COMMENTS
COMMENTAIRES
Acceleration Clauses and Article 1040b C.C.
Although the concept of dation en paiement is an old one in
the civil law, its use in deeds of loan was not common before 1930.’
As such clauses became more popular, they began to cause severe
hardship among builders and other construction tradesmen who
had previously found protection in the Civil Code under their
respective privileges.2 They soon realized that this protection was
at best precarious and could be lost entirely should the lender
choose to exercise his right under the dation en paiement clause.3
In response to these problems, the National Assembly in 1964
amended the Civil Code by adding arts. 1040a to 1040e, under the
title “Of Equity in Certain Contracts”4
This legislation has been analysed elsewhere in great detail.”
It suffices to say here that the legislature chose two mechanisms
to accomplish its purpose: firstly, that of requiring any creditor
wishing to become the absolute owner of an immoveable to give
a sixty-day notice to the debtor and any other creditors with
rights in the immoveable and permitting the debtor or the other
creditors to remedy the default complained of during the delay;6
and secondly, that of allowing the courts to reduce or annul the
obligations of a contract of loan where the cost of the loan is
excessive.Y
One of the questions which arose regarding these articles
concerned the effect which the new legislation would have on
(1969), 45, 46.
‘ Harris, “Sale by Sheriff and Dation en Paiement”, in Meredith Lectures
2 Art. 2009(7) C.C.; arts. 2013 C.C. et seq.; art. 2103 C.C.
3 See, for example: Beaver Hall Investment Ltd. v. Ravary Builders Supply
Ltd. et al., [1963] C.S. 388 and Nineteenhundred Tower Ltd. V. Cassiani et al.,
[1967] B.R. 787.
4 An Act to protect borrowers against certain abuses and lenders against
certain privileges, S.Q. 12-13 Eliz.II 1964, c.67.
5 Harris, supra, f.n.1, 45; Mayrand, “De l’6quit6 dans certains contrats, nou-
velle section Code Civil”, in Lois nouvelles (1966), 51.
GArts. 1040a and 1040b C.C.
7 Art. 1040c C.C.
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COMMENTS – COMMENTAIRES
“acceleration clauses” or “la clause d’6chdance accdldrge”. The effect
of this clause purported to be that upon any occurrence which
constituted a default the entire outstanding balance of the loan
immediately (or shortly thereafter) became due. This clause
provided lenders with added protection and was sufficiently popular
that by 1964 it could be found in most contracts of loan. The
question was therefore simple. If the creditor waited until the
requirements for the operation of the acceleration clause were
satisfied and then gave the notice required by art. 1040a C.C.,
stating the omission to be the full accelerated balance, would the
debtor or other interested creditor wishing to “reinstate the loan”
be required to pay the entire amount outstanding or merely the
payments due as well as interest and costs? In other words, ,was
the effect of arts. 1040a C.C. et seq. to deny a creditor who wished
to exercise a dation en paiement the benefit of an acceleration
clause?
The answer to this question lies in the way in which the courts
interpret art. 1040b C.C., the relevant section of the new legislation
which provides that:
The debtor or any other interested person may prevent the exercise by
the creditor of his right to become the absolute owner of the immoveable
or to dispose thereof, by remedying the omission or breach mentioned in
the notice and any subsequent omission or breach, and by paying the
costs, at any time during the delay for notice and, thereafter, before the
creditor has been declared, by deed signed voluntarily or by judgement,
absolute owner of the immoveable, or, in the case of a right to dispose
of it, before the creditor has exercised such right….
It is submitted that the wording of the legislation is less than
clear. There are two arguments which support the view that art.
1040b C.C. does restrict the operation of acceleration clauses.
Firstly, the historical background and the tenor of the legislation
must be taken into account. The legislation was designed, to provide
relief to debtors and to protect other creditors whose security
ranked below that of another creditor. To continue to permit such
use _of acceleration clauses would significantly reduce the effective-
ness of the legislation. Secondly, since almost all contracts of loan
include acceleration clauses, to allow them to operate in these
circumstances would make the last phrase “and any subsequent
breach or omission” redundant. On the other hand, one might well
argue that a restrictive interpretation should be given to art. 1040b
C.C. Freedom of contract is a fundamental principle of Quebec civil
law,8 and one must apply the presumption in statutory interpretation
8Arts. 13, 990, 1062 C.C.; Christie v. York ICorporation, [19401 S.C.R. 139.
