Pre-judgment interest

Pre-judgment interest is admittedly not, at first blush, the most scintillating subject, but there are some aspects of which counsel should be aware when prosecuting or defending a claim which can make a significant monetary difference to your client.  This article focuses on pre-judgment interest claims in the context of debt and contract claims only.

Court Order Interest Act

Where no contractual rate of interest applies, one normally claims pre-judgment interest pursuant to the Court Order Interest Act, R.S.B.C. 1996, c. 79.

Section 1(1) addresses pre-judgment interest in cases involving a pecuniary judgment and specifies that the addition of interest is mandatory.

Court order interest

1  (1) Subject to section 2, a court must add to a pecuniary judgment an amount of interest calculated on the amount ordered to be paid at a rate the court considers appropriate in the circumstances from the date on which the cause of action arose to the date of the order.

Section 1 gives the court discretion when setting the interest rate, but in most cases the court applies the rate of pre-judgment interest fixed by the Registrar from time to time.  That rate tends to be modest – at present it is 1% per annum.

Section 2(b) of the Act states that interest under section 1 is not awarded in certain cases, including if there is an agreement about interest between the parties.

Contractual Interest

Where the parties have an agreement which addresses interest on amounts due, how that interest rate is expressed is important.  Failure to express it the right way can render the rate unenforceable.

Debt claims often arise in circumstances where there are relatively informal arrangements between the service provider /supplier and the customer.  Often there is little in the way of negotiation or discussion about credit terms prior to the transaction. There may simply an interest term stuck into the fine print on the bottom of a printed invoice form.

If the parties did not apply their minds to interest rate before they formed the agreement, arguably there is no agreement about interest, and any interest rate unilaterally imposed after the fact would not be unenforceable for lack of consideration.  If so, only Court Order Interest Act pre-judgment interest would be available.

In N.B.C. Mechanical Inc. v. A.H. Lundberg Equipment Ltd., 1999 BCCA 775 at para 35 the Court of Appeal found the trial judge in that case had erred in finding an agreement to pay interest could be inferred because the defendant was aware the plaintiff would be charging interest on overdue accounts based on the interest notation appearing on numerous invoices rendered.  The most that could be said was that the defendant was aware the plaintiff was claiming the right to charge interest on overdue accounts, but that was not enough to create an obligation on the part of the defendant.  It found that “A right to charge interest cannot be based simply on a unilateral assertion in an invoice”.  See Alex Gair & Sons Ltd. v. Marr Holdings Ltd., [1987] B.C.J. No. 329 (BCSC).

Where parties do not have an express agreement to pay interest, in some cases agreement can still be inferred from a course of conduct or an acknowledgment by the defendant subsequent to the contract being entered into.  See N.B.C. Mechanical at para 39, and Macklin Mailey Advisertising Ltd. v. Budget Brake & Muffler Distributors Ltd., [1987] B.C.J. No. 2268 (BCCA).

In N.B.C. Mechanical at para 41 the court comments that cases seemed to reflect a tendency in recent years to be less willing to imply a contract to pay interest in the absence of a clear intention between the parties.  If one wishes to charge interest, the most direct path to success is to deal with this in a contractual document.  How the interest rate is expressed is also critical.

One often sees estimates, quotations, agreements or credit agreements which express the interest rate as “per day” or “per month” For example, (a) “1.5% per month”, or an annual rate but compounded on a shorter time cycle, such as (b) “18% per annum, compounded monthly”.  Contractual interest rates tend to be set relatively high to encourage timely payment.  Interest rates expressed in this way, however, are not enforceable.

Interest Act (Canada)

Section 4 of the Interest Act (Canada), R.S.C. 1985 c. I-15 states that if an agreement about interest expresses the rate per day, week or month or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of 5% per annum shall be chargeable, payable or recoverable unless the contract contains an express statement of the equivalent yearly rate or percentage of interest.  The section is as follows:

4.  Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

A case which applies this section is Aluminex Extrusions Ltd. v. Double “D” Glass Ltd. (1987), 22 B.C.L.R. (2d) 220 (S.C.).  In it the court found that a monthly interest rate was void because it did not include an effective annual rate, and as such contravened section 4 of the Interest Act.  It found there was an agreement to pay interest, but because the rate was void, the court substituted interest at the rate 5% per annum.

Accordingly, in the examples used above:

(a)   expressing the rate as 1.5% per month would make it unenforceable if no equivalent annual rate (18% per annum) is included; and

(b)  expressing the rate as “18% per annum, compounded monthly” would make it unenforceable if no equivalent annual rate (19.56% per annum) is included.


Counsel should apply their mind to pre-judgment interest issues when prosecuting or defending a debt or contract claim, including whether the interest rate claimed is contractual or statutory and whether a contractual rate is expressed in a form that is enforceable. The difference between a typical contractual rate (variable, but frequently between 12% and 30% per year), Interest Act (Canada) interest (up to 5% per year) and Court Order Interest Act pre-judgment interest (currently 1% per year) is significant.

Counsel should also make it their practice to warn their client when the form of invoice, credit agreement and/or contract they use in their business expresses the interest rate in a manner which runs afoul of section 4 of the Interest Act (Canada), and recommend changes to make the rate enforceable.

-John W. Bilawich