THE McGILL
LAW JOURNAL
VOLUME 2
SPRING 1956
NUMBER 2
SECURITY UPON MOVEABLE PROPERTY IN
THE PROVINCE OF QUEBEC
Gerald E. LeDan*
At a time when the economy is experiencing a quite remarkable expansion
of credit, it seems appropriate to consider a legal aspect of the subject which
must always be a preoccupation of creditors, namely, the kind of security
which may be obtained by agreement upon the movable property of a debtor.
Most creditors understandably share one weakness, and that is the desire to
be secured against the failure or incapacity of their debtor to pay what he
owes them at due date. It is the task of law, not merely in the interest of
equity and justice, but of commerce itself, to determine which creditors shall
enjoy this favour and under what conditions, and what shall be the order of
preference among them. The free flow of commerce requires not only that
certain persons or institutions be encouraged to extend credit by the guarantee
which they are able to obtain of being paid, but that the ordinary unsecured
creditor should not be driven from the field by the unreasonable extent to
which others have by law or contract been given a preference over him.
Among the considerations which must influence the legislator are the types of
credit to be encouraged, the protection to be given to the creditor, the debtor
and third persons, and the practical necessities of daily life and trade which
will determine the kind of collateral offered and the appropriate security
device for giving it. The subject is a vast one and capable of becoming very
complex as the’rapidly developing body of literature on it in France and the
United States will attest. An attempt will be made in this article merely
to give some general idea of the present state of the law in Quebec. Although
reference will necessarily be made to the special rights or privileges which
are conferred by law on certain creditors, the subject is what may be called
contractual security upon movable property, or in the much more concise
French expression –
les sfiretis inobilires conventionnelles.
THE GENERAL LINES OF THE QUEBEC SYSTEM
The development in Quebec of the law and practice in this field has been
a curious mixture of commercial improvisation within the limits of a fairly
*Associate Professor of Law, McGill University.
McGILL LAW JOURNAL
[Vol. 2
static body of traditional civil law principles, and the dominance in certain
aspects of the field of special legislation of a very advanced and quite original
character, deriving its inspiration from common law rather than civil law
sources. Several factors have contributed to this pattern but the most im-
portant is undoubtedly the strength of the chartered banks in this country
and the extent to which the exercise of the federal legislative jurisdiction
over banks and banking has been able to meet the demands of the commercial
community for new forms of secured financing. The lack of a comparable
legislative initiative from the province in favour of other financing agencies
has left the banks with a virtual monopoly in certain fields. The existence of
this federal legislation is noteworthy not only for its commercial and economic
importance but for its juridical impact on the civil law system. In order to
appreciate the nature of this impact and the framework within which other
lenders are obliged to operate, it is necessary now to consider, if only in the
briefest outline, the fundamental principles of that system.
The basic principle governing the rights of creditors in Quebec, and the
point of departure for the present discussion, is the rule which is found in
article 1981 of the civil code: “The property of a debtor is the common pledge
of his creditors, and where they claim together they share rateably unless
there are amongst them legal causes of preference.” The bias of the law is
against favouring one creditor at the expense of others. The burden is on a
creditor to show cause why he should be preferred. It is constantly affirmed
that legal causes of preference are de droit strict;1 while recognizing their
necessity, the law is concerned that they should not be extended beyond their
necessary limits.
At civil law the legal cause of preference which a creditor may claim is
either a privilege or a hypothec.2 The first is defined by the Code as follows:
“A privilege is a right which a creditor has of being preferred to other
creditors according to the origin of his claim. It results from the law and is
indivisible of its nature.” 3 Privilege is thus a right of preference conferred by
law on certain creditors because of the nature of their claim. It cannot, in
principle, be created by contract,4 that is, be obtained by any creditor.6 A
particular contract may give rise to a claim to which privilege attaches, as for
example, sale or lease, but it is not a contract which has the creation of a
privilege as its principal object. The only way in which any creditor, regard-
‘Wells v. Newman (1897), 12 Que. S.C. 216; Dallaire v. Gauthier & Scott (1903),
24 Que. S.C. 495.
2Art. 1982 C.C.
3Art 1983 C.C.
4Kouri v. Ferguson and Canada Maple Exchange Ltd. (1922), 33 Que. K.B. 208;
Richardson v. Beaubicn (1924), 62 Que. S.C. 413; Beique v. Asbestos Motor Sales
Limited and Vermette and Brassard [1953] Que. Q.B. 699.
5The privilege, however, attaches to the claim and not to the person of the creditor,
and it can accordingly be transferred with the claim.
No. 2]
SECURITY UPON MOVEABLE PROPERTY
79
less of the origin of his claim, can obtain a privilege on the movable property
of his debtor is to take a pledge, or pawn, 6 of such property as security for
his debt. “The pawn of a thing gives to the creditor a right to be paid from
it by privilege and preference before other creditors.” 7 This, too, is a privilege
conferred by law, but it is one which any creditor may acquire for any kind
of indebtedness.
Pledge requires for its validity that the debtor (or person who offers
the security on his behalf) give up possession of the thing pledged by putting
it into the hands of the creditor or some other person appointed by the parties
to hold it.8 (Where the thing is already in the hands of the creditor or third
party, the contract may be constituted by the debtor consenting to it being
retained as security for the debt.) Where the debtor is left in possession,
there may be an agreement which the courts will recognize as a promise of
pledge, enforcable by the creditor against the debtor in the event of default,9
but it will not avail against third parties. The law requires that the debtor
transfer possession of the thing pledged in order that persons who deal with
him should not be deceived as to the extent of his unencumbered assets. There
must be a real, apparent and unequivocal change of possession to constitute a
valid pledge. Many are the cases in which the parties attempt to create the
semblance of pledge while in fact leaving the thing pledged within the actual
reach and control of the debtor. The creditor’s privilege lasts only as long as
he or the person appointed to hold the thing retains actual possession of itJO
The pledgee who voluntarily gives up possession loses his security.
Privilege, or the right to be paid by preference out of the proceeds of a
judicial sale of the thing, is only one aspect of this security. Joined to this
right, and the means of safeguarding it, is a right of retention based on the
creditor’s control over the thing. He has a right to hold it until full and final
payment of the indebtedness ;11 he can oppose the seizure of it by other
GAlthough the civil code states in article 1968 that “the pledging of movable property
is called pawning”, the term “pledge” will be used in this article because the words
“pawning” and “pawn” are reserved in practice for a particular type of lender, the
pawnbroker, who is engaged in the business of making small loans upon the pledge of
movable property and is regulated by special laws: The Quebec Licence Act, (1941)
R.S.Q. c. 76, s. 107 et seq. The Pawnbrokers Act, (1952) R.S.C. c. 204.
7Art. 1969 C.C.
8Arts. 1966 and 1970 C.C. Where the thing is placed in the custody of a third party
there must still be a real and apparent change of possession so that third parties are not
misled: Payenneville & Martineau v. Privost & Major (1916), 25 Que. IKB. 246. For
creditor’s recourses on default where thing is left with third party: Paquette v. Rainville
& Papineau M.L.R. 2 S.C. 123.
OThe Canada Paper Co. v. Cary (1878), 4 Q.L.R. 323; 10 R.L. 501. Cf. Savard v.
Tremblay (1906), 30 Que. S.C. 423.
l0Art. 1970 C.C.
IlPrescription of the debt is interrupted so long as the thing pledged remains in the
hands of the creditor. Macdowell v. Johnson [1948] Que. K.B. 633.
McGILL LAW JOURNAL
[Vol. 2
creditors of the debtor and insist on payment before giving up the thing.12
This may result in his being paid before creditors who would normally out-
rank him. If he allows the thing to be sold, or brings it to sale himself, he
will be paid by preference out of the proceeds according to the rank given
him by law. Nor need his ultimate right in Quebec be confined to payment
by preference. In the ordinary case, where the parties have not stipulated
otherwise, the pledgee cannot “on the debtor’s default, dispose of the thing in
any manner he pleases”; if he wishes to realize on his security he must “cause it
to be seized and sold in the usual course of law under the authority of a
competent court and obtain payment by preference out of the proceeds.”’18
But the parties may agree that on default the creditor shall have the right to
keep the thing as his own property without any accounting to the debtor.
This is the pacte commissoire, prohibited by Roman and old French law, and
by the law of France today.14 Thus while the interests of third parties and
the creditor are safeguarded by the transfer of possession in the contract of
pledge, there is less concern in the Quebec law for the protection of the
debtor.
The importance of the right of retention, from the creditor’s point of view,
is only appreciated if one considers the extent to which possession is still
treated in the civil law as a basic concept around which the whole system of
rights in movable property is organized. The corollary of reliance on pos-
session as evidence of such rights is the protection of possession as the basis
of ownership. Such a system necessarily involves some limitation of the droit
de suite. If movable property is to circulate freely it must not carry too many
hidden charges. It is only possible here to suggest in the briefest outline the
extent to which this policy has been worked out in Quebec law.
The insistence on possession as the basis of contractual security upon
movable property is reflected in a rule concerning the second of the legal
causes of preference: hypothec. Movable property is not susceptible of
hypothecation.15 The only exceptions expressly recognized by the code are
the maritime mortgage and bottomry.15a This rule is expressed in French
in the very old maxim: les ineubles n’ont pas de suite par hypoth-
que. It is understood to mean not only that a creditor cannot acquire by
a2 Art. 646 C.C.P. Mignault, Le droit civil canadien, v. 8, p. 409; Demers, TraitN de
droit civil du Quibec, p. 46; Baudry v. Lepine (1882), 5 LN. 103; Bellean v. Piton &
Whelan (1887), 13 Q.L.R. 337: Leclerc v. Valin (1908), 14 R.L. n.s. 236. This point,
which has always been a controversial one in French doctrine, has not been free from
uncertainty in Quebec. Cf. Fortier v. Hebert & Hirst (1887), 15 R.L. 476; Gauthier v.
Fortin & Lapointe 1 Que. P.R. 500.
13Art. 1971 C.C.
‘4Codifiers’ 6th Report, p. 50.
‘5 Art. 2022 C.C.
1SaMaritime mortgages are provided for and regulated by the Canada Shipping Act,
(1952) R.S.C. c. 29, s. 45 et seq.
No. 2]
SECURITY UPON MOVEABLE PROPERTY
81
agreement with his debtor a real right in movable property which will entitle
him to follow it into the hands of third parties in satisfaction of his claim,
but that he cannot even acquire a right to be paid by preference out of the
proceeds of movable property which remains in the possession of the debtor,
and is seized in the latter’s hands. In referring to this rule it is often said that
Quebec law does not allow a chattel mortgage.
While many of the privileges on movable property are hidden, in that they
exist without any external evidence upon property which is in the possession
of the debtor, they either carry no droit de suite or at most a very limited one.
The rule varies somewhat from case to case. For example, the privileged rights
of the unpaid vendor to revendicate the thing sold or to be paid by preference
last only so long as the property has not passed into the hands of a third party
who has paid for it.16 (His right to have the sale dissolved and to recover pos-
session of the thing for non-payment of the price, whether the sale be one for
cash or on credit, exists only while the thing sold remains in the possession of
the buyer.17 ) The landlord has a right to follow the movables subject to his
privilege within eight days after their removal from the premises. In the
case of mercharidise in commercial premises his right to seize lasts only as
long as the merchandise remains the property of the debtor.18 The lumberman’s
privilege for wages is extinguished “as soon as the lumber shall have passed
into the hands of a third person who has bought it, received delivery thereof,
and has paid the price therefor in full.”‘ 9
Quebec law has not shown the same disposition as the modern law of
France to admit the principle of la subrogation r~elle. Where they once
refused,20 the courts now seem prepared to allow a privileged creditor to
exercise his right of preference upon the proceeds of a vente amiable,21 which
have been garnished in the hands of the third party purchaser, but the law
still does not allow the privilege to be exercised upon the insurance indemnity
which is payable in the event of the loss or destruction of the thing.P
Limitations on the droit de suite in Quebec law do not operate merely
against those exercising a right of privilege on movable property. Possession
16Art. 1999(3) C.C. Cf. Mechanic Supply Co. v. Hudon et al. (1933), 71 Que. S.C. 400.
17Art. 1543 C.C.
18Art. 1623 C.C.
19 Art. 1994c C.C.
2OLanthier v. Avard Denis Ltie & Wilson (1920), 58 Que. S.C. 463.