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against any new legislation altering the general law.9 Thus in the
absence of an express statutory prohibition, contracting parties
are free to draft their contracts as they wish. One could further
argue that freedom of contract is a right which every individual
within the jurisdiction of Quebec civil law enjoys. Therefore one
should presume that an individual is not to be deprived of his
common law rights.’ Finally, the words “any subsequent breach or
omission” are clearly required to protect creditors in situations
where the contract of loan does not contain an acceleration clause.
Early commentators were somewhat divided on this question.
R.C.T. Harris expressed no personal opinion and implied that the
question was doubtful and would have to be resolved by the
courts.’ On the other hand, a more emphatic view was put forward
by Professor Albert Mayrand, as he then was:
La clause d’dchdance accdlirde, en vertu de laquelle le defaut de payer
un versement rend toute la dette exigible, va-t-elle obliger le ddbiteur a
rembourser toute sa dette afin de remddier a sa contravention? Quoique
le texte de l’article 1040b ne soit pas explicite a ce sujet, it nous semble
contraire a l’esprit de la nouvelle ldgislation de donner effet a la clause
de ddehdance automatique du terme.’2
One of the first judicial opinions on this matter appeared in 1967
in the unreported judgment of LesageJ. in Darveau v. Routhier.18
In this case the creditor attempted to exercise an acceleration
clause in conjunction with a dation en paiement. The debtor argued
that the notice given by virtue of art. 1040a C.C. was improper
inasmuch as it alleged that the full outstanding balance of the loan
was due. The Court held that even though the creditor had claimed
more than was due, the notice was still valid:
II faut mgme dire que si le crsancier a exigd plus que l’omission donnant
ouverture b une demande de dation en paiement, cette exigence ne ddtruit
pas l’avis qui comporte tout ce que la loi exigeait …. 14
Although the decision on the validity of the acceleration clause
was obiter, the Court clearly implied that such a clause was inoper-
ative in these circumstances.
9 National Assistance Board v. Wilkinson, [1952] 2 All E.R. 255, 260; Beneficial
Finance Co. of Canada v. Ouellette, [1967] B.R. 721; Hecke v. La Cie de Gestion
Mascoutaine Ltde, [1972] S.C.R. 22.
10 Langham v. City of London Corp., [1948] 2 All E.R. 1018; Beneficial Finance
Co. of Canada v. Ouellette, [1967] B.R. 721; Hecke v. La Cie de Gestion Mas-
coutaine Ltde, [1972] S.C.R. 22.
11 Harris, supra, f.n.1, 50.
12 Mayrand, supra, f.n.5, 64.
13 S.C. Quebec, 149-840. But cf. the earlier case of In re Cldment Jacques, S.C.
Qudbec, 15 September 1965, contra.
14 Comtois, Jurisprudence, (1967) 70 R. du N. 192, 195.
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COMMENTS – COMMENTAIRES
In a subsequent comment, Professor Comtois states that this
case decides that such a clause is inoperative:
Le crdancier ne peut pas demander plus que le paiement des versements
dchus. La clause usuelle voulant que le ddfaut d’effectuer un paiement
entraine la ddchgance du terme et rende exigible le paiement de la somme
totale est sans doute valable dans les cas ordinaires, mais cette stipulation
n’est pas admissible au bdn~fice de celui qui veut en mgme temps se faire
donner l’immeuble en paiement.15
While I would, with respect, suggest that this is reading more
into the decision than it actually held, three recent cases have
confirmed this interpretation of the effect of art. 1040b C.C.
The first of these decisions was that in Re Nadeau; Canada
Permanent Trust Co. v. Miller.6 The litigation arose after the debtor
was bankrupt and he was therefore represented by a trustee.
O’ConnorJ. stated that:
The issue here is whether an acceleration clause in a deed of loan prevents
a trustee from tendering only the payments which are in arrears or
whether in view of such acceleration clause, the trustee must make full
repayment of all moneys owing including all of the capital if he wishes
to prevent the hypothecary creditor from exercising its right under the
dation en paiement clause.17
The decision is complicated by the wording used by the creditor
in his 60-day notice. After setting out the specific omissions and
breaches, the notice continued:
As a result of the foregoing, Daniel Nadeau is in default to make payment
of the entire balance of principal of loan.’8
In considering the notice, O’Connor,J. held that:
… the result is not a breach in itself. The fact that the capital has become
due is a result of other breaches … Article 1040b requires the debtor
to remedy only those omissions or breaches mentioned in the said notice.
The article does not require the debtor to remedy the “result” of such
breaches.’9
However, while the precise drafting of the 60-day notice was one
of the reasons for the decision, it is argued that the Court grounded
its decision principally on the broader view that art. 1040b C.C.,
when correctly interpreted, did not require a debtor who wished
to remedy his default to pay the full outstanding balance. The
Court gave two reasons for this conclusion. The first would appear
15 Ibid., 194.
16 (1969), 15 C.B.R. (N.S.) 171.
