CIRCLE ACCEPTANCE CO. LTD. v. SIGOUIN 1
Warren A. Black *
Promissory note – Holder in due course –
Sales con-
tract –
Acceptance company deliberately refraining
from investigating real nature of transaction – Absence
of good faith – Bills of Exchange Act (R.S.Q. 1952,
ch. 15), art. 56.
Introduction
S. 74(b) of the Bills of Exchange Act 2 states that a holder in
due course “holds the bill free from any defect of title of prior par-
ties, as well as from mere personal defences available to prior parties
among themselves…” This privileged position originated in the law
merchant, a body of usages and customs which existed before any
law of negotiable instruments had developed. Its purpose was to
facilitate trade, so that a merchant who took an instrument bona fide
could be assured that his title would not later be declared invalid.
However, this rule, originally created for the mercantile situation,
also has become a part of household law. In the modern world, the
conditional sales contract has become an accepted arrangement for
those whose consumer needs outstep their income. By the process of
taking a negotiable promise to pay from the purchaser and discount-
ing it with a finance company, the vendor can realize immediate
cash to finance his sales. If the purchaser fails to meet the extended
time payments, the finance company takes an action on the note.
Unfortunately, many unscrupulous finance companies have at-
tempted to rely on the privileged position of the holder in due course
in order to avoid any personal defence which the buyer otherwise
might have raised against the vendor. The question arises as to
whether a holder in due course has a responsibility to inquire into
the nature of the transaction between the original parties to the
instrument. If not, a finance company or other holder could acquire
an impregnable title, even when it has suspected that the original
Of the Junior Board of Editors, McGill Law Journal; second year law student.
1 [19633 S.C. 97.
2 R.S.C. 1952, ch. 15.
No. 2]
CASE AND COMMENT
transaction was tainted with fraud. If the holder in due course is
under such a duty, the value of a negotiable promise as an instru-
ment of credit would be weakened. This critique will attempt to
provide a solution to the dilemma.
Facts and Ratio decidendi
In a recent decision of the Quebec Superior Court, Circle Accep-
tance Co. Ltd. v. Sigouin, this problem arose with interesting
practical implications. The relevant facts were not in dispute. The
defendant, Sigouin, purchased a sewing machine from Better Fur-
niture Manufacturing Inc. by conditional sales contract, giving a
promissory note for $381 (19 instalments of $19 each plus a final
payment of $20)
in payment thereof. The note was discounted by
the furniture company with Circle Acceptance, who sued the de-
fendant on the note as a holder in due course. The evidence estab-
lished that Sigouin, who was only nineteen years old, had been
induced by fraud to make the note.
The learned trial judge, Collins, J., held that the plaintiff
deliberately refrained from investigating a transaction which he
suspected might be fraudulent in order to avoid any knowledge which
might destroy his title as a holder in due course. Thus, the plaintiff
was not in the good faith required of a holder in due course, and
could not recover on the note.
Considering the facts, the judgment appears to be sound in law.
It is in keeping with the jurisprudence which imputes constructive
notice of defects in title to a holder, when the surrounding circum-
stances warrant it 3. However, Collins, J. made several statements,
which if taken alone and out of context, could lead to a diminution
of the value of a negotiable promise as an instrument of credit:
“Whereas it is clear that plaintiff made an insufficient investigation as
to the nature of the business of Better Furniture Manufacturing Inc. (which
is now in bankruptcy) and nade no attempt to verify the methods and
manners by which it did business with its customers and whether or not
such methods and manners were honest or fraudulent;” 4
He adds:
“Considering that when an acceptance company discounts a note given
in connection with a sales contract, it cannot be in the good faith necessary
3 Raphael v. Bank of England (1855) 139 E.R. 1030; Re Gomersall (1875-76)
1 Ch. D. 137; Jones v. Gordon (1876-77) 2 A.C. 616; Lockhart v. Wilson (1908)
39 S.C.R. 541; Ray v. Willson (1912) 45 S.C.R. 401; Waterous Engine Co. v.
Capreol (1923) 3 D.L.R. 575; Nor.nandin V. La Banque de Montrial (1927) 42
B.R. 1; Huot v. Banque Canadienne Nationale [1944] B.R. 497; Forest v. Millette
[1948] R.L. 73; Vincent V. Belhumeur et un autre [1955] B.R. 443.