21Mechanic Supply Co. v. Hudon & Compagnie de Machinerie Mercier (1933), 71
Que. S.C. 400; Tremblay & Villeneuve Enrg. v. Coopirative de Colombier et al. [1944]
Que. S.C. 281.
22Wood v. Lamoureux & The Commercial Union Ass. Co. (1887), 15 R.L. 313;
Voscelles v. Laurier & The Aetna Insurance Company & Dame Marie Virginie Valade
(1895), 8 Que. S.C. 404; Dame Ella Vaughan v. Pelletier & The Manchester Fire
Insurance (1899), 15 Que. S.C. 123; Isaacs v. Talfler & The Guardian Assurance Co.
Limited 11 Que. P.R. 359; Sachs v. Cohen 35 Que. P.R. 390; Comtois v. Lamarre &
Bruli [1952] Que. S.C. 252.
McGILL LAW JOURNAL
[Vol. 2
acquired under certain circumstances is protected against the assertion of a
right of ownership itself. While introducing an important change in the
Quebec law by the rule that ownership should pass in contracts for the alien-
ation of a thing certain and determinate by consent alone, without the neces-
sity of delivery, 23 the codifiers did not give full effect to this change by the
organization of a system of publicity for real rights in movable property.
Possession continued to be the only evidence of such rights on which third
parties could rely. The extent to which the new rule should be made to affect
third parties was in the early years, at least, a matter of uncertainty, dis-
agreement and misgiving. The nature of the problem is fully set out in the
judgment of Sir A. A. Dorion C.J. in the case of Dupuy v. Cushing.24
The uncertainty turned in part on a difference of wording between the
draft of article 1027 C.C., as adopted by the legislature, and the official text
of the code. Whatever the reasons may have been for the change, as article
1027 reads in the accepted version today, it makes the rule concerning transfer
of ownership by consent alone “apply as well to third persons as to the con-
tracting persons”, with one express exception: “if a party oblige himself suc-
cessively to two persons to deliver to each of them a thing which is purely
movable property, that one of the two who has been put in actual possession
is preferred and remains owner of the thing although his title be posterior
in date; provided, however, that his possession be in good faith.” Some would
confine the application of this exception to a subsequent purchaser who has
taken possession in good faith ;25 others would extend the protection to a
pledgee under similar circumstances. 26 Beyond these exceptions the general
rule operates against third persons, in the absence, of course, of fraud. The
contention of Dorion C.J. in Dupuy v. Cushing, that creditors are entitled to
property remaining in the possession of their debtor as against a third person
to whom it has been sold in a bona fide transaction, has definitely been
rejected.
Creditors of a buyer who is in possession of a thing sold under a condi-
tional contract of sale reserving ownership in the seller are in a similar
position. Notwithstanding the fact that they have no notice of the conditional
seller’s right (the conditional contract of sale does not have to be registered
in Quebec) the seller is able to revendicate or oppose the seizure of the thing.
This is the rule of article 1027 in reverse: the reservation of ownership by the
seller, where possession is given to the buyer, affects not only the parties to
the contract but third persons as well. The exceptions in this case are found
in the rules which protect a person to whom a thing is sold or pledged under
2 3Art. 1025 C.C. Also art. 1472 C.C.
24(1878), 22 L.C.J. 201.
2 5Trudel, Traiti de droit civil du Quibec, vol. 7, p. 378.
2 6Chturch v. Bernier (1892), 1 Que. Q.B. 257, per Lacoste C.J., at p. 271.
No. 2]
SECURITY UPON MOVEABLE PROPERTY
83
certain circumstances by one who is not the owner.2 7 If the thing was bought in
good faith at a fair or market, or at a public sale, or from a trader dealing
in similar articles, or in any other sale which is deemed to be commercial, such
as the sale of a business, 28 the owner will not be able to revendicate unless
the thing had been lost or stolen, and then only upon reimbursing the
purchaser what he has paid for it. A pledgee enjoys the same protection if he
has taken the thing in good faith from a trader dealing in similar articles
or in a transaction which is otherwise commercial.P9
Because of what is comprised in the term “stolen”
for example, the
the thing in
buyer under a conditional contract of sale who re-sells
there
violation of the terms of the contract is deemed to have stolen it” –
will be few cases in practice in which the thing will not have been either lost
or stolen and the owner not entitled to revendicate upon reimbursing. This
does not seriously affect the pledgee who cannot ask more than a right of
retention until he is paid. The buyer may be able to oppose the revendication in
such case on the ground of prescription. A person who acquires possession
of a corporeal movable in good faith becomes the owner of it by prescription,
regardless of how long he has possessed it or, when his possession began,
–
27Arts. 1487-1490, 2268 and 1966a C.C.
28The extension of the protection to any sale which is deemed to be commercial may
still be disputed by many in Quebec. It is not possible to enter into the difference of
opinion which has existed for many years over the meaning of the words “nor in com-
mercial matters generally” in art. 2268 C.C. and the word “valid” in art. 1488, which
reads: “The sale is valid if it be a commercial matter, or if the seller afterwards becomes
owner of the thing.” But it is the writer’s belief, based on recent expressions of judicial
opinion, that the law as stated in the text is substantially what the Quebec courts will
apply in the future. Globe Slicing Machine Co. Ltd. v. Ethier [1948] Que. S.C. 257;
Aluminum Co. of Canada v. Selig [1952] Que. S.C. 455, at pp. 457-458. For a full dis-
cussion of the issues on this point see: Perrault, Traiti de droit comrncrcial, v. 2, nos.
622, 625, 629; Pouliot, “Nullit6 de la vente de la chose d’autrui”, (1933-34), 12 R. du D.
450; Owen, (1936), 14 Can. Bar Rev. 434; Challies, (1936), 14 Can. Bar. Rev. 801;
Baudouin, Le droit civil de la province de Quebec, p. 441 ff. The more important cases
have been: Cassils v. Crawford (1876) Q.B. 21 L.C.J. 1; The National Cash Register
v. Deinetre (1905), 14 Que. K.B. 68, 97; Tremblay v. .Mercier and Lachaine (1910), 38
Que. S. C. 57; Kriziuk v. McBride (1923), 29 R.L. n.s. 328; Frigidaire Corp. v. Malone
(1933), 54 Que. K.B. 462; [1934] S.C.R. 121. In the writer’s opinion the true. relationship
between arts. 1488 and 2268 is not that art. 1488 makes the sale transfer ownership in a
thing which does not belong to the seller, and art. 2268 merely states the obvious con-
sequence of this, namely, that the previous owner cannot now revendicate, but that art.
1488 prevents the buyer from repudiating such a sale when it is commercial in nature
because of the protection which art. 2268 gives to the possession acquired under such
circumstances.
29Art. 1966a C.C. Mayrand, “Nantissement de la chose d’autrui”, (1943), 3 R. du B.
313, at p. 317. Cf. Gotfredson Corporation Limited v. Filion (1929), 46 Que. K.B. 52.
5 oComnercial Credit Corp. v. Mulville Motor Sales Reg’d. & U.S. Fidelity & Guaranty
Co. [1953] Que. S.C. 140. For the broad construction to be given to the word “stolen”
see Charron v. Walker (1918), 54 Que. S.C. 439.
McGILL LAW JOURNAL
[Vol. 2
if three years have elapsed since the original owner lost possession, even when
such loss of possession was occasioned by theft.81 Even where the droit de
suite does exist then, it is only for a limited period. In effect, the owner or
other person claiming possession cannot revendicate from the possessor in
good faith unless he does so within three years from the time he lost posses-
sion. Moreover, possession of the thing creates a presumption of lawful title
and the burden is on the person claiming it to prove not only his own right
or basis of claim, such as ownership or pledge, but the reasons why the
person from whom he claims is not entitled to protection, either on the ground
of prescription or because of the special circumstances under which he
acquired possession.
The law governing the sale or pledge of a thing by one who is not the
owner of it is completed in Quebec by articles 1739 and following of the
civil code, which protect persons who deal in good faith with an agent who
has been entrusted with the possession of goods or documents of title. These
provisions, which were modelled on the English Factors Acts of the early
nineteenth century, were originally adopted because of the prevalence and
importance of the old style factor or commission agent to whom goods were
consigned for sale.32 Because of changes in merchandising and distribution
techniques –
the “factor” today is mainly engaged in purchasing accounts
receivable and furnishing a credit service for his clients –
these articles of
the code have become something of a dead letter, though they are still in-
voked from time to time. In their terms they apply to “any agent” entrusted
with the possession of goods or documents of title, but in view of their source,
it would probably be proper to interpret them in the light of English decisions
under the United Kingdom act of 1842, holding that the agent must be one
to whom the goods have been entrusted for sale, and he must have made the
sale or pledge in the ordinary course of his business.33
In the above context of the civil law it will be seen that of the two security
devices to which reference has’been made –
pledge and the conditional con-
tract of sale –
pledge offers the greater protection to the creditor and third
parties. Not only does the transfer of possession by the debtor protect persons
who deal with him, but it protects the creditor from the loss of his security
by the debtor’s acts. But these advantages are in particular cases outweighed
by two very important drawbacks: it may be inconvenient or impossible for
the debtor to give up possession of the security; the creditor may not want
to assume, responsibility for the care of the thing. To appreciate the import-
31Art. 2268 C.C.
3 2For the history of these provisions see Clark v. Lomner & Clark 1860 S.C. 4 L.C.J.
30, affirmed by 1861 Q.B. 6 L.C.J. 77; Robertson v. Lajoie 1878 Q.B. 22 L.C.J. 169, at
p. 196 et seq.
33Cole v. North Western Bank 43 L.J. C.P. 194; 9 C.P. 470; 44 L.J. C.P. 233; 10
C.P. 354. See City Bank v. Barrow (1879-80), 5 A.C. 661, per Blackburn J., at p. 679.
No. 2]
SECURITY UPON MOVEABLE PROPERTY
85
ance of the first objection it is necessary to consider briefly the various
classes of borrower and types of collateral encountered in practice.
Secured financing involving movable property may be classified roughly
for present purposes as follows: the personal loan on the security of personal
property; financing the retail sale of consumer goods and other sales to the
ultimate purchaser for use; financing dealers and manufacturers on the
security of inventory and accounts receivable; financing the agricultural or
other primary producer on the security of products or equipment.
In the case of the personal loan on the security of personal property, the
contract of pledge is unsuitable for a large class of borrower but it still has
an important area of application. The only property of any value which the
average borrower can offer as collateral –
and the automobile is one of the
chief items today –
consists very largely of things which he is unable or
unwilling to hand over to the creditor because they are necessary to his liveli-
hood or personal convenience and comfort. But the contract of pledge con-
tinues to be suitable for a wide range of important forms of collateral such as
commercial paper,. investment securities and insurance policies.
The need for a security device which does not deprive the debtor of pos-
session is felt particularly by the commercial borrower who requires the use
of the collateral in the course of his daily operations. Such is the manufacturer
whose inventory consists of raw materials, work in process and finished
goods. The wholesale or retail dealer, even though he is not processing his
inventory like the manufacturer, cannot generally afford the expense and in-
convenience of placing it in a public warehouse for the purpose of creating
a documentary pledge. The farmer or other primary producer who wishes to
borrow on the security of his products or equipment cannot do so effectively
unless he can give such security without the transfer of possession. The needs
of such borrowers, and those in the field of personal finance who wish to
give security on such property as automobiles, have created over the
years a demand for new security devices or the adaptation of old ones to
new purposes. Not all the devices for creating security without transfer of
possession have had legislative sanction or have met with success in the courts.
Under the provisions of the federal Bank Act8 4 the banks can take security
by assignment without transfer of possession from farmers, fishermen, pro-
ducers of hydrocarbons, wholesale distributors of primary products, and
from manufacturers on their goods, wares and merchandise. In all of these
cases the Act now provides for the protection of third parties by requiring
registration of the security instrument or a notice of intention to give security.
Because of its importance in practice and the interest from a legal point of
view of its application in a civil law jurisdiction, the security taken under
section 88 of the Bank Act from wholesale dealers and manufacturers will
be considered in some detail presently.
s4Stat. Can. 2-3 Elizabeth, c. 48.
