Prohibited Penalty Or Incentive For Good Performance? Interpreting The Interest Act

In a recent decision of the Alberta Court of Appeal in Lougheed Block¹, the Court considered the question of whether incentives for prompt payment in a mortgage agreement, which would be lost upon default, offend the prohibition on penalties for non-performance contained in section 8 of the federal Interest Act.²

Section 8 codifies a long-standing equitable principle and prohibits a fine, penalty or rate of interest "on any arrears of principal or interest" that has "the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears". The provision prohibits penalties for non-performance on loans secured by mortgages of real property.