4 Circle Acceptance Co. Ltd. v. Sigouin, op. cit. at p. 98. Italics added.
McGILL LAW JOURNAL
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to be a holder in due course because it must ascertain fully prior to such
discounting the real nature of the transaction existing between its customers
(the discounter) and the party who entered into such a sales contract with
its customers…” 5
By themselves, these remarks imply that any holder in due course,
whether or not there has been anything to arouse his suspicion,
must investigate the nature of the transaction between the im-
mediate parties to the instrument. In other words, they suggest a
general duty of investigation, an obligation which could lead to
disastrous commercial consequences. These remarks are obiter,
because they are not essential to the actual decision. It seems unlikely
that Collins, J. intended to lay down this proposition as a general
rule: he merely meant to emphasize the fact that the suspicious cir-
cumstances in this particular case should have prompted the finance
company to make further inquiries. However, such a general state-
ment, even though obiter, might be misapplied in subsequent cases.
Since a study of the judgment does not reveal the nature of the
suspicious circumstances, in order to avoid misinterpretation, it will
be helpful to review the whole problem.
Survey of the authors and jurisprudence
In order to avail himself of the privilege granted to a holder in
due course by s. 74(b), the holder must be in good faith and have no
notice of defect of title 6. According to Falconbridge:
“Notice means actual, though not formal notice, that is to say, either
knowledge of the facts, or a suspicion of something wrong, combined with
a wilful disregard of the means of knowledge.” 7
If a holder takes a bill, knowing that the maker was induced by
fraud, duress, illegal consideration, etc. to draw it, his title will be
no better than that of the person who negotiated it to him: thus he will
be subject to regular defences and will fall outside the provisions of
s. 74(b).
Notice of defect of title usually refers to actual knowledge.
However, what happens if a holder does not have specific knowledge
of any defect, but the surrounding circumstances are suspicious, and
he deliberately refrains from making inquiries for fear of discover-
ing something which would give him actual knowledge and thus
render his title defective? This situation is covered by the require-
5 Ibid., at p. 98. Italics added.
6 The other characteristics of a holder in due course will not be dealt with for
purposes of this comment.
7 Falconbridge, Banking and Bills of Exchange, 6th Edition, Toronto, 1956,
p. 624. See also: Byles on Bills of Exchange, 21st Edition, London, 1955, p. 154.
No. 2]
CASE AND COMMENT
ment of good faith in s. 56 (1) (b). If a holder has reasonable grounds
for believing that there is some defect of title and does not in-
vestigate, his conduct will amount to bad faith and he will forfeit
the privilege of s. 74(b).
If a person sues on a negotiable instrument, his good faith is
presumed. S. 58(2) of the Act reads:
“Every holder of a bill is prima facie deemed to be a holder in due course:
but if, in an action on a bill it is admitted or proved that the acceptance,
issue or subsequent negotiation of the bill is affected with fraud, duress, or
force and fear, or illegality, the burden of proof that he is such holder in
due course shall be on him…”
The presumption is juris tantum.s
(i) The General Rule
The position of the holder in due course
is well-stated by
Perrault:
“D’apr~s ce principe (l’inopposabilit6 des exceptions), la personne, signa-
taire d’une lettre de change et poursuivie par un d6tenteur r~gulier, ne
peut pas invoquer, pour 6chapper a la condamnation demand~e contre elle,
les exceptions ou les moyens de d6fense que cette personne aurait pu faire
valoir contre le preneur ou Pun des porteurs interm~diaires en raison de
ses relations personnelles avec eux.” 9
This principle was illustrated in the recent case of Imperial Invest-
ment Corporation v. Mazur.10 A used-car dealer pretended to sell a
truck to Mazur and discounted the latter’s note with a finance com-
pany. This was part of an arrangement whereby the dealer was
supposed to remit the proceeds to Mazur’s friend, who actually
owned the truck. However, the dealer fraudulently kept the money
and did not pay the instalments as he had promised Mazur. When
the finance company sued Mazur on the note, his defence that the
note was made without consideration was rejected, because the
investment corporation was a holder in due course and there had
been nothing to arouse its suspicion.1
8 Tatam v. Haslar (1889) 23 Q.B.D. 345; Canadian Bank of Commerce V.
Peebles (1924) 1 D.L.R. 225; Community Finance Corp. v. Morgan Hardware
Co. (1926-27) 31 O.W.N. 465; Arbuthnot v. Campbell (1930).2 W.W.R. 275;
Banque de Montrial v. Mile Amireault et al. (1938) 65 B.R. 1; Dominion Bank
v. Fassel and Baglier Construction Co. (1955) 4 D.L.R. 161; State Discount Ltd.