17 Ibid., 173.
18 Ibid., 174.
19 Ibid.
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to be an application of the “mischief” rule of statutory interpreta-
tion:2 0
I certainly share the view that it would be against the whole spirit of
this new legislation to permit a lender to require the repayment of the
whole capital of a loan before the debtor could halt the effect of the
dation en paiement clause.2 ‘
The second was the way in which art. 1040b C.C. was drafted:
Another compelling reason for interpreting C.C. art. 1040b as meaning
that the instalment payments in arrears for interest, capital, insurance,
etc., are the omissions referred to and not the omission to repay the full
amount of capital outstanding is the fact that reference in the article is
also made to “any subsequent omission or breach”. If the full amount
of the capital.., is to be paid under the remedying provision of C.C.
art. 1040b there would of course be no “subsequent” omission or breach
for the debtor to remedy. 22
LesageJ. considered this question again in Chambly Realties Lte
v. Dame Lapointe. The issue in this case was very similar to that
in Darveau v. Routhier and it could thus be argued that the
comments of the Court on the effect of art. 1040b C.C. on accelera-
tion clauses were not part of the ratio decidendi. However, LesageJ.
took the opportunity to remark that he had not altered his opinion
on the matter and that the default which the debtor had to remedy
was merely the payment of the arrears due and costs, but not the
full accelerated balance.
The last and most recent decision was that of BatshawJ. in
Forte v. Coast to Coast Paving Ltd.24 The Court defined the issue
as follows:
In the present case, the problem presented to the Court is whether the
wording of article 1040b C.C. will allow a debtor to reinstate the loan by
paying only the instalments in arrears plus the costs, in spite of the
exercise of the creditor’s right to claim the full amount under the acceler-
ation clause.25
The Court, in deciding in favour of the debtor, considered that,
given the tenor and the intent of the legislation, any doubts about
its effects should be resolved in the debtor’s favour. Secondly,
although there was no jurisprudence directly on point, it was
said that two decisions had implied the debtor’s -right
in this
2o Heyden’s Case (1584), 3 Co.Rep. 7a, 7b; 76 E.R. 637.
21 (1969), 15 C.B.R.(N.S.) 171, 175. As O’Connor,I. noted, this view was
previously put forward by Mayrand, supra, f.n.5, 64.
22 Ibid.
23 [19703 C.S. 361.
24 [1972] C.S. 718.
25 Ibid., 718-19.
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COMMENTS – COMMENTAIRES
manner: Chambly Realties Ltde v. Dame Lapointe26 and Langlois
v. La Banque d’expansion industrielle.27 While the former, as
analysed above, certainly does support this view, it is submitted with
respect that the latter did not deal with the point in question.
Thirdly, it was noted that Quebec doctrine had adopted this
interpretation, and in support of this assertion the Court cited
Professor Comtois. Finally, the Court applied the “mischief” rule
of statutory interpretation, as was done in Re Nadeau; Canada
Permanent Trust Co. v. Miller:
To permit the creditbr to insist on payment of the entire capital in
view of the acceleration clause would be an indirect way of defeating the
relief which the legislator intended to give to a debtor in virtue of the
legislation above referred to.28
In a recent note, Professor Comtois strongly approved of Forte
v. Coast to Coast Paving Ltd.:
Nous sommes absolument d’accord avec cette interpretation. Ces disposi-
tions ont dtd mises en vigueur pour venir en aide & un ddbiteur en
difficultd. Eles doivent s’interprdter dans cette optique.29
In conclusion, it is submitted that a sufficiently strong line
of jurisprudence has been developed for one to safely say that
one of the effects of art. 1040b C.C. is to render inoperative an
acceleration clause in a contract of loan where the creditor wishes
to foreclose upon the debtor in default by exercising his dation
ei paiement rights. In order to prevent the operation of the clause,
the debtor need only repay any arrears on the loan as well as costs.
This interpretation has been supported by Quebec doctrine and
is logically consistent with the intent and purpose of the new
legislation. It should be noted that a creditor can still exercise
an acceleration clause. He is simply restricted in that his subsequent
recourse cannot be a dation en paiement.30
Christopher Hoffmann *
26 [1970] C.S. 361.
27 [1969] B.R. 456.
28 [1972] C.S. 718, 720.
29 Comtois, Jurisprudence, (1973) 75 R. du N. 349.
30 He is of course free to take an hypothecary action.
* B.C.L. III, McGill University.