Be careful enforcing contracts that are illegal/against public policy in situations where the only thing left to do with the contract is for the complainant to pay
Facts:
The plaintiffs gave the defendants a loan
The loan's rate exceeded the criminal rate
The defendants had given personal guarantees for a limited amount
Did one or both of the parties intend to break the law
Were the parties in equal bargaining positions
Would one party be unjustly enriched if the contract were not enforced
No
No
They were of equal bargaining power, so the court needs to be careful.
It is a rule that "if a contract be made contrary to public policy, or if the performance would be contrary to public policy, performance cannot be enforced either at law or in equity" BUT when people try to get out of a contract because of this, when all they have left to do in the contract is pay some money be careful with enforcing this rule
The defendants would be unjustly enriched if the contract is not enforced
The court should sever the illegal section of the contract in order to make sure the defendants are not unjustly enriched
New Solutions Financial Corporation v Transport North American Express Inc.
Ratio:
Notional severance is available, allowing judges to change the interest rate to a particular rate without changing the contract
The Blue-Pencil test is problematic because it alters the terms the parties agreed to
Facts:
New Solutions entered into a credit agreement with Transport North American Express
All of these fell within the statutory definition of interest
Monthly interest rate alone when calculated per annum = 60.1%
Other payments per annum = 30.8%
Criminal rate of interest per S.347 of the Code is anything over 60%
When the payments became too much for TNAE they went to the courts to get the agreement declared illegal and unenforceable
Trial judge (Cullity J.)
If using old method ("blue pencil") had to severe clauses
Only option was to eliminate monthly interest leaving lender with 30.8%
Decides to apply "notional severance" allowing the interest rate to be reduced to 60% (making it legal, but without any particular provision being struck out
Court of Appeal used Blue Pencil
Appeal to SCC
Issue:
Is "notional severance", as formulated by Cullity J. valid in Canadian law and applicable?
Decision:
For plaintiff, appeal allowed 60% interest rate from "notional severance" reinstated
In certain cases voiding the contract will be fine
In other cases severance
The court applies most of the same questions in the previous case
Equal bargaining power?
Did they intend on breaking the law?
They don't consider unjust enrichment but that is likely because they have already decided to enforce the contract the question is just how to do that.
The SCC agrees with the trial judges "notional severance" which keeps the contract intact but changes the interest payable to the legal limit.
Discussion on Blue pencil test:
It was originally used for deeds which were under seal