v. Crawford [1960] O.W.N. 451.
9 Perrault, Traitg de Droit Commercial. Tome 3, 1940, p. 798.
10 (1962) 33 D.L.R. (2d) 763.
11 See also: London Joint Stock Bank v. Simwons [1892] A.C. 201; Reinhardt v.
Shirley et at. (1894) 6 S.C. 11; Killoran v. Monticello State Bank (1920-21)
61 S.C.R. 528; Laurentide Acceptance Corp. v. Lemay [1951] S.C. 469; Canyon
Securities v. McConnell (1959) 17 D.L.R. (2d) 730; McCabe V. Bank of Nova
Scotia (1962) 30 D.L.R. (2d) 649: Charboizneai, v. Traders Finance Corporation
Ltd. [1963] B.R. 681.
McGILL LAW JOURNAL
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Although s. 74(b) states that a holder in due course holds free
from defects of title of prior parties, it does not specify any duty
of investigation on his part. Since the Act is silent, it may be taken
as a general rule that there is no such duty. However, the require-
ment of good faith imports through the back door a responsibility
to investigate: if suspicious circumstances exist, good faith may
require further inquiry.
“Given facts exciting suspicion, that is, actual suspicion arising from facts
known or believed to exist, and either an absence of enquiry or an enquiry
which does not remove the suspicion, the situation is incompatible with
good faith…” 122
The main problem is in determining when the circumstances have
become suspicious enough to put the holder in due course on guard
to make further inquiries into the nature of the transaction between
maker and payee.
(ii) Negligence
If the holder was negligent in omitting to make further inquiries,
he may still be in good faith. S. 3 of the Act states that
“a thing is deemed to be done in good faith within the meaning of this Act,
where it is in fact done honestly, whether it is done negligently or not.”
By honestly is meant
“droiture, conduite exempte d’intention malicieuse ou frauduleuse … I1 n’est
pas n~cessaire qu’elle soit exempte d’une certaine n6gligence. Quelqu’un
peut avoir agi de bonne foi, mgme si l’on constate que l’acte qu’il posa
pouvait 6tre accompagn6 d’une plus grande prudence… La negligence de
la part d’un d4tenteur… n’est donc par elle-m6me suffisante pour lui
imputer une conduite de mauvaise foi et… lui faire perdre son recours …
Bonne, ou mauvaise, foi est une question de fait laiss6e A l’appr6ciation
des tribunaux.” 13
In the Sigouin case, this “droiture” was clearly lacking on the part
of the finance company, who deliberately avoided looking into a
transaction which they had good reason to suspect might be frau-
dulent.
It should be pointed out that some sections of the Act exclude
negligence as a defence by saying that a thing must be done “in
good faith and without negligence.” 14 However, as a general rule,
negligence is not inconsistent with good faith 15. But it may be
evidence of bad faith when considered in connection with surround-
ing circumstances 16
12 Falconbridge, op. cit., p. 625.
13 Perrault, op. cit., p. 227.
14 For example, ss. 172 and 173.
15 Falconbridge, op. cit., p. 421; Raphael v. Bank of England, op. cit.; Jones V.
Gordon, op. cit.; Ross v. Chandler (1912) 45 S.C.R. 127.
