INTEREST RATES AND THE CRIMINAL CODE

[Pages:5]INTEREST RATES AND THE CRIMINAL CODE

Since the text was written, there has been a great deal of activity in the courts regarding s 347 of the Criminal Code. That section defines "interest at a criminal rate" as annual interest in excess of 60%. It also states that:

(1) Notwithstanding any Act of Parliament, every one who (a) enters into an agreement or arrangement to receive interest at a criminal rate, or (b) receives a payment or partial payment of interest at a criminal rate

is guilty of

(c) an indictable offence and is liable to imprisonment for a term not exceeding five years, or (d) an offence punishable on summary conviction and is liable to a fine not exceeding twenty-five thousand dollars or to imprisonment for a term not exceeding six months or to both.

Section 347 is widely regarded as a legislative failure. It was introduced in 1980 for the laudable purpose of dealing with "loan sharks." It appears, however, that it has never actually been put to that use. Instead, it frequently has been used to invalidate what many people would regard as legitimate credit arrangements.

Questions

1. Why has s 347 not been used against its primary target: loan sharks? In answering that question, consider the availability of evidence. Legitimate lenders create an enormous amount of documentary evidence every time they grant loans. After all, for the purposes of enforcing a loan, they require at least the threat of proving their case in court. Loan sharks, in contrast, operate entirely outside regular channels. Court is the last place they want to be. Their enforcement mechanisms are cruder and their record-keeping more informal.

Case Study: Garland v Consumers' Gas Co

As the sub-sections indicate, a crime is committed if either: (a) an agreement or arrangement calls for the payment of a prohibited rate of interest, or (b) interest in fact is received at a criminal rate. The Supreme Court of Canada has confirmed that the latter branch requires a "wait-and-see" approach.1 Consequently, an agreement that is valid on its face under sub-section (a) may still be caught under sub-section (b) if, for example, a debtor who is allowed to make payment at any point within a period of time pays earlier (and hence at an effectively higher, impermissible interest rate) rather than later (and hence at an effectively lower, permissible interest rate).

1 (1998) 165 DLR (4th) 385 (SCC).

Precisely that situation occurred in Garland v Consumers' Gas Co. The defendant sold gas to consumers in Ontario. Its sales agreement contained a provision for late penalty payments (LPPs) that required customers to pay a charge of 5% of a monthly unpaid bill if payment was not made within sixteen days. As calculated on an annual basis, the LPPs violated s 347(1)(b) if a customer paid within thirty-seven days, but not if a customer paid after that period had lapsed. The evidence indicated that 81% of late payers paid within ten days. Consequently, the LPPs frequently violated s 347.

In 1998, the Supreme Court of Canada held that the LPPs violated s 347(1)(b) under the "wait-and-see" approach. Class action proceedings were then instituted in an attempt to compel the gas company to pay back all of the money that it had "illegally" received under the LPPs over the course of many years. The value of the claim, if successful, is well in excess of $100 million.

That action failed at both trial and before the Ontario Court of Appeal,2 but the Supreme Court of Canada has agreed to revisit the case on the restitutionary issues.

Questions

1. Was the LPP scheme in Garland objectionable from a business perspective? Does it fall within the spirit of s 347 of the Criminal Code?

2. If the gas company is held liable and ordered to provide restitution, how will it satisfy judgment? Who, in reality, will be required to pay for much, if not most, of the judgment?

Payday Loans

There is a thriving "payday loan" industry in Canada. For whatever reason, people often find it difficult to make it to the next payday. They know that they will be receiving cheques from their employers sometime soon, but they need money now -- not later. They consequently turn to businesses like the Cash Store for help.3 The Cash Store provides short term loans against repayment from future pay cheques. Such arrangements almost always violate s 347 of the Criminal Code. As we saw in Garland v Consumers' Gas Co, even an interest rate that seems commercially reasonable when considered in the short term may well exceed 60% when calculated on an annual basis. For the purposes of the Criminal Code, it is irrelevant that the parties expect a payday loan to be repaid promptly. So too, it is irrelevant that the interest rate is described in the loan documents not as "interest," but rather as "NSF fees," "broker fees" or the like. The courts look at the substance, rather than the form, of the transaction.

For many years, payday loan companies operated illegally, but generally without interference. Recently, however, litigation has increased substantially. And in some instances, the courts have decided that since a loan in violation of s 347 is criminal, it

2 (2001) 208 DLR (4th) 494 (Ont CA). 3 Cash Store v Lajoie [2002] AJ No 780 (QL) (Prov Ct).

need not be repaid. The borrower is relieved of the need to repay both the usurious interest rate and the principal sum!4 If that trend continues, businesses like the Cash Store will quickly disappear.