McGILL LAW JOURNAL
[Vol. 2
Apart from the right to secure a bond issue by trust deed under the Special
Corporate Powers Act,3 5 and the maritime mortgage and the contract of
bottomry, to which reference has already been made, provincial legislation
has only departed in one instance from the basic civil law pledge: articles
1979a and following, added to the code in 1940, allow a farmer to “pledge,
as security for a loan which he contracts, for a term not exceeding eighteen
months, all his livestock, and farm produce, present and future, while at the
same time retaining them in his possession.” The written document evidencing
the pledge must be registered in the registration office of the division in which
the farm is situated. On the borrower’s default, the creditor has the right to
demand delivery of the security and to sell it by public auction after notice,
but he must account to the borrower, or his creditors, for any surplus. The
pacte commissoire is forbidden. The creditor must realize on the security
promptly if the borrower so requires.
The creation of this particular security and its characterization as “pledge”
confronts the Quebec civil law with theoretical and practical problems similar
to those which have been raised in France by the marked development there
of what are called les sfiretbs mobilires conventionnelles sans d~possession.
The French warrant agricole, although by no means identical, corresponds to
the agricultural pledge in Quebec. The Quebec law has followed the general
tendency of French legislation in treating this type of security as a pledge
rather than a hypothec upon movable property, but French doctrine has argued
strenuously over the merits of this approach. “En r~alit6,” it is said by some,
“ces pr~tendus ‘gages sans dipossession’ sont de v~ritables hypoth~ques mo-
bili~res, et le l~gislateur aurait mieux fait de leur reconnatre leur veritable
caract~re, plut6t que de maintenir certaines r~gles du gage IA oil les principes
de l’hypoth~que auraient seuls dfi recevoir application.” 36 Those who take
this view see the transfer of possession as indispensable to the constitution of
pledge. On the other hand, hypothec is characterized by a droit de suite.
Article 1979d of the civil code concerning the pledge of agricultural
property provides: “As to the rest, this pledge gives to the creditor the rights
resulting from pawning.” Under pawn, or the ordinary pledge of movable
property, the creditor has a privilege as long as he, or the third party to whom
the thing has been given, remains in possession. He has a right of retention
which he may oppose even to other creditors. Can the pledgee of agricultural
property oppose the seizure and sale by other creditors? Does he lose his
privilege when the thing passes into the hands of third persons or does
ie
have a droit de suite? The essence of the pledge is not a droit de suite but a
right of retention. Does registration change this ?3 And, if so, would the
35(1941) R.S.Q. c. 280.
36Planiol et Ripert, Traiti pratique de droit franCais, XII, par E. Brecqu6, p. 296.
3TSee Caisse Populaire de Ste. Melanie v. Coopirative des Tabacs Laurenliens et
Pelletier [1952] Que. S.C. 22, where it was held that the registration under arts. 1079a
and following has the same effect as the registration of rights in immovable property.
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87
jurisprudence which has been persistently followed by the courts in QuebecO8
(despite the contrary holding of the Supreme Court), 0 to the effect that
registration creates at most a presumption juris tantum and not a presumption
juris et de jure of knowledge of real rights, be applicable in this case? Or, in
other words, could a subsequent purchaser or pledgee be in good faith in the
face of such registration? How would the pledgee of agricultural property,
whose rights have been assimilated to those of a pledgee of movable property,
rank as against creditors claiming a right of privilege or hypothec on an uncut
crop as immovable property? Should the principle contained in article 1966a
CC., respecting the pledge of a thing which does not belong to the pledgor,
apply to a case in which the pledgee is not put in possession?
These are only some of the questions which suggest themselves in con-
nection with a “pledge” of movable property in which registration takes the
place of a transfer of possession. The rules governing the pledge of agricultural
property show a greater concern for the protection of the debtor than those
which regulate the ordinary pledge, but they do not deal adequately with
the rights of the creditor and third parties. This particular venture of
provincial legislation into the field of security without transfer of possession
suggests that it may be a mistake to try to fit what is essentially a radically
new departure into traditional molds, and that it is wiser, as federal legislation
seems to have done, to create a new security device out of new cloth.
Quebec law has not created a device by which financing agencies under
provincial legislative jurisdiction may acquire security similar to that which
is obtained by the banks under section 88 of the Bank Act upon the inventory
of wholesale dealers and manufacturers. The industrial factor, for example,
cannot obtain in Quebec the non-possessory “factor’s lien” which exists under
the New York Personal Property Law and similar legislation in many other
states of the American union, and his operations in this province are, therefore,
almost exclusively confined to the purchase of accounts receivable. Financing
agencies other than the banks are free to lend on the security of accounts
receivables, but the banks, because of their ability to meet seasonal demands
for loans on inventory, are in a stronger position competitively. When they
take security on inventory they obtain a right to the receivables as well. Be-
cause of this situation,. the possibilities of the documentary pledge as a device
which may be adapted to minimize, if not eliminate, the disadvantages of the
physical pledge will be given special consideration in this study. But here
again it will be seen that existing legislation favours the banks.
The sale of consumer goods and equipment for industrial and commercial
purposes and the purchase of dealer inventories of manufactured goods are
38Darling v. Bricault (1924), 37 Que. K.B. 388; Beaudry v. Vandal [1953] Que. S. C.
328; Mayrand, “Bonne Foi et Prescription par Tiers Acquireurs”, (1942), 2 R. du B.
9, 151.
39Meloche v. Shnpson (1898), 29 S.C.R. 375; Grouxl v. Bricault (1922), 63 S.C.R. 32.
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financed by means of the conditional sale contract which continues to occupy
a somewhat anomolous and only partially regulated position in the civil law
system: It has already been observed that Quebec law does not require the
conditional sale to be registered. A certain amount of regulation is provided
by articles 1561a and following of the civil code for commercial instalment
sales at retail in which the price does not exceed eight hundred dollars, but
there are a number of important articles, including automobiles and other
motor vehicles, which are expressly excluded even if they come within the
eight hundred dollar figure. 40 The regulations cover the amount of the down
payment, the term allowed for payment of the balance, the interest which may
be charged, the buyer’s right to pay by anticipation and the allowance to which
he is entitled in such case, the information which the contract must contain
and the form and characters in which it must be printed, and the recourses of
the seller on the buyer’s default. It would appear, however, that despite the
imperative form of these provisions a failure to comply with them does not
import nullity, for it is stated in article 1561i that any sale which does not
comply with the foregoing provisions “is a sale with a term, subject to the
ordinary provisions of obligations with a term, which transfers to the buyer
the property of the thing sold, notwithstanding any stipulation or declaration
to the contrary. ’41
Two of the provisions in this section of the code apply to all conditional
sales and other contracts having a similar purpose, such as promises of sale
or lease-hire arrangements, regardless of the price or the nature of the com-
modity involved. 42 Where the thing sold has been re-possessed by the seller,
article 1561h gives the buyer or his creditors the right to recover the thing
within twenty days of such re-possession upon payment to the seller of the
balance owing on the price and the reasonable expenses which the seller has
incurred by re-possession and the preservation of the thing. By article 1561g
any creditor of the buyer has the right (presumably at any time) to pay the
seller the balance of price and thus make the thing sold subject to seizure and
sale as property of the buyer. The creditor in such case acquires the privilege
of an unpaid vendor for the sum which he has paid.
The true position of the purchaser under a conditional sale is only ap-
preciated, of course, if one bears in mind that in practice the conditional
401n these cases there is only such protection against harsh conditions in the contract
as the courts are prepared to give, and their approach has not been uniform. Cf. Com-
mercial Acceptance Corporation Ltd. v. Partridge [1955] S.C. 80, in which it was held
that the condition, however unjust, had to be applied as it was not illegal nor contrary
to good morals or public order; and Commercial Acceptance Corporation v. Prouix
(1941), 79 Que. S.C. 325, where the court refused to apply a similar condition.
4’Cf. Paquette v. Metropolitan Plumbing and Heating Co. Ltd. [1942] Que. S.C. 430,
where it was held that failure to comply with federal wartime regulations concerning
down-payment made the contact null and void.
42Art. 1561j C.C. Tremblay v. Tremblay [1949] Que. K.B. 539.
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SECURITY UPON MOVEABLE PROPERTY
89
seller generally transfers his right in the contract, the property sold, and the
promissory note signed by the buyer to a finance company. The finance com-
pany is able to sue on the note as a holder in due course free from defences
which the buyer may have arising out of the contract of sale.43 Moreover, even
where the company bases its action on the contract of sale, it is a nice question
how far under Quebec law the buyer may be prevented by statements in the
contract, 44 and his consent to or acceptance of the assignment,45 from raising
defences which he might have against the seller himself.
Outside of the regular pattern of commercial financing permitted by exist-
ing legislation, efforts are continually made by lenders of all kinds to obtain
security without transfer of possession by means of sales with right of re-
demption and similar devices. Such devices have been and still are resorted to
by institutional lenders in, for example, the field of automobile financing, not
only for personal loans on the security of automobiles, but for advances on the
used car inventories of dealers. They are frequently used by private lenders to
whom borrowers turn when they are unable to obtain bank credit. The
validity of such devices has been the subject of much litigation and for a time,
at least, of conflicting jurisprudence..
SALES WITH RIGHT OF REDEMPTION AND
SIMILAR DEVICES
These attempts to obtain, within the framework of the civil law principles,
a valid security without transfer of possession have taken a variety of forms.
Their main object is the transfer of ownership to the creditor, but they usually
provide that the debtor shall have the right to redeem the thing. There may
be a sale with right of redemption, properly speaking, in which the transfer
of ownership to the creditor and the seller’s right to redeem are stipulated
in the same contract, or there may be an outright sale in one document and
in another a conditional sale, lease with promise of sale, option or other
agreement giving the debtor the right to recover the ownership of his property
upon payment of a sum of money which represents his indebtedness. The
particular form which the transaction has taken does not seem to have had
too much influence on the courts in their consideration of its validity. It is
the purpose of the transaction which has been stressed.
43Laurentide Acceptance Corp. Ltd. v. Letwuy [1951] Que. S.C. 469; Laurentide Ac-
ceptance Company v. Corneau [1952] Que. S.C. 379.
44Continental Guaranty Corporation of Canada Ltd. v. Papineau (1930), 49 Que. K.B.
366; Guaranty Acceptance Corporation v. Rittner [1942] Que. S.C. 116.
45Continental Guaranty Corp. of Canada Ltd., supra, per Tellier J., at p. 371 citing
art. 1180 C.C.; art 1192 C.C. Mignault, Droit civil canadien, v. 5, pp. 643 ff.; v. 7, p.
184; Baudry-Lacantinerie et Saignat, Vente, nos. 848, 849. Laurent, Prncipes de droit
civil, v. 24, no. 511. Aubry et Rau, Droit civil franais, V, 6th ed. 1946, p. 162. Sometimes
the contract removes all doubt on the question by some such clause as the following:
“[Buyer] accepts said assignment and acknowledges that [the assignee] shall not be
affected by any equities existing between the seller [and the assignee].”
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There is a well established jurisprudence that such transactions, so long
as they are not completely fictitious and non-existent in the intention of the
parties, are valid and binding between the parties to them.4 6 In such cases the
courts apply the principle that the parties have the right to give their contract
the form they prefer, and they treat the contract as the parties appear to
have intended it to be, namely, a transfer of ownership as security for in-
debtedness; they hold that such transfer takes place by consent alone without
the necessity of delivery. As regards the effect of such transactions on third
parties, there have been several schools of thought and at one time two
distinct lines of jurisprudence, but the prevailing view today is that a sale
with right of redemption or other transfer of ownership of movable property
for the purpose of securing a loan is of no effect against third parties, such as
the creditors of the seller, if possession is not transferred to the buyer.
The grounds on which such sales have been held to be of no effect against
third parties, usually on the contestation of an opposition to seizure or a
petition for possession in bankruptcy made by the buyer, fall into roughly
three categories. There are the cases in which the court has found that the
sale was made with the intent to defraud the creditors of the seller, 47 and it
has been possible to apply the rules of the action paulienne;48 there are those
in which the transaction has been set aside on the ground of simulation as
being, in the real intent of the parties, a contract of pledge, invalid for failure
to transfer possession ;49 and finally, although this may be regarded by some
as simply another application of the doctrine of simulation, there are those
in which the sale has been held invalid as contravening what the court appears
to have treated as a principle of public order embodied in articles 1966 and
46Despins v. Despins (1922), 33 Que. K.B. 153; Conover v. Commercial Acceptance
Corporation Limited & Dame Skelcher [1950] Que. K.B. 116; Stewart v. Leblanc [1951]
Que. S.C. 237; Booth v. McLean [1927] S.C.R. 243; [1927] 2 D.L.R. 289; General Motors
Acceptance Corporation v. Ricndeau [1953] Que. S.C. 420.
