The Court of Appeal Weighs in on Prejudgment Interest Rate Applicable to Non-Pecuniary General Damages
The Court of Appeal for Ontario recently weighed in on the issue of the prejudgment interest rate applicable to claims for non-pecuniary general damages claims in Henry v. Zaitlen, 2024 ONCA 614.[1]
The underlying action arose from a medical malpractice claim. At trial, the plaintiff was awarded $204,500.00 in non-pecuniary general damages and $100,000 was awarded to the plaintiff’s wife.
The Trial Judge applied a prejudgement interest rate of 1.3%, on the grounds that the 5% rate outlined in the Rules of Civil Procedure Rule 53.10 would result in overcompensation of the plaintiff, as market interest rates, and prejudgment interest rates on pecuniary damages were lower than 5%. The Judge also considered the Consumer Price Index (“CPI”) from the time the cause of action arose until trial, from 2010 to 2021. The Trial Judge exercised his discretion and set the pre-judgment interest rate at 1.3%, which was the rate at the time the statement of claim was issued in 2012.
The Trial Judge relied on the decisions in Macleod v. Marshall, 2019 ONCA 842 and Cobb v. Long Estate, 2017 ONCA 717, and in particular the Court of Appeal for Ontario’s comments in those cases as follows:
- The goal in the consideration of the applicable interest rate is to ensure that the injured party is compensated fairly.
- Interest rates fluctuate over time and it only makes sense that the interest rates set by the court should reflect these changes. The goal is to fairly compensate an injured party and to restore him or her, so far as money is able to do, all that he or she has lost as a result of the injury — but neither too much, nor too little.
- Subsection 128(2) was enacted to lower the interest rate that would otherwise be applicable to non-pecuniary damages due to the high interest rates prevailing at that time. It was not intended to raise the prejudgment interest rate beyond prevailing market rates.
- The application of Rule 53.10 and s. 128(2) of the CJA has always been, and remains subject to the court’s exercise of discretion under s. 130 of the Courts of Justice Act (CJA).
The Court of Appeal held that ordinarily, the Trial Judge’s exercise of discretion would be subject to deference, however the Court held that the Judge’s legal analysis was flawed and that he incorrectly interpreted S. 130 of the CJA, based his analysis on incorrect principles, and erred in considering changes in market interest rates, and the evidence needed to establish market interest rates. The Court held that these errors amounted to an error of law, subject to a standard of correctness.
The Court of Appeal held that the Trial Judge erred in not taking as a starting point that the plaintiffs were entitled to pre-judgement interest at 5%, in accordance with the plain language meaning of s. 130(1) of the CJA and Rule 53.10. The Court of Appeal further held that the decision in Cobb v. Long Estate did not displace this presumption, but merely established that the presumptive rate can be altered where the court considers it just to do so. The Court of Appeal held that, ultimately:
“…[T]he prescribed interest rates should not be deviated from as a matter of course but rather where the court determines that there are unusual or special circumstances sufficient to justify such a departure, having regard to the mandatory criteria under s. 130(2) of the CJA and all other relevant considerations [citations omitted]. This is a cumulative assessment: each factor taken into account by the court does not have to by itself amount to an unusual or special circumstance, so long as, taken as a whole, the factor or factors relied upon by the court amount to unusual or special circumstances.”
The Court of Appeal went onto say that the discretion under s. 130(1) of the CJA was not unfettered, and rather is informed by the “mandatory list of factors under s. 130(2) of the CJA that must [emphasis in original] be taken into account:”
(a) changes in market interest rates;
(b) the circumstances of the case;
(c) the fact that an advance payment was made;
(d) the circumstances of medical disclosure by the plaintiff;
(e) the amount claimed and the amount recovered in the proceeding;
(f) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; and
(g) any other relevant consideration.
The Court held that “changes in the market interest rates” is only one of the factors, and that none of the factors should predominate the analysis.
The Court further held that the discretion under s. 130(1) of the CJA was granted to encourage timely and efficient litigation, giving the court a tool to reward efficiency and discourage long protracted litigation, but that this does not displace the principle that interest awards are compensatory, and not punitive. The underlying purpose is to ensure fair compensation for plaintiffs.
Pre-judgment interest rather, should “deprive ‘the wrongdoer of a windfall benefit he would otherwise receive’, namely, the use that the wrongdoer had of the money that should have been paid to the plaintiff.”
The Court further noted that no one pre-judgment interest formula can resolve all problems, including the problem of compensating plaintiffs fairly, as interest rates are forever changing and the rates used are simple, and not compound. Ultimately, this is why the analysis and consideration of the factors outlined in s. 130(2) must be comprehensive, and changes in market rates is only one factor for consideration.
The Court also held that “changes in market rates” as a factor increases or decreases in significance based on the extent of the fluctuation, and that the fluctuations must be unusual to warrant the departure from the presumptive interest rate.
