as its average return on capital and its blended average cost of borrowing. These figures would be constantly changing.

[24] While there is no doubt that an agreed upon interest rate of 18% contains an element of ‘incentive’ in addition to an element of compensation, I find nothing extravagant or unconscionable about a goods or service provider charging 18% interest if they are not paid on time for goods or services provided…

[26] I find nothing ‘extravagant or unconscionable’ in the 18% interest rate agreed to between Precision and Yangarra, and therefore find it to be enforceable.

The most recent analysis on contractual interest rates from the Alberta Court of Appeal in Bidell Equipment LP v. Caliber Midstream GP LLC, 2020 ABCA 478, affirming 2019 ABQB 296, confirms this approach.

The contractual interest rate at issue in this case was 24% per annum, which was applied to the unpaid invoices for manufacturing custom natural gas compression units. At the time of judgment, the quantum of interest was $6,073,407.05. Referring to the Judgment Interest Act provisions addressing interest agreements between parties, the trial judge ordered payment of pre-judgment interest at the contractual rate of 24% per annum.

The Alberta Court of Appeal affirmed the trial judge’s decision, confirming that, in the context of contractual debt claims for unpaid invoices:

• Courts should generally defer to the interest rate agreed to by the parties: “Even a contractually agreed upon high interest rate is enforceable and a creditor is entitled to judgment in accordance with the terms of the contract… This is particularly so with sophisticated commercial actors” (para 48).
• A high interest rate is not by itself a “penalty”: “With respect to a 24% per annum interest rate being a penalty, this submission may be appropriate in a damages calculation, but not in a debt claim pursuant to enforcement of a contract” (para 47).
• A high interest rate is not by itself unconscionable or oppressive: The parties contracted interest rate of 24% was not unconscionable or oppressive, did not make the debtor “vulnerable” or a “victim”, nor did it mean that the creditor got an “undeserved windfall” through the accumulation of interest (para 48).