47Lahaie v. Cayonette & Messier (1931), 51 Que. K.B. 459; In re Goyer & Boisvcrt
v. St. Amour (1902), 21 Que. S.C. 502; Edgerton v. Lapierre (1903), 5 Que. P.R. 389;
Champagne v. Jackson & Shapiro (1918), 54 Que. S.C. 388; Rickaby v. Bell (1877-79),
2 S.C.R. 560.
4 8Arts. 1032 et seq. C.C.
49Cushing v. Dupuy, P.C. (1880), 24 L.C.J. 151; Boslanger v. Caisse Populaire de
St. Sylvere (1936), 60 Que. K.B. 538; Chevalier & Beauchemin v. Latraverse (1890),
18 R.L. 614; Moffat v. Burland (1884), 4 D.C.A. 59; Bouchard v. Couture & Jacob
(1933), 71 Que. S.C. 536; Stern v. Trustee, In re La Mode Dress Company Limited
(1923-24), 4 C.B.R. 563; In re Rene Huot v. Bonnier & Le Foyer de Placement Inc.
16 C.B.R. 43; Imperial Oil Ltd. v. Gagnon & Caisse Populaire de Ste.
(1934-35),
Clothilde [1945] Que. S.C. 32; Campbell Auto Finance Co. Ltd. v. Comtois [19461 Que.
S.C. 136; Campbell Auto Finance v. Bonin S.C., St. Frangois, No. 2289; K.B., No.
2362, October 27, 1944; leave to appeal to the Supreme Court refused, [1945] S.C.R.
175. Cf. Le Garage Central D’Amos Linite v. Lamarre [1955] Que. Q.B. 725, where
the Court of Appeal upheld the transaction on the ground that it was not, as alleged by
the trustee, “fictitious”.
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SECURITY UPON MOVEABLE PROPERTY
91
1970 requiring that the creditor or third party custodian be in possession for
a valid pledge and in article 2022 prohibiting the hypothecation of movables. 50
In the last category of cases the conclusion amounts to a finding that in so
far as third parties are concerned the civil law does not recognize security
on movable property without transfer of possession or other form of notice
Often the courts will rely on a combination of the above grounds so that the
cases cannot all be assigned exclusively to one or another of them.
With the cases based on a finding of fraud one cannot quarrel. Fraus omnia
corrumpit. The application of the doctrine of simulation requires closer
examination. So also does the view that even where the parties intend a
bona fide sale with right of redemption of movable property it contravenes a
basic principle of Quebec law to allow such a sale to take effect against third
parties when there has been no transfer of possession.
There is simulationl when the parties clothe their transaction in one form
but really intend to enter into another contract as evidenced by a secret
agreement. The secret understanding or counter-letter may completely destroy
the effect of the apparent agreement, in which case the transaction is said to
be fictitious, or it may merely modify the effect of the contract, when the
transaction is said to be disguised. Simulation is not in principle a cause of
nullity, but third parties must not be prejudiced by it. Those who have acted
on the faith of the apparent contract may invoke it in their favour; those who
are prejudiced by the apparent contract may call for application of the rules
which govern the transaction that was really intended. Although simulation-
is frequently prompted or accompanied by fraud, it must not be equated with
fraud and may exist in the absence of any fraudulent intent.
The finding of simulation in the cases under discussion is based on the
assumption that there cannot be a bona fide sale where the purpose is to secure
repayment of a loan. The real contract in the intention of the parties is
deemed to be one of loan, with an accessory contract of pledge. In fact,
although the purpose which they wish to achieve may be similar in both cases,
the parties do not intend pledge, they intend sale. And neither the seller’s
right of redemption nor his remaining in possession changes that fact. The
real question in such cases, but one which is not asked too often, is whether
there remains an obligation on the debtor’s part to repay and if so, whether
such an obligation is compatible with a valid sale with right of redemption.
The fact that the buyer’s reason for entering into the sale is not that he is
particularly interested in acquiring the thing in question, but that he wishes
to be guaranteed against the seller’s failure to repay a loan, should not make
it any less a transfer of ownership in the intention of the parties.
5OThompson and Alix Ltd. v. Gerard LaPierre & Cyrille Lapierre (1934), 72, Que.
S.C. 461; Bcaupri, Lamarre v. Campbell Auto Finance Co. Ltd. [1942] Que. S.C. 97.
51Ripert (Boulanger), Traiti dlmentaire de Droit civil, v. 2, nos. 580 ff.
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There may be a basis here for distinguishing, as the courts do not seem to
have done, between the sale with right of redemption, properly speaking, and
the transaction in which the parties enter first into an absolute sale and then
some other agreement providing for re-purchase or redemption. The buyer
in the latter case claims under what purports to be a straight sale which it
was not the intention of the parties to effect. The courts examine such a
transaction for indicia of an ordinary sale and, finding that they do not exist
but that the real intention was to give security, conclude that there hag been
simulation. Such was the case in Dupuy v. Cushing, 2 now one of the leading
authorities for the application of the doctrine of simulation to such transac-
tions. In addition to the absence of a transfer of possession, which the Privy
Council said “must still be one of the material facts to be regarded in de-
termining the question whether any particular sale is real or simulated”,
there was a finding that the transaction lacked a “fixed price.”
.
.. ” –
The civil code recognizes the validity of a sale with right of redemption.
It makes no distinction between immovable and movable property. In the
wording of article 1550a -”
. . and in the case of an immovable or an im-
movable right .
it clearly contemplates that there may be a sale with
right of redemption of other than immovable property, and in fact, the authors
and numerous judicial decisions recognize the sale with right of redemption
of movable property. Moreover, as has been pointed out on several occasions,
the sale with right of redemption has traditionally had hardly any other
purpose in practice than that of obtaining and assuring the repayment of an
advance of money. It is true that there is technically a distinction to be drawn
between the legal relation of the parties under this contract and their rights and
liabilities under a loan secured by pledge, even when the latter carries the
pacte commissoire, and this distinction will be considered. But the fact that
the sale with right of redemption is entered into to enable the seller to have
the use of the buyer’s money for a certain limited period of time does not
alter the intention of the parties to effect a sale.
This point was well made by Girouard J. of the Supreme Court of Canada
in the case of Salvas v. Vassal,53 a decision which has been relied on by a line
of jurisprudence taking a different view than that which has followed Dupuy
v. Cushing.54 Here a sale with right of redemption of immovable property for
the usual purpose of securing what amounted to a loan was held in the absence
of fraud, to be valid as against a third party even though possession had not
been transferred to the buyer. After reviewing the history of the sale with
52 24 L.C.J. 151; 22 L.C.J. 201.
53(1896-97), 27 S.C.R. 68.
54Beaubien v. Perrault & Pichi (1900), 17 Que. S.C. 410; Bergeron v. Campeau
& Ruthman (1904), 25 Que. S.C. 26; Creed v. Haensel & William Strachan Company
(1903), 24 Que. S.C. 178; In re Victory Pop Corn; Prevost v. Feliciano (1923-24), 4
C.B.R. 429; Bilanger v. Desiardins (1929), 32 Que. P.R. 317; Pomerance v. Desroches
& Homes and Lands Ltd. (1940), 78 Que. S.C. 244.
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SECURITY UPON MO VEABLE PROPERTY
93
right of redemption, its use in France to evade the prohibition against the
pacte commissoire in the contract of pledge, and the absence of such con.
siderations or reasons for declaring it invalid in Quebec law, Girouard J.
concluded that there was no reason for not applying the clear intention of
the parties where it was manifestly, as in this case, to enter into a contract of
sale with right of redemption and not one of pledge. He drew a distinction
between the contract intended by the parties and the motives for making such
a contract, or the object which it was to serve. “Pour dicider la question,
m~me vis-.-vis des tiers, il s’agit de rechercher non pas les motifs, ou le but
immidiat ou ult&ieur, ou les r6sultats possibles ou probables que les parties
avaient en vue, mais la nature de la convention qu’elles avaient l’intention de
la simulation? Les
faire, et qu’en ralitE elles ont faite … Oii se trouve ii
parties n’entendaient-elles pas faire une vente irr6vocable, si le prix n’6tait
pas rembours6? ’55
In the application of this decision to the average case in which an attempt
is made by means of a sale with right of redemption to obtain security upon
movable property without transfer of possession, there are two possible
difficulties: the extent to which an obligation on the part of the seller to repay
may be incompatible with a sale with right of redemption, and the fact that
in a sale with right of redemption of immovable property, without transfer
of possession, as in Salvas v. Vassal, third parties are protected by the re-
gistration of the deed of sale.
With respect to the first point, the test of a sale with right of redemption
is the alienation of the thing with the intention that the buyer should become
absolute owner of it on the seller’s failure to redeem it. Where the intention
is that the transfer of ownership should not be irrevocable on the seller’s
default but that the buyer should have the option of keeping the property or
claiming from the seller the amount which he has received, the contract has
been held to be one of pledge.5 6 The authors emphasize this basic distinction
between the sale with right of redemption and the loan secured by pledge: the
seller is not indebted to the buyer, nor is he obliged to redeem; unlike the
pledge, even with pacte commissoire, in which the thing pledged does not
automatically become the property of the creditor on default but only at his
option,57 the sale of the thing with right of redemption is intended to ex-
tinguish the seller’s indebtedness. 58 The jurisprudence has recognized this to
be its effect.5” For this reason some commentators have seen a contradiction in
terms in the use of the word “security” in connection with such a transfer of
55(1896-97), 27 S.C.R. 68, at p. 81.
56La Compagnie d’Assurance sur la Vie “La Sauvegarde” v. Ayers [1938] S.C.R. 164.
57Holman v. Scott (1906), 15 Que. K.B. 193.
58Laurent, op. cit., vol. 24, no. 380; Baudry-Lacantinerie et Saignat, op. cit., no. 607.
59Landry v. Nicole (1917), 51 Que. S.C. 253; J. R. Booth, Limited v. McLean [1927]
S.C.R. 243; [1927] 2 D.L.R. 289; (1926), 40 Que. K.B. 331.
McGILL LAW JOURNAL
[Vol. 2
ownership. In the recent case of Rousseau Inc. v. Boulanger & Lepine, 0 in
which the Quebec court of appeal was able to dispose of an attempt to give
security without transfer of possession on the ground that the actual terms
of the contract were those of pledge rather than sale, Marchand J. referred
to “des concepts de propri&6 et de garantie qui r6pugnent i coexister au sujet
du m~me objet”.6′ In connection with the documentary pledge and security
under section 88 of the Bank Act, it will be seen that there is nothing incomp-
atible in a transfer of ownership subject to redemption and a continuing
obligation in the debtor to repay the advance.
With the sale with right of redemption, however, the law would seem to be
otherwise. The following statement of Gagn6 J. in the Rousseau case expresses
the traditional view: “Et pour qu’il y ait vente r~elle ou encore dation en
payement comme le dit le savant juge de premiere instance, il faut que la
dette soit 6teinte, c’est-4-dire que le cr~ancier ne puisse plus poursuivre son
d~biteur pour autre chose que l’objet m~me qui lui est transport6. Telle est
]a condition essentielle. Si l’on ajoute un droit de rmr6, cela n’y change rien:
la dette doit &re 6teinte et le d6biteur lib~r6 s’il n’exerce pas son droit de
r6m~r6.”62 But the Supreme Court admitted an important qualification of
this rule in the case of The Queen v. Montinigny,6
3 where it was agreed by
the parties that, if on the purchaser becoming absolute owner and taking
possession, the amount realized on a sale of the property was less than the
price stipulated in the sale with right of redemption, the purchaser should
have a claim against the seller for the difference. It was held that “La clause
par laquelle le vendeur garantit que l’immeuble vaut le prix pay6 et que la
vente en rapportera le montant n’a rien d’incompatible avec la vente.” Thus a
creditor taking a sale with right of redemption of movable property without
transfer of possession should be able to protect himself to the extent allowed
in the Montinigny case without invalidating the transaction.
The second difficulty involved in the application of the holding in Salvas v.
Vassal to a sale of movable property without transfer of possession –
the
fact that third parties do not have the protection of registration –
is the real
reason why the majority of Quebec judges have refused to give effect to such
a contract where third parties were involved. They have created a rule of public
order out of the spirit and intention which they believe emanate from the
articles requiring a transfer of possession for pledge and the article pro-
hibiting the hypothecation of movables. It is a frank assertion of judicial
policy to supply the deficiencies of the law. Others have felt that such a
position could not be justified in the face of articles 1025 and 1027 which,
with one exception, make the transfer of ownership perfect by consent
60[1952] Que. K.B. 772.
