In Caisse populaire Desjardins d'Aylmer v. Roy,1 the Quebec Court dismissed a claim against two individuals (the " Debtors ") by a financial institution (" CPDA ") for payment of interest allegedly due on a loan. By mistake, the loan agreement failed to state an interest rate. After realizing its mistake, CPDA unilaterally modified the loan agreement to include a 6.95% interest rate (which rate CPDA had previously proposed to the debtors would be the rate on the loan) and increased the number of monthly payments required to repay the loan so that the interest would be recovered. When the Debtors refused to make any monthly payments following the end of the term originally set out in the loan agreement before it was unilaterally amended, CPDA system registered a notice of default of payment, which was noted on the credit report of one of the Debtors. The Quebec Court refused to require the debtors to pay interest and condemned CPDA for damages for having negatively affected the credit rating of its customers without justification.
the legal issues
Can a Court rectify the loan agreement to include an interest rate and order the debtors to pay such interest? Can a creditor be condemned for damages for registering a notice of default of payment on the credit file of its debtor when it was aware that its claim was contested?
In January 2005, the Debtors made a first loan application to CPDA in order to buy a vehicle in the amount of $27,000, with an interest rate of 6.95% per annum. CPDA approved the application, but the Debtors never signed any documents prepared by CPDA at that time. In March 2005, the Debtors returned to CPDA to apply for another loan for the same purpose. The representative of CPDA completed his paperwork by using the same information that was provided in January 2005, but failed to take into account the interest rate of 6.95% in calculating the monthly payments due under the loan. The Debtors signed the loan agreement and no one noticed that no interest rate was specified therein. The next day, CPDA discovered its mistake and changed the interest rate to 6.95% and extended the term of the loan to recover the interest. When the term on the original loan agreement expired, the Debtors refused to make any additional payments to CPDA. CPDA system registered a default of payment which appeared on the credit file of one of the Debtors.
The Court dismissed CPDA's claim, holding that no interest was payable under the loan agreement. While it was decided that both parties intended to conclude a loan agreement with interest which, by error, was not stipulated in the loan agreement, the Debtors had no intention of reimbursing the whole amount of the loan in five years, at an interest rate of 6.95%. The judge held that the amount for the monthly payments (which did not include an amount for interest) was an important factor in the Debtors' decision. If the payments had been higher, they would have borrowed a lesser amount.
As for the damages claimed by the Debtors, the Court found that the negative credit rating, which was the result of an illicit and intentional act by CPDA, harmed one of the Debtor's financial reputation. The credit report by CPDA failed to mention that the payment was contested by the Debtors. The Court ordered that CPDA pay damages for the harm made to his reputation, for troubles and inconvenience as well as punitive damages to prevent and dissuade such fault for a total amount of $2,412.20.
The Court noted that, according to article 1400 of the Civil Code of Quebec, the error vitiated the consent, making the contract annullable. However, the contract would only be modified by the Court if it was demonstrated that there was a common intention and that the error was strictly regarding its expression.
Both parties admitted that they made a common error in the loan agreement, since they both believed that it was a loan with interest. The Court concluded that there was a common intention and an error in its transcription. However, it refused to grant CPDA claim as CPDA did not apply for its annulment, but rather decided to ask for a rectification of the agreement. There was proof that CPDA wished to loan the amount with an interest rate of 6.95%, but no proof that the Debtors accepted such rate. The Court considered that the application of January 2005 noted an interest rate of 6.95% but held that that document was not indicative of what the Debtors had accepted, being a separate application. The Court decided that the only possible remedy was to annul the loan agreement, but that was not the remedy requested by CPDA.
We should note that had CPDA asked for its annulment, the Court would have put the parties in the same position as they were before entering into the agreement. This would not have solved CPDA's problem as, in that event, the Debtors would only have had to return the capital amount of the loan only.
As to the Debtors' claim for damages, the Court held CPDA liable for damages for the harm done to one of the Debtors' reputation even though the evidence failed to show that the negative credit rating resulted in any refusal by other financial institutions to provide credit. The Court awarded damages on the basis that a bad credit rating harms a debtor's financial reputation. The Court also awarded punitive damages on the basis that CPDA committed an illicit and intentional fault. CPDA was aware that the debtor's credit rating would be affected by the information registered in its system, which was erroneous and incomplete, because it failed to indicate that the obligation to pay interest was contested and that CPDA had extended the term of the loan without advising the Debtors. The Court held that a financial institution, which provides erroneous information and fails to correct it, is well aware that the incorrect information will be published by credit rating agencies.
In addition to ensuring that credit applications are properly completed to include the applicable interest rate, this decision is a warning to financial institutions to ensure that information they maintain about their customers that will find its way to credit rating agencies be complete and accurate.