Canadians, for over a decade, and especially over the course of the recent pandemic, have experienced a low interest rate environment. While interest rates are in the news again, with a possibility of a slight rate movement upward, many litigants, from a Defendant’s perspective, hope the movement in the context of personal injury litigation is in fact downward.
For many years, the default prejudgment interest (“PJI”) rate in Ontario for non-pecuniary damages (such as general damages for pain and suffering) in all personal injury actions was 5%. When this rate was introduced however, market interest rates were actually much higher than 5%.
To account for lower market interest rates, the default 5% PJI rate in motor vehicle cases changed in 2015. The Insurance Act was amended to add section 258.3(8.1), the effect of which was to provide that for personal injury claims that involved a motor vehicle, s. 128(2) of the Courts of Justice Act (“CJA”) and Rule 53.10 of the Rules of Civil Procedure did not apply. Instead section 128(1) of the CJA governed the calculation of PJI for non-pecuniary loss. Therefore, as of January 1, 2015, PJI on non-pecuniary damages in motor vehicle accident claims is based on the floating bank rate as opposed to the previous flat 5% rate. The law is still unsettled as to whether the changes in the interest rate are to be applied retrospectively or prospectively
What this means for Defendants is that they are paying a much lower PJI rate on non-pecuniary damages in almost all motor vehicle cases, since the bank rate (on which the PJI rate is based) has been low in recent years. In fact, the bank rate has not been above 5% since 2001. This has created a discrepancy in the rates applied to non-pecuniary damages in personal injury actions that do not involve a motor vehicle, and which make up a large percentage of all personal injury actions.
Analysis of Legislation
A party entitled to a monetary award is presumptively entitled to request and to receive prejudgment interest. This is explicit in the wording of section 128(1) of the CJA, which provides that a party “is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate.” Thus, in the vast majority of cases where the successful party has pleaded a claim for prejudgment interest, such interest will be awarded.
Section 128 of the CJA templates two default rates of PJI. Section 128(1) sets out the “general” rate, which pursuant to section 127(1) is the bank rate. The bank rate is defined under the CJA as the rate established by the Bank of Canada as the minimum rate at which the Bank of Canada makes short-term advances to Canadian banks. Section 128(2) then sets out the rate applicable to non-pecuniary loss in a personal injury action, which pursuant to Rule 53.10 of the Rules of Civil Procedure is 5%.
The PJI rates in sections 128(1) and (2) are referred to as “default” rates because section of the CJA gives the court discretion to reduce, increase, or disallow interest otherwise payable under section 128 for a number of reasons, including changes in market interest rates. The Court of Appeal in Cobb v. Long Estate (2017 ONCA 717) confirmed that the legislation does not create a “vested” right to a particular rate of prejudgment interest. Interest rates fluctuate over time, as such, it only makes sense that the rates set by the court should reflect these changes as well. The Court of Appeal in Cobb found that the provisions of the CJA “recognize that rates of prejudgment interest require variation to keep pace with economic realities”.
Why 5%
The 5% rate for non-pecuniary loss in personal injury actions was the legislative response to the 1987 Ontario Law Reform Commission Report for Compensation for Personal Injuries and Death. The Report criticized the practice of awarding prejudgment interest on pecuniary and non-pecuniary damages at the same rate due to the cap on non-pecuniary damages. The Report concluded that giving the default interest rate (which, at the time, was much higher than 5%) was more appropriate for non-pecuniary damages in personal injury actions.
Does the 5% Prejudgment Interest Rate Continue to Apply in Personal Injury Actions that do not Involve a Motor Vehicle?
MacLeod v. Marshall 2019 ONCA 842 (“MacLeod”)
On October 25, 2019, the Court of Appeal for Ontario signaled a shift away from the default rule of 5% prejudgment interest for non-pecuniary damages in personal injury actions, as contemplated by Rule 53.10 of the Rules of Civil Procedure.
MacLeod was a historic sexual assault case. The Court of Appeal was asked to rule on whether the trial judge erred in setting the prejudgment interest rate at 5% for non-pecuniary damages. More specifically, the Court of Appeal considered whether the trial judge failed to exercise his discretion pursuant to section 130 of the CJA, and whether he considered the changes in market rates when exercising his discretion to depart from the default rate.
The Court of Appeal reviewed the law with respect to prejudgment interest, and ultimately concluded that trial judges enjoy a wide discretion under section 130 of the CJA to allow prejudgment interest at a rate higher or lower than the rate of interest prescribed by the CJA, where they consider it just to do so. The Court of Appeal, quoting Matherson J. in Awan v. Levant (2015 ONSC 2209), stated that it is important to remember than an award of prejudgment interest is compensatory. The ultimate goal is to compensate an injured party and to restore, so far as money is able to do, all that that they have lost as a result of the injury, but not more or not less. The court must therefore have regard that interest rates fluctuate over time, and, as such, it only makes sense that the interest rates set by the court should reflect these fluctuations.