The Court of Appeal also held that, in legislating the presumptive rate at 5%, the legislature would have appreciated that interest rates fluctuate constantly, and that this might result in some over and under compensation. Nevertheless, the legislature’s intention must have been to have the presumptive rate at 5% notwithstanding this possibility of over or under compensation. This, combined with the policy consideration of encouraging early settlements and payments, leads to the conclusion that the legislature intended any windfall to be enjoyed by plaintiffs and not defendants.
Moreover, the Court held that they fact that the legislature did not amend Rule 53.10, but did amend s. 258.3(8.1) of the Insurance Act to effectively subject non-pecuniary damages claims in the auto claims context to the tariff rates, was further evidence that the legislature endorsed the continuing use of 5% as the presumptive rate in non-auto cases.
The Court held that only the legislature can change the presumptive rate and the legislature has not done so, even in the context of market rates well below 5%.
Ultimately, the Court of Appeal held that the Trial Judge erred in over-emphasizing the importance of “changes in market rates” as a factor and in not considering the other factors under s.130(2), and erred in departing from the presumptive 5% rate.
The Court of Appeal also discussed at length the meaning of “changes in market interest rates.” The Court found that the Trial Judge equated “changes in market interest rates” with prejudgment interest rates as defined under s.127(1) of the CJA and the Consumer Price Index, when there was no evidence or legal basis to do so. Notably, “market interest rate” is not a defined term under the CJA or any other related legislation, which the Court held signaled an intention that the term be treated broadly, and more broad then other legislatively defined terms such as “bank rate” or “prejudgment interest rate.”
The Court of Appeal further stated that the onus is on the person relying on changes in the market rates to lead evidence on the rates. In the within case, the parties put forward the bank rates, CPI, and the growth rate of the Toronto Stock Exchange for the relevant period. Unlike in other cases, there was no agreement by the parties that the market interest rates equaled the prejudgement interest rates under s. 127 of the CJA.
The court held that the Trial Judge erred in taking judicial notice of the CPI and its impact on market interest rates, absent evidence or agreement.
The Trial Judge rejected the plaintiff’s submission that he could have invested stock during the relevant time period, which would have resulted in more than a 1.3% return rate, despite the defendant not having objected to the evidence’s admissibility.
The Court held that the Judge erred in effectively reversing the onus that was on the defendants to prove that there were special or unusual changes in the market rates to justify departing from the presumptive 5% rate. In this case, the plaintiff’s did not ask for a deviation form the presumptive rate and therefore were not required to prove that they would not be overcompensated by its application.
Rather, the onus was on the defendant to prove overcompensation of such a magnitude, that it justified a deviation from the presumptive rate. The party seeking to have the court exercise its discretion to deviate from the presumptive interest rate must produce evidence of rates available in the market over the relevant period. This may be evidence of actual interest earned by an insurer or plaintiff over the relevant period, or expert evidence. The defendant in this case failed to adduce such evidence, and therefore there was no evidence to support the Trial Judge’s deviation from the presumptive 5% rate.
The Court of Appeal allowed the appeal and ordered that the prejudgment interest rate applicable to the plaintiffs’ non-pecuniary general damages awards to be set at 5%.
Takeaways
The key takeaways from the Court of Appeal’s decision in this case is that, presumptively, plaintiffs are entitled to the 5% rate outlined in the Rules. Courts can then exercise their discretion under s. 130(2) of the CJA, where there are unusual or special circumstances sufficient to justify a departure from the presumptive rate, and in considering all of the factors outlined under s. 130(2).
The Court of Appeal also emphasized that it was the legislature’s intention that there may be windfalls where the presumptive rate is higher than market rates, and that the intention was that plaintiffs would receive the benefit of this windfall. Notably, and what was not discussed by the Court of Appeal in the decision, if market interest rates are ever higher than 5%, the windfall would be to the defendant. This could arguably undermine the policy goal of encouraging efficient and early resolutions of claims.
Accordingly, the mere fact of a windfall will not be considered unusual or special circumstances warranting a departure from the presumptive rate, as this possibility was implicitly considered and endorsed by the legislature. Rather, changes in market rates, must be unusual and significant to warrant a departure from the presumptive rate.
Ultimately, the onus is on the party seeking to depart from the presumptive rate to tender evidence as to any relevant “changes in the market rates” that they say warrant a deviation. This can be evidence of actual interest earned by the parties during the relevant time period or expert evidence, where required.
[1] The reasons in Henry v. Zaitlen, are consistent with the decision in Aubin v. Synagogue and Jewish Community Centre of Ottawa (Soloway Jewish Community Centre), 2024 ONCA 615, which also addressed the applicable prejudgment interest rate to non-pecuniary general damages awards and was released at the same time.