16 Byles, op. cit., p. 154; Jones v. Gordon, op. cit.
No. 2]
CASE AND COMMENT
(iii) Wilful Blindness
A different situation arises when a holder is aware of suspicious
circumstances surrounding a negotiable instrument, but wilfully
closes his eyes to avoid discovering anything which would destroy
his position as a holder in due course. In this case, he will be deemed to
have had notice of defects of title which he ought to have investigated.’ 7
The difference between negligence and wilful blindness is illus-
trated by the leading English case of Jones v. Gordon.”, Gomersall
and Searby, both of whom being insolvent, drew bills on each other
for the purpose of defrauding their creditors. Bills worth 1727,
drawn by Searby, were purchased by Jones for a mere 200. When
Gomersall went into bankruptcy, Jones claimed against his estate for
the full 1727. The trustee’s defence was that Jones was not a holder
in due course.
Their Lordships, affirming the decision of the Court of Appeal,
held that Jones’ wilful lack of inquiry into circumstances which
invited such inquiry amounted to constructive notice that the bills
were fraudulent, and thus he was not entitled to recover as a holder
in due course.
This case illustrates the type of suspicious circumstances to
which a holder in due course cannot close his eyes: Jones knew that
Gomersall was financially embarrassed, but thought that he was
still solvent; Jones admitted it was “a very risky thing”; he knew
persons who could have disclosed Gomersall’s exact financial status,
but he refrained from inquiries; he knew that these bills had been
refused by other people, presumably because it was well known that
Gomersall could not meet them; a sale of bills worth 1727 for 200
must have shown that Searby was desperate; moreover, Jones, being
a businessman, must have realized the probability of fraud in getting
such an enormous bargain. Lord O’Hagen states that a man in good
faith would have investigated further such an abnormal transaction:
he had the sources of information at his disposal but did not use
them, because he realized that this might lead to the discovery that
the bills were fraudulently drawn and this would invalidate his claim.
Lord Blackburn makes an important distinction:
“If he was… honestly blundering and careless, and so took a bill of
exchange.., when he ought not to have taken it, still he would be entitled
to recover. But if the… circumstances are such that the jury… came
to the conclusion that he was not honestly blundering and careless, but
that he must have had a suspicion that there was something wrong, and
that he refrained from asking questions, not because he was an honest
blunderer or a stupid man, but because he thought in his own secret mind –
17 See cases in footnote 3.
18 op. cit.
McGILL LAW JOURNAL
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I suspect there is something wrong, and if I ask questions and make further
inquiry, it will no longer be my suspecting it, but my knowing it, and then
I shall not be able to recover -I
think that is dishonesty.” 19
Thus, in the Sigouin case, it was unnecessary for Collins, J. to put
the finance company under a duty to ascertain the nature of the
contract between Sigouin and the furniture company: it would have
been preferable to say that the finance company closed its eyes to
suspicious circumstances, which put it in bad faith and prevented
recovery on the note.
The determination of whether the circumstances have become
suspicious enough to amount to bad faith is in the discretion of the
court, depending on the fact patterns of each particular case. The
courts have considered varying elements as evidence of bad faith.
In Kern v. Tamblyn,20 it was held that a businessman must have
known that a company’s property could not be pledged for a private
debt; in Samuel Creighton v. Halifax Co.,21 it was held that suspi-
cious circumstances exist when a person takes a note knowing that
a partner is using the company’s security for his own personal ends
and is thus exceeding his authority, although the exact details of the
fraud are unknown; in Vincent v. Belhumeur et un autre,22 a man
who spent $3000 in taking a note from his brother (the payee) was
presumed to know of the latter’s bankruptcy; in Swaisland v. David-
son et al.,23 a torn portion on one note, when the holder noticed an
erasure attempt on a similar note, amounted to suspicious circum-
stances, considering that the holder was a private banker; in Huot
v. Banque Canadienne Nationale,24 public rumour in a small town
was taken into account.
(iv) Speculative Surmise
It is recognized that there must be sonething to put the holder
on guard.25 This point arose in Union Investment Co. V. Wells. 20
Respondents were induced by the fraud of the payee’s agent to make
a promissory note bearing a fixed rate of interest. After the time
for the first interest payment had lapsed, the note was endorsed
to appellant company. Nothing on the face of the note indicated that
the interest was unpaid. Appellant sued on the note as a holder in
due course. Respondents pleaded that it was overdue when negotiated
19 Ibid., at p. 629.
20 (1914) 16 D.L.R. 529.
21 (1889-90) 18 S.C.R. 140.
22 op. cit.