GlAt p. 777.
62At p. 780.
63(1898-9), 29 S.C.R. 484.
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SECURITY UPON MOVEABLE PROPERTY
95
alone even against third parties. 64 In Creed v. Haensel & William,”5 which
has been followed as recently as 1940 in the Superior Court,66 but never ap-
parently in the Court of Appeal, Doherty J., relying on Salvas v. Vassal, says
that he sees “no reason for making a distinction between the acquisition for
though he does not make
such purpose of movables and immovables,”
specific reference to registration. Faced with the usual arguments drawn from
articles 1970 and 2022, he contends that these articles refer to security other
than a transfer of ownership, which cannot be said to be prohibited by them.
He points to the case of the conditional sale to show that there is no general
principle operative in Quebec law requiring that ownership in movables be
evidenced by possession to avail against third persons. But this view, how-
ever logical it may be, has not prevailed.
An interesting commentary on. the relative weight of legal logic and the
judicial “hunch” about policy in this matter is to be found in certain remarks
of Ramsay J. in two of the earlier cases. Dissenting in Dupuy v. Cushing67 he
said: ” . . . I consider article 1025 is a serious disimprovement to the law.
The rule of the old law was perfectly clear. As against third parties secret
sales were of no avail. If by jurisprudence we can come back to this doctrine,
I shall be very glad, but it certainly is not the law of the Code.” Later, in
Moffat v. Burland,68 he said: “It seems to me that both of our courts of appeal
have declared themselves against concealed sales, and I am very glad they
have been able to find law for it, which I willingly take from them on trust.
In several cases we have applied the doctrine in the most absolute form …
This is going back to the old law sans phrase.”
THE DOCUMENTARY PLEDGE
The documentary pledge, which is security in the form of a bill of lading,
warehouse receipt or other document of title, conforms in its essential
elements to the requirements of pledge, but offers the parties more flexibility.
The borrower can give such security while the goods are in transit or safe-
keeping; the creditor does not have the bother of the physical custody and
handling of the goods which nevertheless remain beyond the debtor’s control
in the custody of a disinterested third party. In its traditional use, however,
this device suffers from the chief disadvantage of the physical pledge: the
borrower may be greatly inconvenienced by being deprived of possession.
Where, for example, the goods are-warehoused at some distance from his
premises he may be put to considerable expense and loss of time in handling
and moving the goods as they are released by the creditor. Modem adaptation
U4See note 54, supra. Also The Sonne Awning, Tent and Tarpaulin Co. v. McDonald
& Walterer (1908), 33 Que. S.C. 481.
65(1903), 24 Que. S.C. 178.
66Pomerance v. Desroches & Homes and Lands Ltd. (1940), 78 Que. S.C. 244.
6722 L.C.J. 201, at pp. 201-202.
68(1884), 4 D.C.A. 59, at p. 64.
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of the documentary pledge has been designed to reduce these disadvantages as
much as possible.
The documentary pledge is governed in Quebec, for the most part, by
legislative provisions which are essentially of common law derivation. They
stand in sharp contrast, both in terminology and substance, to the civil law
rules respecting pledge. The banks are governed by section 86 and following
of the Bank Act, other lenders by the Quebec Bill of Lading and Warehouse
Receipt Act 69 and the rules of the civil code applicable to agents entrusted
with the possession of goods or documents of title.7 The provisions of the
present Bill of Lading and Warehouse Receipt Act in Quebec are in essence
those which regulated the right of banks as well other lenders to take security
on documents of title in the province of Canada at the time of Confederation. 71
While the terms of the Bank Act have undergone considerable change and
modernization since then, those of the Quebec law have undergone almost
none. This has meant that in certain particulars –
for example, when the debt
must be contracted and the length of time for which the security may be held
the Quebec law offers less flexibility to lenders than the Bank Act.72 This
–
example of legal atrophy cannot be put down simply to legislative indifference;
once again it reflects the pattern of commercial activity in the country and
the importance and centrality of the position occupied by the banks in this
particular field of secured financing. It is difficult to avoid the conclusion
that here, as in the case of security without transfer of possession on the
inventory of manufacturers, it is less the law which has determined the pat-
such as in-
tern of financing than it is commercial and economic factors –
terest charges and the comprehensiveness of services – which have determined
the shape of the law. Nonetheless, a liberalization of the provincial law on the
documentary pledge might conceivably make this type of security, particularly
in the field warehouse form, sufficiently attractive to other lenders to make
possible the kind of volume that would allow them to be more competitive in
the matter of rates.
Under section 86 of the Bank Act, a bank “may acquire and hold any
warehouse receipt or bill of lading as security for the payment of any debt
incurred in its favour, or as security for any liability incurred by it for any
person, in the course of its banking business.” The bank thereby acquires “all
the right and title to the warehouse receipt or bill of lading and to the goods,
wares and merchandise covered thereby of the previous holder or owner
thereof”, and in the case where, instead of being endorsed to the bank, the
bill of lading or warehouse receipt is issued directly to it, “all the right and
69(1941) R.S.Q. c. 333.
7OArts. 1739-1754 C.C.
71Cons. Stat. Can. c. 54, s. 8; 24 Vic. c. 23; 29 Vic. c. 19.
72The same time limits are to be found in The Mercantile Law Amendment Act of
Ontario, (1950) R.S.O. c. 231.
No. 2]
SECURITY UPON MOVEABLE PROPERTY
97
title to the goods mentioned therein of the person from whom the goods,
wares and merchandise were received or acquired by the bank.” It would
appear from the wording of section 86, therefore, that the bank cannot
acquire a better title to the bill of lading or warehouse receipt, or the goods
covered by it, than that of the person from whom it acquired the security,
and that despite a contrary holding by the Quebec court of appeal in an early
case,73 the civil law rules governing a pledge taken from one who is not the
owner would not apply to section 86 security. This is further indicated by
section 87, which states the exceptional cases in which the bank may acquire
the rights of the owner upon taking security from a person who has been put
in possession by the owner. This section was originally intended to apply the
provisions regarding factors to section 86 security, but it is much broader in
its terms than the usual factors legislation7 4 –
certainly it is broader than the
terms of the Quebec civil code on that subject. The term “person”, for
example, is used instead of “agent” and there is no mention of the require-
ment of good faith. Whatever the scope of section 87, it excludes the applica-
tion of the civil code rules on factors.
Under division I of the Quebec Bill of Lading and Warehouse Receipt Act,
lenders other than banks may take security in the form of a bill of lading or
warehouse receipt on cereal grains, goods, wares or merchandise, and under
division II, on logs, pulpwood or other timber, boards, deals, staves or other
lumber or products thereof. The document of title may be taken by endorse-
ment from the “owner of, or person entitled to receive” the property in
question or “his attorney or agent”; such endorsement vests in the endorsee
“all the right and title of the endorser to or in” the property in question.
Once again it would appear that except in a case covered by the rules of the
code regarding factors – which should apply to any documentary pledge
taken by lenders other than banks –
the creditor cannot acquire a better title
than the person from whom he takes the security. But in contrast to the
ordinary pledgee, when he takes from an owner or one deemed to be owner,
he does not become simply a depositary but acquires all the rights of the
owner in the security.
The debt, liability, loan or advance for which section 86 security is given
must be contracted or made at the time the security is given or upon a written
promise to give the security. 75 In the latter case the Bank Act says that the
debt, liability, loan or advance may be contracted or made before or at the
time of or after the security is acquired. Under division I of the Quebec
statute the debt must be contracted at the time the security is given. 76 There
78Canadian Bank of Commerce v. Stevenson (1892), 1 Q.B. 371, reversed by the
Supreme Court (23 S.C.R. 530) without discussion of this. point.
74See Falconbridge, Banking and Bills of Exchange, 5th ed., 1935, p. 225.
75Stat. Can. 2-3 Elizabeth, c. 48, s. 90(1).
76(1941) R.S.Q. c. 333, s. 5.
McGILL LAW JOURNAL
[Vol. 2
is no provision, as there is in division II of the Act dealing with security
on timber, for taking a written promise to give security.77 In this respect
there is an important discrepancy between division I of the Act and article
1748 of the civil code concerning factors, which validates the security taken
under a written promise existing at the time the debt was contracted. This
distinction, which does not exist in the corresponding provisions of the
Mercantile Law Amendment Act of Ontario,73 could well be removed from
the Quebec act. It has been held under division I of the Quebec act that the
security must not be taken before the loan is contracted3 9
The Bank Act places no limit on the length of time for which section 86
security may be held, whereas under the Quebec Bill of Lading and Ware-
house Receipt Act security can only be held on cereal grains, goods, wares
or merchandise for six months” and on timber for twelve.8-
It is difficult to
say just how seriously the six months’ rule limits the usefulness of the prov-
incial legislation, but it probably accounts in some measure for its infrequent
application. When these delays were retained in the federal Bank Act for a
certain time after Confederation, they could be extended with the consent of
the borrower.82
To appreciate the full possibilities of the documentary pledge as a practical
device answering the needs of a businessman who must have ready and
inexpensive access to his inventory for his daily operations, it is necessary
to consider the extent, under the two acts, to which a valid warehouse receipt
may be given for goods which remain on the premises of the borrower. The
warehouse receipt which a bank may take includes “any receipt given by any
person for goods, wares and merchandise in his actual, visible and continued
possession as bailee thereof in good faith and not as of his own property.”8 3
Under the terms of this definition the courts seem prepared to allow arrange-
ments whereby the borrower sets aside a part of his premises to serve as a
warehouse and leases the space for a nominal rental to an officer or employee
who issues a receipt for the property and acts as custodian of it, presumably
releasing it only in accordance with the instructions of the creditor.8 4 Such an
Co. Inc. (1946), 27 C.B.R. 203.
77Sec. 8.
78(1950) R.S.O. c. 231, s. 11(3)
79Re Inter-British Trading Co. Inc. (1946), 27 C.B.R. 203.
SOSec. 5. See MacNider v. Beaulieu & Allen 14 L.N. 59; Re Inter-British Trading
81Sec. 8.
82(1871), 34 Vic. c. 5, s. 50. Molson’s Bank v. Lanaud (1882), 5 L.N. 263.
83 Stat. Can. 2-3 Elizabeth, c. 48, s. 2(1) (ac) (i).
84La Banque Nationale v. Boyer (1911), 20 Que. K.B. 341, where wholesale grocers
rented for a nominal fee two floors of their premises to one of their clerks who acted as
custodian and issued a receipt which was transferred as security to the bank. It must
be noted, however, that two judges dissented in the Court of Appeal, and a majority of
all those in the three courts which heard the case were of the opinion that there had not
been a compliance with the Act. Cf. In re Wedlock [1926] 2 D.L.R. 263; 7 C.B.R. 147,
No. 2]
SECURITY UPON MOVEABLE PROPERTY
99
arrangement obviously lends itself to abuse, and no clear standard emerges
from the little judicial opinion that is available on the question as to the care
and propriety with which the operation must be carried out to satisfy the
requirement of good faith in the definition. The Quebec law does not lend
itself to similar arrangements for it requires that the document of title be
“given by a warehouseman, miller, wharfinger, master of a vessel or a car-
rier.”8 5 In view of decisions interpreting another provision of the Act which
allows these classes of persons to give security in the form of receipts issued
by them for their own goods, 8 6 there is little doubt that if the courts did not
require the custodian’s sole occupation to be that of warehouseman, they
would at least require evidence of transactions in which he had acted as ware-
houseman for the goods of others.
Such a scheme, however, even when using the services of an employee of
the borrower as custodian, is an entirely different thing when carried out as
a modem field warehousing operation under the control of a recognized field
warehousing company. Although well established in the iUnited States for
several years now, field warehousing is only beginning to take hold in Canada.
The field warehousing company leases space on the borrower’s premises
which is fenced off or segregated in some other way and put under lock and
key in charge of one of the borrower’s employees who is formally put on the
payroll of the warehouseman and covered by fidelity bond. The warehouse
company itself issues the negotiable warehouse receipt on information supplied
to it by the custodian. A sign is usually posted to show that the premises
rented from the borrower are being occupied as a field warehouse. Spot
checks of the inventory covered by the warehouse receipt are made regularly by
a representative of the warehouse company. There can be no doubt about the
validity of a bona fide field warehousing operation of this kind under the Bank
Act, and there would seem to be no reason why it should not be equally valid
under the provincial law. The important thing, however, is not simply that the
receipt be issued by a recognized warehouseman, but that there be that actual
and visible change of possession which has always been required for the
protection of third parties in the contract of pledge8 7 While supervision by a
where a company dealing in automobiles leased a show-room to its Secretary-Treasurer
who made a daily check of inventory and reported to the bank.