The Court of Appeal concluded that the trial judge should have taken the factors listed in section 130(2) of the CJA into account, specifically the changes in market interest rates from the date the cause of action was discovered. The Court of Appeal noted that the interest rates during the relevant period of time (i.e. from the time the claim was issued to the time judgment was rendered) were low, and therefore set the prejudgment interest rate at 1.3%, as a rate of 5% PJI would be ‘over-compensating’ the Plaintiff. The Court of Appeal confirmed that the default 5% prejudgment interest rate has been out of step with modern slow-growth interest rates.
MacLeod confirmed that courts have discretion when setting the prejudgment interest rates for non-pecuniary damages arising from personal injury actions, except in motor vehicle accidents. In doing so, the Court of Appeal signaled a possible shift away from the default rule of 5% prejudgment interest rates for non-pecuniary damages by adding significant weight to the discretionary function prescribed by section 130 of the CJA.
C.O. v. Williamson 2020 ONSC 3874 (“Williamson”)
In another historic sexual assault case, Williamson, the Ontario Superior Court of Justice exercised its discretion under section 130 of the CJA to apply less than the default 5% interest rate for the non-pecuniary damages awarded to the Plaintiff.
Taking some guidance from the Court of Appeal in Macleod, defence counsel submitted that pre-judgment interest should run at the rate of 1.3% per annum.
The Superior Court of Justice found that Williamson differed from MacLeod with respect to the fluctuations in the interest rates during the relevant period of time. In the Williamson case, the Plaintiff’s cause of action arose on December 27, 1996. Although not specifically stated in the Court of Appeal’s reasons in MacLeod, based on paragraph 4 of those reasons, it appears that they accepted 2010 as the date that Mr. MacLeod’s cause of action arose. The Court in Williamson considered the pre-judgment interest rates set out in the Rules. In the years between 1997 and 2010, pre-judgment interest rates were higher than after 2010, sometimes considerably higher. Since the financial crisis of 2008, market interest rates have been extremely low, sometimes historically so. Those low interest rates were in place for the entire relevant period in MacLeod but only for a much lesser portion of the entire relevant period in Williamson.
In these circumstances, the Superior Court of Justice was persuaded that the pre-judgment interest rate for the non-pecuniary awards should be higher than in MacLeod. Considering the fluctuations in pre-judgment and market interest rates, the Court was satisfied that in this case, the applicable pre-judgment interest rate should be 2.5% per annum.
Despite applying a different rate than in MacLeod, the Court nevertheless exercised its discretion under section 130 of the CJA to apply less than a 5% interest rate for the non-pecuniary damages awarded to the plaintiff, specifically due to the fluctuations in market rates since 1996.
Burke v. Dupont 2021 ONSC 7988 (“Burke”)
The Burke case dealt with the negligent performance of a chiropody surgery that occurred in 2014. The Court decided to deviate from the bank rate interest in MacLeod on the basis that the claim in Burke arose much more recently than the claim in MacLeod.
The Plaintiff requested that prejudgment interest on general damages be set at 5%, in accordance with Rule 53.10 of the Rules of Civil Procedure. The Court awarded this rate, and concluded the following,
“I have considered MacLeod in which the Court of Appeal said that the trial judge in an historic sexual assault cause should not have applied the 5 per cent but should have considered the factors in s. 130(2) of the Courts of Justice Act, R.S.O. 1990 c. C.43 (“CJA”). The 5 per cent rate in Rule 53.10 is obviously much higher than the prejudgment interest rates prescribed by the CJA for the past seven years. However, unlike MacLeod, the plaintiff’s claim does not date back dozens of years. The legislature has not seen fit to amend s. 128(2) of the CJA or Rule 53.10. There was no one before me on this default motion to argue what interest rate should be applied, if not the 5 per cent. For these reasons, I award the plaintiff prejudgment interest on the general damage award in the amount of 5 per cent from the date of his surgery, March 3, 2014, to the date of this decision and fix prejudgment interest at $62,000.”
Of note however, is that this was a default judgment case. There was therefore nobody before the Court to argue that a different prejudgment interest rate should be applied. Perhaps this would have led to a different ruling and a different rate being applied by the Court.
Key Take-Away Moving Forward
While it appears that the 5% rate listed under Rule 53.10 of the Rules of Civil Procedure continues to be the default rate applied by courts (as can be seen in Burke), it also appears that courts are more willing to use their discretion under section 130 of the Courts of Justice Act to apply the bank rate to prejudgment interest, by specifically taking into consideration fluctuating market rates and recognizing that interest is to be compensatory.
As more cases emerge with respect to prejudgment interest, counsel should keep cases such as MacLeod and Williamson in mind when evaluating claims, negotiating settlements, and making submissions to the court on what rate should be applied. One may anticipate future requests by defence counsel for courts to utilize their discretion in order to minimize the risk of over-compensating a Plaintiff in a personal injury action by applying the default 5% rate.