23 (1884) 3 O.R. 320.
24 op. cit.
25 Falconbridge, op. cit., p. 626; Byles, op. cit., p. 154.
26 (1908) 39 S.C.R. 625.
No. 2]
CASE AND COMMENT
to appellant: thus the latter could not be a holder in due course
and must take the note subject to the defect of title (the fraud).
The Court held (Idington and MacLennan, J.J. dissenting) that
there were no suspicious circumstances which should have put ap-
pellant on guard, because the note was not on its face overdue.
Since appellant could not have known that the interest had not been
paid, its title was not affected by the fraud of the transferor. Duff, J.
gives a clear statement of the principles involved:
“the failure to pay the interest can be regarded as such a (suspicious)
circumstance only on the hypothesis that the law imposes upon the person
taking such an instrument after the time for such a payment is passed,
the duty to inquire whether the payment has been made; … it seems to
one to be abundantly clear that an instrument the negotiation of which is
regulated by such a rule of law is not in the full sense of the term a nego-
tiable instrument-that is to say, it is not negotiable as the commercial
currency of the country is generally…” 27
He continues:
“but it would be going a long way to lay down as a proposition of law
that ‘mere suspicion’- a speculative surmise that something might be wrong
without any objective basis -could
never in any circumstances be consistent
with honesty.” 28
Thus, there must be more than mere speculation, which is only a
possibility and not a probability.
(v) Intimate Connection between Payee and Transferee
Although Collins, J. in the Sigouin case does not reveal what
the suspicious circumstances were,
it seems evident that young
Sigouin was the victim of the sharp practices of Circle Acceptance,
who were primarily concerned with getting themselves into the
category of a holder in due course. In many instances involving con-
ditional sales contracts, the finance company is not an independent
third party: often there is some regular arrangement whereby the
payee of the note drawn by the customer has previously entered
into a discounting procedure with the finance company. In such a
case, the finance company should not be permitted to claim the
status of a holder in due course, because its connection with the
dealer may be so close that the two might be considered as engaging
in one operation. Since negotiation (required by s. 56 (1) (b)) means
a real transfer to an independent person, no real negotiation of the
note will have taken place. Thus, the finance company cannot plead
that when it took the note, it was unaware of the suspicious circum-
stances: it is presumed to know. However, if there was no previous
arrangement for regular discounting of notes and the finance com-
27 Ibid., at p. 636.
28 Ibid., at p. 643.
McGILL LAW JOURNAL
[Vol. 10
pany is really a separate party, it should be treated like any other
holder in due course, i.e. it is under no duty to investigate, unless
the probability exists that something is wrong.
In Federal Discount Corporation Ltd. V. St. Pierre and St.
Pierre,29 an intimate arrangement existed between a dealer selling
home knitting machines, as part of a complicated home knitting
scheme, and a finance company. The court held that the finance
company was not a holder in due course, because its connection with
the dealer went beyond the normal business dealing between finance
company and merchant. Kelly, J.A., discussing the modern type of
conditional sales contract, remarked:
“The very existence of the seller’s business depends on his ability to convert
into cash these obligations and the finance company, standing ready and
willing to buy them, has become not only an essential part of retail selling
on the time payment plan but is in effect a department of the seller’s
business…” 30
Finance companies often have tried to claim they are independent
agencies, although in fact they have been organized for the sole
purpose of purchasing contracts or discounting notes from specific
companies even before the contracts were entered into. Their aim
is to obtain the position of a holder in due course, in order to avoid
defences which could be set up against a mere assignee. In the
St. Pierre case, Kelly, J. A. rightly rejects such a fiction:
“The course of dealings between the plaintiff and the officers of Fair
Isle indicates a relationship much more intimate than that of endorsee or
endorser in a normal commercial transaction … To pretend that they were
so separate that the transfer of each note constituted an independent com-
mercial transaction not affected by the pre-existing arrangements between
them would be to permit the form to prevail over the substance.” 31
However, not all finance companies have such a close connection
with the seller, and these independent ones should not be precluded
from being holders in due course. Some American states have gone
so far as to deny the position of a holder in due course to a finance
company 32, but this is unjust to the many finance companies who
are in good faith.