85(1941) R.S.Q. c. 333, s. 2.
86Sec. 3, also sec. 7. Ross v. Thompson & Laird 9 Q.L.R. 365; 10 Q.L.R. 308; Young
v. Demers (1895), 4 Q.B. 364; Banque Molson v. Janes 9 L.C.J. 81; The Merchants’ Bank
of Canada v. Smith (1880-84), 8 S.C.R. 512.
87See Payenneville & Martineau v. Prevost & Major (1916), 25 Que. KB. 246, where
the pledge of two automobiles was held invalid because although they were supposedly
in the hands of a third party custodian in a part of the premises not rented to the debtor,
there was nothing to suggest to third persons that they had passed out of the debtor’s
possession and control. Cf. Merchants Bank et al. v. Monteith (1886), 10 O.R. 529 and
Milloy v. Kerr 3 O.A.R. 350; 8 S.C.R. 474 for a case where warehouseman issued receipt
for accomodation of the borrower or lender without having the goods in his actual
custody and control.
McGILL LAW JOURNAL
[Vol. 2
reliable warehouse company affords the creditor adequate protection, unless
some form of notice is made mandatory, third parties are liable to be misled.
The American courts have been fairly strict in the requirement of notice to
third persons 8 8 Uncertainty on the adequacy of formalities in this respect is
removed by the Uniform Commercial Code which requires the filing of a
financing statement to perfect security under a field warehouse receipt even
where a sign has been posted.89 Because of its practical utility, not only in
cases where a lender cannot obtain security without transfer of possession,
but where a bank may desire a greater measure of control or protection than
it enjoys under section 88 security, there is every reason why field warehousing
should become increasingly popular in Quebec. As it does so, it may be found
desirable to follow the American example of providing for some form of
registration of the security interest.
A point of some importance in connection with the documentary pledge in
Quebec is the legal nature and effect of a trust receipt. The trust receipt is
used in Quebec almost exclusively by the banks, although there is nothing to
prevent other lenders on the security of a documentary pledge from making
use of it as well. It is a document which is signed by a person to whom the
bank surrenders a bill of lading or warehouse receipt for certain limited
purposes, such as clearing the goods through customs, the substitution of one
kind of bill of lading for another on trans-shipment, or sale of the goods on
the bank’s behalf. The borrower acknowledges in the trust receipt to have
received the document of title as an agent, “trustee” or “bailee” for the
purpose mentioned therein, and if the purpose be sale, he undertakes to sell
the property and collect the proceeds for the account of the bank. There is no
doubt that this undertaking is binding on the borrower and that he is liable
to criminal prosecution for acts in fraud of the lender’s rights, but what
effect as regards third parties, such as the borrower’s creditors, does such
a surrender of the document of title have on the lender’s security in Quebec?
The practice is a well established banking custom, and it has been settled in
English law, since the decision of the House of Lords in North Western Bank
Ltd. v. John Poynter, Son & Macdonald,9 0 that by surrendering the document
of title to the borrower for a limited purpose under trust receipt (or “letter
8 8Friedman, “Field Warehousing”, (1942), 42 Col. L.R. 991, at p. 999; Birnbaum,
“Form and Substance in Field Warehousing”, (1948),
13 Law and Contemporary
Problems, 579, at pp. 590-591. The American law requires that the warehouseman have
“actual, open and exclusive possession” of the goods.
8 9Uniform Commercial Code, secs. 7-205(2), 9-305(2), 9-401. Certain of the French
commentators who have been sufficiently attracted by the American experience with field
warehousing to advocate its development in France have recommended a system of
publicity by registration. Cabrillac, La Protection du Criancier dans les mriretis mobilires,
conventionnelles sans dipossession, 1954, no. 303.
90[1895] A.C. 56. See also In re David Allester, Ltd. (1922), 2 Ch. 211; Official
Assignee of Madras v. Mercantile Bank of India Ltd. [1935] A.C. 53.
No. 2]
SECURITY UPON MO VEABLE PROPERTY
101
of trust” as it is generally called in England) the lender does not lose his
security interest as pledgee in the goods or the proceeds thereof. It would
appear, however, that a third party purchaser or pledgee in good faith will
be protected as taking from an agent who has been entrusted with the pos-
session of the goods or the documents of title for sale.9 ‘
The federal Bank Act does not deal expressly with the trust receipt,
although section 90(2), which states the cases in which a bank may exchange
one document of title or form of security for another, might be considered at
first sight to have a bearing on the question. It declares that the bank may
exchange a bill of lading for a warehouse receipt and vice versa and “surrender
any bill of lading or warehouse receipt held by it and receive in exchange
therefor any security that may be taken under this Act.” Subsection 2 and
section 90 must be understood in the light of subsection 1; its purpose is to
show that the bank is not prevented by the rules as to when security may be
validly taken from substituting one form of security for another. In the
English decisions the “trust receipt” has not been treated as a form of security
or an instrument creating a security interest; the lender is regarded as having
retained the security interest which was originally created by the documentary
pledge. A trust receipt is not a “security that may be taken under” the Bank
Act if by that is meant a security which is created or expressly authorized
by the Act. It is submitted that the effect on the bank’s rights of surrendering
the document of title on trust receipt is a matter to be determined by law
outside the Bank Act, and that where the security has been given in Quebec,
the question should be determined by Quebec law.
Although there is not much authority on this question in Quebec, and
what there is of it is old and conflicting, it would seem on the whole that
Quebec law differs from the common law on this point. In Merchants Bank
of Canada v. McGrail and Lajoie, 2 the Quebec Court of Review. held that
the bank had not lost its rights by surrendering the document of title under
trust receipt. But some ten years later in La Banque Molson v. Rochette,9 3
in a judgment which was unanimously confirmed without further comment
in the Court of Appeal,9 4 Casault J. of the Superior Court, held that by doing
so the bank in that case had given up possession and in virtue of article 1970
of the Civil Code had lost its rights as pledgee. He added: “Le droit anglais
et am~ricain est, sous ce rapport, diff6rent du n6tre (Jones on Pledges, No.
40). LA, une remise temporaire, ou une possession par le propriitaire i titre
d’agent ou de fidei-commissaire du nanti, conserve le gage . . . Mais notre
droit ne reconnait pas ces distinctions, ni ces conversions de possession par
91LIoyd’s Bank, Ltd. v. Bank of America Trust and Savings Association [1937] 2 KB.
631; [1938] 2 KB. 147.
9222 L.CJ. 148; 1 L.N. 231.
93(1888), 14 Q.L.R. 261.
9417 R.L. 139.
McGILL LAW JOURNAL
[Vol. 2
le propri~taire de sa chose, sauf dans un cas, celui oi ce propritaire est
gardien d’entrep6t. . . “” There is no reference to the earlier decision.
Mignault, likewise making no mention of The Merchants Bank of Canada
v. McGrail and Lajoie, approves the holding in the Rochette case and cites
it in support of the following proposition of law: “Ainsi, si le cr6ancier remet
l’objet du gage au d~biteur qui s’engage A le conserver pour lui, il perd son
droit de gage. De m~me le d~biteur ne peut se constituer d6positaire pour le
compte du gagiste, en remettant Ace dernier un requ oii il reconnait poss~der
pour lui.”911
Although this view may be in strict conformity with the civil law principles,
it is from the commercial point of view extremely inconvenient, and one may
ask whether this is not a case for application of article 1978 of the Civil Code
which provides: “The rules contained in this chapter, are subject in com-
mercial matters to the laws and usages of commerce.” The English decisions
on this question appear to have been influenced very largely by consideration
for commercial necessity and usage. As Lord Wright put it in the Privy
Council: “Such procedure is the usual course of business, and is obviously
either necessary, or at least convenient for the conduct of the business in
question.” 97 The fact, however, that this is a necessary and well established
commercial practice is one thing: Whether, as a matter of commercial usage, a
bank is regarded and treated by other creditors as retaining its security
interest under a trust receipt, is another thing. But quite apart from com-
mercial usage in this sense, it may be argued that inasmuch as the creditor
is treated by both federal and provincial law as having a right of ownership
in virtue of a documentary pledge, the civil law rule of 1970 should not be
applied to the analysis of his position under a trust receipt; that in such case
he should be regarded as an owner who has entrusted property for certain
limited purposes to an agent, and he should have the right, not only as
regards the borrower but as regards the borrower’s creditors as well, to claim
as his own property the document of title, the goods themselves or even the
proceeds of their sale if they are identifiable. As will be seen, this view is
consistent with the one which is taken of the bank’s rights as holder of section
88 security.
The objection will be made, of course, that whereas the Act requires the
registration of notice of intention to give security under section 88, there is
no such requirement for section 86, and to allow a lender to surrender the
document of title and still retain his security interest is to allow a document-
ary pledge to be converted by means of trust receipt into security without
transfer of possession and without notice to third parties. In Quebec, sub-
sequent purchasers or pledgees in good faith would be protected; in so far as
95(1888), 14 Q.L.R. 261, at pp. 263-264.
96Droit civil canadien, v. 8, p. 403.
9 7 OffiCial Assignee of Madras and Mercantile Bank of India, Limited. [1935] A.C. 53,
at p. 64.
No. 2]
SECURITY UPON MO VEABLE PROPERTY
other creditors of the borrower are concerned, their position would be no
different than that of creditors of a buyer who are in possession under a con-
ditional sale. But as in the case of sales with right of redemption and similar
devices, the Quebec courts are not likely to be persuaded by arguments drawn
from their own inconsistency to allow further exceptions to the principle
that contractual security upon movable property must be evidenced by transfer
of possession or some other form of notice to third parties.98
SECURITY UNDER SECTION 88 OF THE BANK ACT
The rights and priorities given to a bank by what has come to be known
as “section 88 security” constitute, from both the juridical and economic
point of view, the most important qualification in Quebec of the principle
that the movable property of a debtor is the common pledge of his creditors.
Compared to the civil law pledge, section 88 security is a breath-talingly
modern and streamlined device. Not only does the bank obtain security
without depriving the borrower of possession, but it is able to secure a revolv-
ing line of credit by a kind of floating charge over all the property of the
borrower, existing or after acquired, which answers a given description and
is found in designated places. The security exists on the raw materials, work
in process and finished goods of a manufacturer.99
Prior to 1923, the bank’s lien was a secret one. Today the protection afforded
to third persons by the transfer of possession in the case of pledge is supplied
under section 88 security by the registration in the Bank of Canada, in the
province where the borrower has his principal place of business, of a notice
of intention to give security. Such notice does not specify the property to be
given as security nor the extent of the borrower’s indebtedness to the bank,
but it is in effect a warning to third persons, if they bother to consult it,
98in the United States the trust receipt has developed into a very important security
device of much wider application than its traditional use by banks in foreign trade
transactions. It has been especially important in the financing of automobile dealers’
inventories. (In Quebec such financing is carried on by means of the conditional sale
“floor plan”) Because of judicial hostility to secret liens, the Uniform Trust Receipts
Act was drafted to put American trust receipt financing on a sound basis. The Act has
been adopted by many states. It requires the filing of a financing statement to perfect
the creditor’s security interest.
99Sec. 89(5) of the Bank Act, which states that the security interest of the bank in
goods, wares and merchandise extends to the work in process and finished goods into
which they are turned by the manufacturing process, applies in its terms to section 86
as well as section 88 security. Similarly, under the Quebec Bill of Lading and Warehouse
Receipt Act, the security on timber extends to “all property into which the same or any-
thereof may be converted.” It is difficult to see the application of this rule to the
documentary pledge, except in cases where the law allows a person to give security in
the form of a receipt issued by him for his own goods. This is permitted by the Quebec-
law, but no longer by the Bank Act. For a case applying the principle of sec. 89(5)
to such a situation when it was allowed by the Bank Act see Re Goodfallow Traders-
Bank v. Goodfallow (1890), 19 O.R. 299.
McGILL LAW JOURNAL
[Vol. 2
that the bank will have a right to all the borrower’s property of a given
class, including the receivables from the sale of same, and that consequently
they deal thereafter with the borrower at their own risk.
