Interest and Additional Indemnity

Overview

Several years may pass between the occurrence of an injury and the final judgement that puts an end to the proceedings. To compensate the victim for this delay in receiving reparation, Quebec civil law provides two mechanisms of moratory damages (dommages-intérêts moratoires): interest at the legal rate of 5% (art. 1618 CCQ) and the additional indemnity (indemnité additionnelle) (art. 1619 CCQ). Interest accrues as of right, while the additional indemnity falls within the discretion of the court. The starting point of these calculations rests on the concept of default (demeure) (arts. 1594 and following CCQ), which replaced the rigid former reference to the date of judicial demand under art. 1056 c) of the Civil Code of Lower Canada. Determining the starting point and the conditions governing the award of the additional indemnity are the most frequent practical difficulties in this area.

Learning Objectives

Distinguish the legal rate of interest (art. 1618 CCQ) from the additional indemnity (art. 1619 CCQ) in terms of legal nature, method of calculation, and the powers of the court.
Explain why the legislature introduced the additional indemnity and how its characterisation as an "indemnity" rather than "interest" addresses the constitutional division of powers.
Identify the four modes of putting a debtor in default (mise en demeure) under art. 1594 CCQ and determine which applies as the starting point for the calculation in a given case.
State the conditions of validity of an extrajudicial demand (mise en demeure extrajudiciaire) for the purpose of calculating interest and the additional indemnity.
Apply the grounds for refusal or reduction of the additional indemnity recognised in the case law.

Key Concepts and Definitions

Moratory damages (dommages-intérêts moratoires): compensation awarded for the injury caused by the delay in paying a sum owed. Under Quebec law, moratory damages comprise interest (art. 1618 CCQ) and the additional indemnity (art. 1619 CCQ).
Legal rate of interest (taux d'intérêt légal): the rate set by law at 5% per annum, applicable to the capital of an award of damages (art. 1618 CCQ).
Additional indemnity (indemnité additionnelle): a discretionary supplementary amount that the court may award to compensate for the loss of purchasing power resulting from the gap between the legal rate of interest and market rates (art. 1619 CCQ).
Liquidated damages (dommages-intérêts liquidés): an amount of damages calculated and determined before judgement.
Unliquidated damages (dommages-intérêts non liquidés): an amount of damages assessed by the court at the time of judgement.
Default (demeure): the legal state of a debtor who is late in performing an obligation, triggered by one of the four modes set out in art. 1594 CCQ.
Notice of default (mise en demeure): the act by which the creditor formally places the debtor in default.
Extrajudicial demand (mise en demeure extrajudiciaire): a letter or communication by which the creditor puts the debtor in default without recourse to the courts (art. 1595 CCQ).

Moratory Damages

The delay between the occurrence of injury and the judgement that disposes of the proceedings itself causes harm to the creditor, who is deprived of the use of a sum of money during that interval. Moratory damages are designed to repair that deprivation. They comprise two distinct components: interest at the legal rate and the additional indemnity. Both mechanisms apply in contractual and extra-contractual matters alike.

The Legal Rate of Interest (art. 1618 CCQ)

Art. 1618 CCQ sets the rate of interest applicable to damages at 5% per annum. This rate applies to the capital of the award.

Mandatory character. In the absence of an agreement between the parties, the court has no discretion to set a different rate, whether lower or higher than the legal rate. The court's only latitude concerns the starting point of the calculation. The court may neither refuse to award interest to the plaintiff (interest is automatic in character), nor fix a date on which the calculation ceases, nor limit the calculation period to any defined interval.

Practical limitations of the legal rate. The 5% rate does not always bear a relation to prevailing financial market rates. When market rates exceed the legal rate, the debtor of a pending condemnation may have an economic incentive to delay payment: the debtor invests the sum at a higher rate and profits from the spread. This observation prompted the legislature to intervene by enacting art. 1619 CCQ.

Example. A court condemns a debtor to pay $100,000 in damages. Interest at the legal rate of 5% runs from the date of the notice of default. If three years separate the notice of default from the judgement, interest amounts to $15,000 ($100,000 x 5% x 3 years). The court has no power to reduce that amount.