29 (1962) 32 D.L.R. (2d) 86.
30 Ibid., at p. 98.
31 Ibid., at p. 99. It is interesting to note that the Quebec Court of Appeal
deprived a finance company of the status of a holder in due course, deciding
that if the holder of a cheque finds his right to claim in an agreement in writing
separate and distinct from the cheque, he does not enjoy the advantages conferred
by the Bills of Exchange Act on a holder in due course and the drawer of the
cheque is free to urge any defence that may be open to him. See the opinion of
Casey, J. in Elmhurst Investment Company v. Allard [1963] B.R. 236 at 243.
s2 Louise Korns, Case Comment in (1952-53) 27 Tulane Law Rev. 255 at 256.
No. 2]
CASE AND COMMENT
Conclusion and personal opinion
The general rule is that the holder in due course has no respon-
sibility to investigate the nature of the transaction between the
original parties, contrary to what Collins, J. seems to imply. However,
this comment has attempted to show that the necessity of good faith
means that a holder in due course cannot ignore suspicious circum-
stances merely to get himself into the privileged category, although
honest negligence will be tolerated. Moreover, mere surmise that
something might be wrong is not sufficient: there must be some
happening to arouse suspicion. Finally, the type of business rela-
tionship between the seller and the finance company is an element
to be considered in deciding if the finance company is a holder in
due course.
As mentioned above, the main difficulty is in answering the
question, “When have the circumstances become suspicious enough
to warn the holder in due course?” In the Jones case, the fact
pattern clearly established that it was probable that there had been
fraud. But what could the holder do when it is merely possible
that something is wrong? It is submitted that the circumstances
must create suspicion which goes beyond the realm of possibility
and into probability. Possibility should not be sufficient, because
mere speculative surmise that the title of a negotiable instrument
is defective is always present. While the solution proposed will
undoubtedly lead to the further problem of distinguishing between
possibility and probability, such matters of mixed fact and law
must be left to the trial judge. Moreover, it is submitted that the
court must look at the circumstances from the subjective position
of the particular person involved: a “reasonable man” test would
destroy the concept stated above, i.e., no matter how gross a person’s
negligence, this will not put him in bad faith.
It is respectfully submitted that if the statements of Collins, J.
are literally applied, this could lead to undesirable commercial conse-
quences. The principle that third parties must be protected demands
that the holder in due course be under no obligation to verify his
title before taking an instrument. This is in accordance with the
ultimate object of negotiability –
circulation of the instrument similar
to legal tender. As Perrault states:
C’est ce principe de l’inopposabilit6 des exceptions qui permet h la lettre
de change… de faciliter le r~glement des obligations juridiques formes
quotidiennement. Sans ce principe de l’inopposabiit6 des exceptions, ni Ilun
ni l’autre de ces titres de credit ne pourrait tenir lieu de monnaie dans les
paiements. S’il n’existait pas, il serait impossible au preneur ou A l’endos-
sataire de faire d’une lettre de change ou d’un billet un instrument de credit.
McGILL LAW JOURNAL
(Vol. 10
Nul ne voudrait accepter Pun ou l’autre de ces titres si les signataires
avaient la facult6 d’invoquer vis-A-vis du d~tenteur les causes d’annulation
ou de resolution des obligations formes entre les parties ant~rieures h ce
d~tenteur. L’inopposabilit6 des exceptions se rattache h la nature mme
des titres de credit.” 33
To permit negotiable instruments to fulfil their economic role, good
faith holders must be free from the necessity to make verifications
which often would be difficult or impossible. If every person who
took a negotiable instrument in the course of business feared that
its title might be defective, this would tend to weaken the stability
of commercial transactions.
The question as to whether a holder in due course must in-
vestigate involves a conflict between public policy and private
interest. For the sake of commerce, public policy requires that third
parties who take an instrument in good faith should be free from
any challenge to their title. On the other hand, we must not lose
sight of the private interest of the maker who has been defrauded
(in the Sigouin case, by the fraud of the furniture company). While
the remarks of Collins, J. might be taken to mean that private in-
terest should prevail, this comment has tried to show that public
policy is the most important factor, although there are certain
mitigating factors which help to protect the private interest.
33 Perreault, op. cit., p. 799.