The bank, on the other hand, does not enjoy the protection afforded by the
civil law rules to the person who relies in good faith on the apparent right of
ownership evidenced by the possession of the one with whom he deals. It is
clear from the wording of the Act, and decisions under it,100 that in order to
obtain a valid security under section 88 the bank must take from the owner
of the property assigned or from one who becomes owner before the release
of the security. In subsection 2 of section 88 the only rights and powers which
the Act speaks of a bank acquiring in virtue of an assignment under section 88
are those “in respect of property therein described . . . of which the person
giving the security is the owner at the time of the delivery of such document
or of which such person becomes the owner at any time thereafter before the
release of the security… ” Moreover, under the form of assignment prescribed
in schedule C of the Act, the borrower only assigns property of a given de-
scription of which he “is now or may hereafter become the owner.” Thus,
under the form which is used by the banks, a bank could, not claim to have
received an assignment of property not owned by the borrower.
The precise nature of the bank’s right under section 88 security has been
the subject of conflicting judicial opinion. It has been variously characterized
as a “lien”, 10 1 “essentially a mortgage transaction”, 10 2 “security in the nature
of chattel mortgage or bills of sale”,10 3 a sale with right of redemption, 10 4
a “contrat de gage sui generis”,0 5 “une constitution de droit de proprit6
sui generis”.0 6 The Act says that the bank “acquires the same rights and
powers as if the bank had acquired a warehouse receipt or bill of lading in
which such property was described.’ 0 7 It will be recalled that when the bank
takes a warehouse receipt or bill of lading it acquires “all the right and title
0OThe Port Royal Pulp and Paper Company Ltd. v. The Royal Bank of Canada, P.C.
[1941] 4 D.L.R. 1; [1939] S.C.R. 186; [1939] 1 D.L.R. 337; 12 MP.R. 219; (1937)
4 D.L.R. 254; Ackroyd Brothers (Canada) Limited v. Brackon Products Inc., and
Bank of Nova Scotia [1948] Que. S.C. 407; The Union Sulphur Co. of New York v.
Riordon Company Limited & The Bank of Montreal (1924), 30 R.L. n.s. 144, holding
that art. 1966a C.C. did not apply to section 88 security; Barry v. The Bank of Ottawa
17 O.L.R. 83, holding that sec. 87 of the Bank Act did not apply to sec. 88.
‘O’Landry Pulpwood Company Ltd. v. Banque Canadienne Nationale [1927] S.C.R. 605,
at p. 615.
‘O2Bank of Montreal v. Guaranty Silk Dyeing and Finishing Company Limited (1934-
35), 16 C.B.R. 104, at p. 111.
‘0 3CIarkson v. Dominion Bank (1917-19), 58 S.C.R. 448, at p. 481.
‘O4Lefaivre v. Bank Canadienne Nationale & Right Electronics Co. Ltd. [1951] Que.
K.B. 83, at p. 87; La Commission des Accidents du Travail de Quebec v. Les Industries
de Tourville Ltie [1951] Que. P.R. 394.
‘O5Lefaivre v. Banque Canadienne Nationale, supra, at p. 112.
‘0 6Banque Provinciale du Canada v. Jacques [1955] R.L. 197, at p. 218.
‘lSec. 88(2).
No. 2]
SECURITY UPON MOVEABLE PROPERTY
105
to the warehouse receipt or bill of lading and to the goods, wares and
merchandise covered thereby of the previous holder or owner thereof.”‘ 08
Since the bank must take section 88 security from the owner of the property
it is reasonable to conclude, as the weight of opinion has done, that the bank
acquires a right of ownership, subject to a right of redemption in the bor-
rower. Davis J., who in an earlier case 0 9 in the Ontario Supreme Court had
described section 88 security as “essentially a mortgage transaction”, took a
much less complicated view of the matter when sitting on the Supreme Court
of Canada in The Royal Bank of Canada v. Workmen’s Compensation Board
of Nova Scotia.110 “The bank”, he says, “acquires ownership in the goods
by the statute.””‘ He offers the following as a possible explanation for the
original or sui generis character of this security: “This type of security is
peculiar, so far as I know, to our Bank Act and it may be that in view of the
civil law of the province of Quebec, the draftsman of the Act refrained from
setting up the English form of mortgage involving the equitable doctrines
(unknown to the Quebec civil law) of redemption and foreclosure.””12
Quebec draftsmen have not always avoided this particular kind of difficulty.
One may compare the case of Lalibert6 v. Larue,-13 in which the Supreme
Court had to decide whether the words “cede, transporte et donne en gage” in
a trust deed securing a bond issue under The Special Corporate Powers Act” 4
meant a transfer of ownership, or whether the word “gage” controlled the
sense and assimilated the trustee’s right to one of pledge or hypothec. Com-
menting on the unhappy use of the word “mortgage” in the English version
of the Act, Rinfret J. said: “Or, il convient peut-8tre de souligner que le
syst~me de droit de la province de Quebec ne comporte pas la conception de
la common law qui reconnalt le beneficial ownership dans une personne et le
legal title dans une autre. Dans le Quebec, les deux sont invariablement r~unis
sur la m~me ttre”.1 5 Such are the living problems of comparative law in
Quebec!
The bank’s right of ownership in the property covered by section 88 security
was made the basis of an important decision recently by the Quebec court of
appeal in Lefaivre v. Banque Canadienne Nationale & Right Electronics Co.
Ltd.”16 The bank claimed, on the bankruptcy of the borrower, to have the
right to accounts receivable arising out of the sale by the borrower of property
108Sec. 86(2).
‘0 9Bank of Montreal v. Guaranty Silk Dyeing and Finishing Company Limited (1934-
35), 16 C.B.R. 104.
10[1936] S.C.R. 560; [1936] 4 D.L.R. 9.
“‘[1936] S.C.R. 560, at p. 567.
112[1936] S.C.R. 560, at pp. 566-567.
113[1931] S.C.R. 7.
“14(1941) R.S.Q. c. 280.
15[1931] S.C.R. 7, at p. 16.
116[1951] Que. R.B. 83.
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covered by its security. At the time the security was taken the borrower
signed the usual collateral agreement which contained, among several clauses
defining the rights and obligations of the parties in connection with the loan
and security, one which purported to assign to the bank all proceeds from
any future sale of the property by the borrower. The clause added that any
further assignment was to be deemed in furtherance of the present agree-
ment and not an acknowledgment of any right in the borrower to such
proceeds. There does not appear to have been any other assignment, nor was
the purported assignment in the collateral agreement signified, as required
by the civil law to make it binding on third parties. The Superior Court 1 7
treated the clause in the special agreement as an assignment subject to the
civil law requirement of signification and denied the bank’s claim. The major-
ity of the Court of Appeal, with two judges dissenting, took the view that
the bank had entrusted property, of which it was the owner in virtue of section
88, to the borrower as its agent, and that accounts receivable from the sale
of such property by the borrower were property of the bank in the hands of
its agent. In other words, the majority took the position that the bank’s right
did not rest on assignment but on the right of an owner to the indentifiable
proceeds from the sale of his property.118
The minority argued that section 88 security, being an exceptional right,
must be confined to the kinds of property expressly covered by it in the Bank
Act, that is, in the case of a manufacturer, to goods, wares and merchandise,
and not accounts receivable or other proceeds from the sale of such property.
Bissonnette J. denied, moreover, that the bank’s right was one of ownership
and likened it to one of pledge. His opinion abounds in pungent comment on
the necessity of keeping an innovation that is alien to civil law principles within
reasonable limits.
Among all the authorities consulted by the Court of Appeal only the case
of Canadian Hart Products Limited, ex parte Royal Bank of Canada18
is
directly in point. There the Supreme Court of Ontario, ruling on essentially
the same clause in a collateral agreement as the one in the Lefaivre case, held
that the Bank was entitled as against the borrower’s trustee in bankruptcy
“to all cash realized from the sale of goods covered by the bank’s lien received
by the trustee and to any book accounts for or securities given on the sale of
the goods covered by the bank’s lien, subject to the bank identifying the
cash, book accounts or securities as being received by the trustee for the
goods covered by the bank’s lien… “120
If one accepts the basic premise that the bank’s right is one of ownership,
there appears to be no particular reason why the conclusion of the Canadian
Hart Products case should not be applicable in Quebec as regards identifiable
117[1951] Que. S.C. 75.
118Cf. In Re Grondin v. Lefebvre [1931] S.C.R. 102, per Rinfret J., at p. 111.
119(1923-24), 4 C.B.R. 211.
12OAt p. 216.
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SECURITY UPON MOVEABLE PROPERTY
107
cash or negotiable paper, but as regards accounts receivable, a distinction
might have been made by the Court of Appeal in the Right Electronics case.
The question before the court was simply this: were the accounts receivable
property of the bank or property of the borrower? The property consisted of
contractual rights or claims for goods sold and delivered. They were rights
which the borrower, and the borrower alone, had against third parties. As
regards these third parties the bank could only be considered an undisclosed
principal, and it is now the jurisprudence of Quebec, even if it was once
otherwise, that an undisclosed principal has no right of action based on con-
tract against the person who dealt with his agent other than that which he
acquires in virtue of an assignment of the agent’s rights.121 There could be no
lien de droit between the bank and third party purchasers apart from assign-
ment. The accounts receivable were not rights or property of the bank; they
were rights or property of the borrower. The clause in the collateral agree-
ment, in so far as it purported to be an assignment, or any subsequent assign-
ment of specific debts would not be binding on third parties unless properly
signified in accordance with the provisions of the civil code. On this view
of the question, to contend as Bertrand J. did in the Right Electronics case,
that registration of a notice of intention to give section 88 security dispenses
with the signification required by civil law, is to extend the effect of such
registration beyond what is reasonably contemplated by the Bank Act.
The priority given to the bank over other creditors by section 89 of the
Bank Act raises nice questions of interpretation. With the exception of a
claim for wages for the three months period prior to the bankruptcy of the
borrower,122 the bank is given priority over all rights subsequently acquired
“in, on or in respect” of the property covered by its security. This is in
contrast to the civil law principle governing privileges on movable property
which makes the rank depend entirely on the nature of the claim. In principle,
the bank takes subject to rights acquired before it took its security. It must
be noted, however, that in relation to certain claims against the debtor, such
as those for taxes or workmen’s compensation assessments, the special nature
its right of ownership and power to take
of the bank’s rights and powers –
possession of its security – may place it in an entirely different position than
the creditor with an ordinary privilege. The result will depend, of course,
on the terms of the particular taxing statute.1m
12lYoung v. C8tj (1922), 33 Que. K.B. 55; Balfour, White Co. v. Finlayson (1923),
34 Que. K.B. 436; Cumby v. Brunton 11944] Que. S.C. 64; Chartrand v. Darabaner
(1928), 66 Que. S.C. 135.
12Sec. 88(5).
128Cf. Royal Bank v. Nova Scotia Workmen’s Compensation Bd. [19361 S.C.R. 560;
La Commission des Accidents du Travail de Quebec v. Les Industries de Tourville Lte.
[1951] Que. P.R. 394; In re P. W. Ellis Company Limited, 10 C.B.R. 491; In re Metal
Studios Limited, Ex parte City of Hamilton 15 C.B.R. 305; In re James Steele Limited,
15 C.R.R. 339.
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There is an express exception to the rule that the bank takes subject to
the rights acquired before it takes its security. The bank has priority over
the claim of any unpaid vendor, regardless of when his claim arose, unless at
the time the bank acquired its security such unpaid vendor had a “lien” upon
the property to the knowledge of the bank.’24 it is difficult to determine the
application of this proviso in Quebec. Although it is used with different
meanings in several places in the code,’ 25 “lien” is not a term of the civil law.
The words “without knowledge on the part of the bank of such lien” in section
89 may suggest some right in the seller to which the buyer has agreed, as
distinct from one conferred by law — and this has been the view taken by
one of our judges in Quebec128 – but it is submitted that the Act also con-
templates the case where at the time the bank takes an assignment under
section 88 it knows that certain property which has been sold to the borrower,
and which will be affected by its security, is still in the possession of the
vendor who has not yet been paid and who, therefore, has a lien or right of
retention.127 The equivalent case under Quebec law would be one where, to
the knowledge of the bank, the unpaid vendor is in possession of the property
under circumstances which entitle him to a right of retention within the
meaning of articles 1496 and 1497 of the Civil Code. Outside of this case,
the fair meaning in Quebec of the words in section 89 would seem to be that
the bank’s rights always take priority over the privileged claim of the unpaid
vendor. Thus the bank is placed by the Act in a superior position to the civil
law pledgee who normally ranks behind the unpaid vendor.128
This result, however, may be largely off-set in practice if Quebec courts
follow the decision in the case of In re Win. A. Marsh Co. Ltd. and L. N.