It is, however, not entirely clear that the disappearance of such business would be desirable. While payday loan companies often employ sharp practices, their situation is at least somewhat removed from the classic "loan sharking" scenario that initially motivated Parliament to enact s 347. A recent study indicates that customers of such businesses are not, for instance, among the most vulnerable and unsophisticated of Canadians.5 They tend to be people with annual incomes near the national average who temporarily have fallen financially short and need a quick injection of funds to meet day-to-day expenses. What will such people do if payday loan companies are driven into extinction?

Questions

1. Many Canadians have used payday loan services. Have you? If so, did you feel the terms were criminally unfair? Were alternative forms of financing available to you? If a payday loan service had not been available, would you have been able to make ends meet in some other way?

2. Leaving aside the application of s 347 of the Criminal Code, what risks face payday loan companies? Do those risks justify the extraction of substantial interest rates?

3. To what extent should the government legislate to protect people from themselves? Section 347 was intended, at least in part, to discourage people from taking loans in circumstances that support the extraction of potentially ruinous interest rates. But what about other forms of credit? People frequently abuse credit cards, much to their own detriment. Should the government enact laws that prevents credit card companies from, for instance, increasing credit limits or sending credit cards to people with limited means?

Fixing the Problems

Once a court has determined that the interest provision in a credit arrangement violates 347, it becomes necessary to decide on a remedy. Sub-sections (c) and (d) determine the sanctions available in criminal law. In practice, however, the relevant question tends to pertain not to the punishment of criminals, but rather to the enforcement of loans. And in that regard, the courts have developed a range of responses.

? As previously noted, some judges have declared loans to be entirely unenforceable -- thereby relieving borrowers of the obligation to repay anything.

4 CAPS International v Kotello [2002] 6 WWR 307 (Man QB) ("the public policy need for a strong and clear message that courts will not assist lenders in the business of loaning short-term money at criminal interest rates to unsophisticated customers far outweighs the public policy concern of unjustly enriching a person by not granting judgment for repayment of principal"). 5 S Lott & M Grant Fringe Lending and "Alternative" Banking: The Consumer Experience (2002) 34-47.

? It might be possible to simply "read down" an interest provision by effectively reducing the parties agreed-upon rate to an acceptable level.6 Generally speaking, however, courts are reluctant to re-write contracts.

? Alternatively, some courts have used a "blue pencil" approach, under which key provisions in an impermissible loan agreement are struck out, leaving behind a coherent and criminally non-offensive transaction. Other courts, however, have rejected the technique of "notional severance" on the ground that it brings the law into disrepute.7

There is, then, an open question as to how the courts should deal with offending credit arrangements. The Supreme Court of Canada will soon address that issue when it hears Transport North American Express v New Solutions Financial Corp.8

There is also a distinct question as to what, if anything, Parliament should do to cure the problems created by s 347. Commentators have offered a number of proposals:

? the provision might be repealed altogether, ? s 347 might be re-written so as to exempt commercial and consumer loans granted

by government-regulated companies, ? s 347 might be re-written so as to limit its affect on the re-payment of loans to

situations in which the lender has been criminally prosecuted, ? the prohibited annual rate might be raised from 60% to, say, 500% (a figure which

seems absurd when considered over the course of a year, but which may be entirely reasonable for the purposes of short term loans), or ? judges might be given greater flexibility to re-write contracts or eliminate offending contractual clauses.

Questions

1. Virtually every commentator regards s 347 as unnecessary or, at best, ill-conceived. How could Parliament, with all of its resources and committees, have gotten it so wrong? And now that things have gone so wrong, what should Parliament do to fix the problem?

Further Reading

J Ziegel "The Usury Provisions in the Criminal Code: The Chickens Come Home To Roost" (1986) 11 Canadian Business Law Journal 233.

S Antle "A Practical Guide to Section 347 of the Criminal Code -- Criminal Rates of Interest" (1994) 23 Canadian Business Law Journal 327.

MA Waldron "What Is To Be Done With Section 347?" (2003) 38 Canadian Business Law Journal 367.

6 Boyd v International Utility Structures Inc (2002) 216 DLR (4th) 139 (BC CA). 7 Transport North American Express v New Solutions Financial Corp (2001) 200 DLR (4th) 560, rev'd (2002) 214 DLR (4th) 44 (Ont CA). 8 Leave to appeal granted (2002) 220 DLR (4th) vii (SCC).

I Ramsay "Of Payday Loans and Usury: Further Thoughts" (2003) 38 Canadian Business Law Journal 386.

J Ziegel "Does Section 347 Deserve a Second Chance: A Comment" (2003) 38 Canadian Business Law Journal 394.

J Berryman "Mr Garland Goes to Ottawa: Comments on Restitution in Canada Through the Lens of Garland v Consumers' Gas" (2003) 36 Loyola of Los Angeles Law Review 779.

J Ziegel "Criminal Usury, Class Actions and Unjust Enrichment in Canada" (2002) 18 Journal of Contract Law 121.

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