The Additional Indemnity (art. 1619 CCQ)

Art. 1619 CCQ permits the court to award, in addition to interest, an additional indemnity calculated by reference to the difference between the legal rate of interest and a higher reference rate. This provision applies in both contractual and extra-contractual matters.

Legal characterisation. The legislature characterised this mechanism as an "indemnity" rather than "interest." This terminological distinction has constitutional significance: the power to legislate on interest belongs to the Parliament of Canada (s. 91(19) of the Constitution Act, 1867), while provincial competence over property and civil rights (s. 92(13)) permits the Quebec legislature to create a right to a compensatory "indemnity."

Discretion of the court. Unlike interest at the legal rate, the additional indemnity is not automatic. The court possesses a discretionary power over its award, subject to two prerequisites: the party must request it, and the court must consider its award justified in the circumstances. In practice, the indemnity is granted on a near-automatic basis when claimed.

Grounds for Refusal or Reduction of the Additional Indemnity

The case law has identified several situations in which the court may refuse or reduce the additional indemnity:

Dilatory conduct of the plaintiff. Where the plaintiff adopted dilatory or reprehensible conduct in the proceedings, the court may refuse or reduce the additional indemnity.
Manifestly exaggerated claim. If the amount claimed significantly exceeds the amount ultimately awarded, the court may take this into account in exercising its discretion.
Conventional interest rate exceeding the threshold. Where the parties agreed to a contractual interest rate that already exceeds the minimum rate used as the basis for calculating the additional indemnity, granting the indemnity would result in double compensation.
Prolonged enjoyment of property. Where the successful party enjoyed the use of property for several years pending judgement, the court may refuse the indemnity on the ground that the party already derived an economic benefit from the delay.

Example. A plaintiff claims $500,000 in damages. The court awards $75,000. If the court finds that the initial claim was manifestly excessive and that the exaggeration contributed to prolonging the litigation, it may refuse or reduce the additional indemnity for the portion it considers disproportionate.

Starting Point of the Calculation

The question of the date from which interest and the additional indemnity begin to run has undergone a marked evolution between the former law and the Civil Code of Quebec.

Default as the Reference Point

Under the Civil Code of Lower Canada, art. 1056 c) imposed the date of the judicial demand as the sole starting point for the calculation. The case law was divided on the rigidity of this rule, with certain courts considering that it led to inequitable results.

The Civil Code of Quebec sought to resolve this controversy by replacing the reference to the date of service of proceedings with the broader concept of default (demeure) (arts. 1617 and following CCQ). The notice of default constitutes, in principle, the starting point for the calculation of interest, and postponement to a later date is the exception. This evolution favours the victim, since it permits interest to run from a date earlier than the institution of judicial proceedings.

The Four Modes of Putting in Default

Art. 1594 CCQ provides four modes by which a debtor may be put in default:

By operation of the contract (art. 1594, para. 1 CCQ): where the contract itself fixes a term, the expiry of which automatically constitutes the debtor in default.
By operation of law (arts. 1594, para. 2 and 1597 CCQ): in cases expressly provided for by legislation.
By extrajudicial demand (arts. 1594, para. 2 and 1595 CCQ): a letter of demand sent by the creditor to the debtor.
By judicial demand (arts. 1594, para. 2 and 1596 CCQ): the service of the originating proceeding itself puts the debtor in default.

Art. 1598 CCQ establishes that the judicial demand is a suppletive mode: the date of service of proceedings applies as the starting point only in the absence of proof that one of the other modes of default occurred at an earlier date.

Example. An accident occurs on 1 January. The creditor sends an extrajudicial demand on 1 March, then files the judicial demand on 1 September. If the extrajudicial demand satisfies the conditions of validity, interest runs from 1 March, not 1 September. If the extrajudicial demand is insufficient, interest runs only from the date of service of the judicial demand.

Requirements for an Extrajudicial Demand

For the date of the extrajudicial demand (mise en demeure extrajudiciaire) to serve as the starting point, the case law requires several conditions of form and substance:

The demand must originate from the creditor or the creditor's mandatary.
It must set out the existence of the obligation and the defaults attributed to the debtor.
It must specify the performance demanded or the sum claimed. This requirement is determinative: the person responsible must be in a position to know what is being claimed.
It must state the remedy the creditor intends to pursue in the event of non-performance.