BuzzellP2 9 from which it may be inferred that a bank takes subject to the
right of an unpaid vendor under article 1543 C.C. to have a sale dissolved for
non-payment of the price while the thing sold remains in the possession of
the buyer. The right must be exercised within 30 days of delivery in the case
of insolvency, and for this reason it is usually referred to in connection with
bankruptcy as the right of “30 day goods”. It was held in the Marsh Co. Ltd.
124Sec. 89.
25Arts. 1739ff., 1816a, 1994a C.C.
1
126Gibsone J. in the case of In re Win. A. Marsh Co. Ltd. and L. N. Bit.ell (1928-
30), 11 C.B.R. 463, at p. 467. The Act is certainly not referring to the right of ownership
reserved by a conditional seller because the Bank must take its security from the owner
of the property. The Bank will always take subject to the right of the conditional seller
in Quebec. In a province where a conditional sale agreement must be registered to take
effect against subsequent purchasers and mortgagees in good faith, a bank may take free
from the conditional seller’s right if the agreement has not been registered and the bank
does not have notice of it. In such a case the buyer is deemed to be the owner of the
property as against third persons. Royal Bank v. Hodges [1930] 1 D.L.R. 397.
127See Mutchenbacker v. Dominion Bank (1911), 21 M.L.R. 320.
128Cf. arts. 1994, 2000. C.C.
129(1928-30), 11 C.B.R. 463.
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SECURITY UPON MOVEABLE PROPERTY
109
case that the unpaid vendors had a right to recover the possession of their
goods from the buyer’s trustee in bankruptcy, and where the trustee used
the goods in continuing operations, the court ordered the unpaid vendors to
be collocated “in preference to the bank for the value of their merchandise
existing at the date of the assignment.” Although the discussion of what is
meant by the “lien” of an unpaid vendor is not too clear in this case, the
result would appear to be logical enough if the bank’s right is regarded as
one of ownership subject to the same resolutive conditions and causes of
nullity or dissolution as that of the borrower from whom the security is
acquired. The recourse under Art. 1543 C.C. should only lie, however, if the
bank has not taken possession of its security. The unpaid vendor may safe-
guard his action, if taken in time, by accompanying it with a conservatory
attachment.
Conflicts between the privileged claim of the landlord for rent and the
bank’s right under section 88 have made it necessary for Quebec courts to
consider how extensive an effect should be given to the registration of the
notice to give security under section 88. The landlord’s privilege exists not
only on property of the debtor but on property of third persons brought
onto the premises with their consent, unless and until he is notified or other-
wise acquires knowledge of their rights. 30 It has been held that the registra-
tion of the notice to give security under section 88 does not satisfy the civil
law requirement of notice to the landlord.131 The bank is obliged to notify
the landlord directly of the particular property covered by its security. Until
it does so, the property is affected by the landlord’s privilege for all rent
owing up to the time of notice.
It does not appear to have been decided whether the terms of section 89
of the Bank Act give the bank a right to follow the property covered by its
security into the hands of subsequent purchasers in good faith in the ordinary
course of trade. The bank is given “priority over all rights subsequently
acquired in, on or in respect of such property” so that the terms of the section
do not exclude such a possibility.132 If the bank has such a right in virtue of
this wording, it is contrary to a fundamental principle recognized by all
modem thinking on security devices, and the Act should be changed according-
ly. Certain language of Mignault J. in the Supreme Court decision in Landry
Pulpwood Company Ltd. v. Banque Canadienne Nationale33 suggests that he
considered the question one which was open to discussion, although he did
183Art. 1623 C.C.
131Spivack v. Ettenberg (1927), 33 R. de J. 118; L’Expansion Jeromienne Inc. v.
183[1927] S.CR. 605, at p. 615.
1
Delmna Plastics Ltd. & Banque Canadienne Nationale [1950] Que. S.C. 326.
3 2See also Sec. 88(4) of the Bank Act which states that the rights and powers of the
bank are null and void as against “creditors of the person giving the security and as
against subsequent purchasers or mortgagees in good faith of the property covered by
the security” unless the notice of intention to give security is registered.
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not express an opinion on it. Apart altogether from the commercial necessity
of good faith purchasers in the ordinary course of trade being able to take
in perfect confidence, the principle which should govern this issue is the same
one which was applied in Bank of M’ontreal v. Guaranty Silk Dyeing and
Finishing Company Limited.13 4 There it was held that, when a bank instructed
its customer to deliver property covered by its security to a dyer for processing,
it could not claim priority over the dyer’s lien. By the same token, the bank
which consents to the sale of the property covered by its security in the
ordinary course of trade should not have the right to follow it into the hands
of purchasers in good faith. The exercise of any rights of an unpaid vendor
which it might acquire from the borrower is, of course, another thing.
An important problem, recently considered by the Quebec Superior Court
in the case of Banque Provinciale v. Jacques 3 5 is the nature and effect of the
bank’s right to take possession of property covered by section 88 security.
In contrast to the case of security taken on oil or other hydrocarbons under
section 82(3), or security from a farmer under section 88, the Bank Act
does not expressly provide, in the case of security taken from a wholesale dealer
in natural products or from a manufacturer, for the right to take possession
and operate the business of the borrower for the better preservation and
realization of the bank’s security. But this right is stipulated in the usual
collateral agreement which is signed by the borrower at the time the security
is taken. In the Banque Provinciale case, the bank took possession and operated
the business of the borrower for a certain period through an appointed re-
presentative, but for some reason failed to realize on its security or satisfy
the indebtedness of the borrower by this process. It then turned to personal
sureties of the borrower for payment of what remained owing. Lalonde J. in
the Superior Court did not question the right of the bank to acquire these
exceptional powers by agreement, but he held that the bank’s exercise of
them constituted an acceptance in payment (or as he put it, a dation en paic-
ment), which discharged the sureties under article 1960 of the civil code. The
decision may have been equitable in the circumstances because the court
seems to have concluded that the bank was acting in bad faith and abusing
its powers, but the proposition of law on which the decision was based is
very questionable and is one which is bound to cause some consternation in
banking circles. The bank’s taking of possession is given the same effect as
retention by a pledgee of his security under a pacte comniissoire. The latter is
deemed to be a dation en paiement, which extinguishes the debt.’
This is a misunderstanding of the true nature and purpose of the exceptional
right to take possession and carry on the business of the borrower which is
expressly conferred by the Bank Act in certain cases and which the bank
134(1934-35), 16 C.B.R. 104, 363.
135[1955] R-L. 197.
136Mignault, Drolt civil canadien, v. 8, p. 415.
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SECURITY UPON MOVEABLE PROPERTY
ill
acquires by agreement in others. The purpose of this right is to enable the
bank in critical circumstances to act in relation to its security in such a
manner as to protect itself from loss and to assure the maximum realization.
It is illogical that the bank which takes possession for the purpose of realiza-‘
tion by regular trading operations –
a form of sale which will generally be
much more advantageous to the debtor than a sale en bloc –
should not have
a claim for any balance still owing to it. In the exercise of its right to sell
under section 88(4) the bank is accountable to the borrower for any surplus.
It would seem perfectly clear that it should have a claim for any deficiency
remaining after the sale. It must be admitted, however, that the default
provisions of the Bank Act –
and for that matter the Quebec Bill of Lading
and Warehouse Receipt Act as well –
could do with some clarification,
particularly with regard to the right to enter into a pacte commissoire.137
Unfortunately, it has not been possible to deal with this problem in the
present study.
CCINCLUSION
An introductory survey of this kind is not the place to attempt to deal
seriously with the question of reform. The purpose here has been simply
to sketch the outlines of the subject and to touch on some of the more in-
teresting or important questions which suggest themselves in a cursory exam-
ination. The coverage of the material has been necessarily selective and does
not pretend to present an adequate, much less a complete picture of secured
financing in Quebec. Certain matters like the conditional sale contract, which
could be the subject of detailed study, have received only the most summary
treatment; the practical importance of others, such as accounts receivable
financing, 38 has probably not been sufficiently emphasized. Mention has not
even been made of certain security devices of very special and limited ap-
plication, such as the equipment trust for financing the purchase of railway
rolling stock.’3 9 Under such circumstances it would be out of place to attempt
to offer detailed proposals for changes in the law. Moreover, if the law in this
13 7The pacte commissoire must be viewed from the point of view not only of the
protection of the debtor but of the protection of his other creditors as well. As to the
bank’s right to make an agreement with the borrower concerning the application of any
surplus to other indebtedness: Thompson v. The Molson Bank 16 S.C.R. 664; 12 L.N.
339.
13BArt. 1571d of the Civil Code permits the assignment of a block of book debts,
present or future, to be registered in the office of the registration division where the
assignor has a place of business and notice of such registration to be published in the
newspapers. These formalities not only dispense with the need for the usual signification
to individual debtors, but they bring the assignment within the terms of section 63(2) of
the Bankruptcy Act, which makes any general assignment of book debts null and void
against creditors of the debtor unless there has been ccmpliance with provincial legisla-
tion providing for registration of such assignment.
‘1 9The Railway Act, (1952) R.S.C. c. 234, s. 137-146.
McGILL LAW JOURNAL
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field is to answer commercial needs it must reflect the realities of social and
economic conditions and business practice, and a great deal of systematic
study and discussion is required before one can speak with confidence of these.
A beginning must be made somewhere, however, and the following brief
observations are offered merely to focus attention on what appear to be some
of the issues today.
Probably the chief question of practical importance at the moment in
Quebec is whether the provincial law should provide for a security device
which would serve the same purpose as the chattel mortgage does in the other
provinces. There are at least two considerations here: whether it is desirable
to make it easier for certain lenders to obtain security upon the movable
property of debtors; and secondly, whether, from a practical point of view,
a system of registration or filing of security interests in movable property
represents a real measure of protection for third parties. With respect to the
first point, there seems no good reason why the law should be amended to
permit lenders in the personal loan field to obtain security upon movable
property without transfer of possession. They get along quite nicely as it is,
and probably make fewer bad loans because they are not able to rely on such
security. Nor is a system of registration or filing of mtich practical value to
third parties who deal with this category of borrower. Quite apart from the
difficulty of organizing a satisfactory system of registration for property that
moves about a great deal, it is too much to expect of the average creditor
that he should go to the trouble of consulting the records. For the same
reason there is little point to requiring registration of conditional sales of
consumer goods. The chief problem here is the sale of stolen automobiles, 140
and the answer to that is a title certificate system.
The commercial borrower presents quite a different case. Here the law
could be more helpful than it is. As a “purchase-money” device the con-
ditional sale contract is adequate for the financing of dealer inventories of
manufactured goods, but there is no device for securing advances on existing
inventory, such as, for example, the used car inventory of automobile dealers.
Lenders must still get what comfort they can from sales with right of re-
demption and similar devices. There would not seem to be any reason, either,
why lenders other than the banks should not be able to obtain security with-
out transfer of possession on the inventory of manufacturers. Although
admittedly the volume of business here might not be too significant (the
finance companies are able to offer low rates on the wholesale floor plan only
because they obtain the lucrative consumer paper), the right to obtain such
security would enable the factors, for example, to tide their customers over
14OThe conditional seller is protected by the terms of the Quebec Motor Vehicles Act,
(1941) R.S.Q. c. 142, s. 21. Only licensed dealers are deemed to be traders dealing in
similar articles, and all dealers are required to post a surety bond to guarantee that the
owner who has to reimburse the third party purchaser on revendication will be able to
recover what he has paid.
No. 2]
SECURITY UPON MOVEABLE PROPERTY
113
seasonal difficulties. The manufacturer’s inventory calls, of course, more for
the floating charge type of security than the individual item approach to
dealer inventories.
The protection afforded by a system of registration or filing of security
interests is not nearly as illusory in the case of the commercial borrower as
it is in the case of the non-commercial one. It pays the creditors of commercial
borrowers to check such records or to consult credit information agencies
which do so. Even if no new security devices are created in Quebec, the law
could well be amended to require, in the interests of creditors, the registra-
tion of conditional sales to commercial buyers, whether they be sales of equip-
ment 141 or sales of goods for re-sale in the ordinary course of business.
141Cf. La Banque d’Hochelaga v. The Watrous Engine Works Company (1896-97)i
27 S.C.R. 406; Bernier v. Durand & Pageau (1916), 25 Que. K.B. 461.
