Are You Entitled to Interest on Arrears?

Does your business issue invoices requiring the payment of interest on outstanding arrears?  Do those terms match a current and valid credit agreement between your business and the customer?  Although you may think that you are entitled to interest at the rate stated on your invoice, the recent case of a wood supplier and cabinetmaker indicates that there are more than just the words of the invoice to consider. 
 
FACTS
 
Rite Style Manufacturing Ltd. (Rite Style) made wood cabinets and had, since 1993, purchased wood from one of three corporate entities that were part of the Sauder group of companies.  These were all related entities that operated the same business at different times. 

In 1998, Rite Style signed a credit application with one of the Sauder companies, in which the interest rate was expressed as simply “2% per month”.  All invoices and packing slips issued to Rite Style throughout  (by all Sauder entities) expressed the interest rate as “2% per month (effective annual rate of 24%)”.  The Interest Act requires that for contractual interest to be payable, it must be expressed in annual terms.

In 2004, Rite Style had fallen into arrears with respect to certain invoices issued while one of the Sauder companies was the supplier, and a different Sauder entity (which had amalgamated with the prior supplier) sued on those invoices claiming contractual interest at 24% per annum. 

Rite Style argued that it was not liable for interest at 24% because there was no express agreement at this rate.  The Sauder company suing, while admitting that the credit application was not compliant with the Interest Act, argued that an agreement on interest ought to be inferred on the basis that the invoices and packing slips always stated the interest as an annual rate of 24%, and the parties had always done business on those terms. 

At stake was about $11,000 in interest.

DECISION & COMMENTARY        

At the trial level, the court agreed with Sauder and found that an agreement on interest at 24% per annum ought to be inferred because the parties had always conducted business according to the terms of the invoices.  Rite Style appealed this decision. 

On appeal, the court held that an agreement could not be inferred despite the invoices, packing slips, and the long course of dealing between Rite Style and the related Sauder suppliers.  The court required express evidence that there was an agreement to pay interest at an annual rate of 24% and there was none.  The non-compliant credit application was with only one of the Sauder companies, and was irrelevant.  The invoices and packing slips merely constituted notice to Rite Style that Sauder was claiming the right to charge interest on overdue accounts.  That, however, was not enough to obligate payment of that interest.  On the record, there was no evidence that Rite Style had ever paid interest, or that Sauder had ever charged Rite Style interest.  According to the court there was simply no evidence on which to infer an agreement regarding the interest rate payable. 

The Court of Appeal went on to determine that an interest rate of 5% set by the Interest Act was appropriate in the circumstances and held that Rite Style was liable to pay that rate on the debt owed.  A savings of nearly $8,700 for Rite Style.

LESSONS LEARNED:

  1. An interest rate set out on an invoice does not entitle recovery of interest unless there is other evidence that the debtor actually agreed to pay it. 
  2. To avoid problems in collecting interest on unpaid invoices ensure that a current contract or credit application is signed with the right parties, and which complies with the provisions of the Interest Act, (interest stated in annual terms).

This article was written by Robert G. Kuhn, a lawyer who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.