Where the letter of demand grants a period of time to the debtor, that period must be taken into account in calculating the starting point. Interest begins to run only upon the expiry of the period granted.

An imprecise demand that does not quantify the claim or that remains vague as to the performance demanded will not be accepted as the starting point. In that case, the date of the judicial demand (demeure judiciaire) prevails on a suppletive basis.

Special Cases

Several categories of damages raise particular difficulties regarding the starting point:

Punitive damages. The starting point of interest on punitive damages may differ from that applicable to compensatory damages, depending on the date on which the right to punitive damages was invoked.
Lost profits spread over time. Where lost profits were suffered progressively, the starting point may be apportioned to reflect the date on which each loss crystallised.
Non-pecuniary and prospective losses. These losses, which are by nature unliquidated, raise the question of the date from which the creditor may be considered deprived of the enjoyment of the corresponding sum.
Extrajudicial fees. Where the court awards extrajudicial fees, the starting point of interest and the additional indemnity cannot precede the respective date of each fee account rendered.

Practice Checklist

Before instituting proceedings

Draft an extrajudicial demand that identifies the creditor, the obligation, the defaults, the sum claimed, and the intended remedy.
Quantify the claim in the demand to satisfy the case law requirements regarding the starting point for interest.
Preserve proof of sending and receipt of the demand.
Grant a reasonable period and note the date of its expiry.

In the originating proceeding

Claim interest at the legal rate of 5% expressly (art. 1618 CCQ).
Claim the additional indemnity expressly (art. 1619 CCQ).
Specify the starting point claimed for the calculation (date of the extrajudicial demand, date of service of proceedings, or another mode of default).
File the letter of demand and proof of its receipt in the record if claiming a starting point earlier than the date of service.

Risk assessment

Verify whether the plaintiff's conduct in the proceedings could justify refusal or reduction of the additional indemnity.
Assess whether the amount claimed is proportionate to the evidence to avoid a finding that the claim is exaggerated.
In contractual matters, verify whether a conventional interest rate was stipulated and whether it exceeds the threshold for calculation of the additional indemnity.

Special cases

For punitive damages, lost profits spread over time, and prospective losses, anticipate a distinct starting point.
For extrajudicial fees, link the starting point of each tranche of interest to the date of the corresponding fee account.

Glossary

Additional indemnity (indemnité additionnelle): a discretionary sum added to interest to compensate for the gap between the legal rate and market conditions (art. 1619 CCQ).
Compensatory damages (dommages-intérêts compensatoires): damages that aim to restore the victim to the position in which the victim would have been absent the injury.
Default (demeure): the legal state of a debtor who is late in performing an obligation (art. 1594 CCQ).
Extrajudicial demand (mise en demeure extrajudiciaire): a communication by which the creditor puts the debtor in default without recourse to the courts (art. 1595 CCQ).
Extrajudicial fees (honoraires extrajudiciaires): lawyer's fees incurred outside the tariff-based judicial costs.
Judicial default (demeure judiciaire): default resulting from the institution of judicial proceedings (art. 1596 CCQ).
Legal rate of interest (taux d'intérêt légal): the rate set by law at 5% per annum (art. 1618 CCQ).
Liquidated damages (dommages-intérêts liquidés): an amount of damages calculated and determined before judgement.
Moratory damages (dommages-intérêts moratoires): compensation for the injury caused by delay in the payment of a sum owed, comprising interest and the additional indemnity.
Notice of default (mise en demeure): the act by which the creditor formally places the debtor in default.
Punitive damages (dommages punitifs): damages intended to deter and sanction wrongful conduct, distinct from compensatory damages.
Unliquidated damages (dommages-intérêts non liquidés): an amount of damages assessed by the court at the time of judgement.

References and Further Reading

Civil Code of Quebec: arts. 1594, 1595, 1596, 1597, 1598, 1617, 1618, 1619.
Civil Code of Lower Canada: art. 1056 c) (repealed; relevant for historical analysis).
Constitution Act, 1867: ss. 91(19), 92(13) (division of powers regarding interest).
Doctrine: Gardner, Daniel, passages relating to moratory damages and the starting point for the calculation of interest.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Quebec civil law may evolve through legislation and judicial interpretation. For advice on a specific situation, consult a qualified Quebec lawyer or notary.

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