The Credit Consumer in Trouble:
Remedies of Canadian Consumer Creditors
Ronald C.C. Cuming*
INTRODUCTION
It now has been recognized almost universally by scholars, judges,
legislators and even the consumer credit industry that measures must
be taken by society to avoid the socially unacceptable consequences
which too often are by-products of an unregulated consumer credit
market. For the last sixty years, social experimentation has been
carried out in many jurisdictions in North America with a view
to finding effective methods of dealing with this problem without
inordinately disrupting a system which has been one of the factors
contributing to the high standard of living enjoyed by most of us.
A number of different methods designed to accomplish this goal
have been studied and tried, including licencing of certain types of
credit grantors so as to ensure that only those who meet certain
standards of financial responsibility, honesty and fairness deal with
the public; requiring full disclosure of the terms of credit contracts
to credit consumers in the hope that this will allow them to avoid
harsh credit agreements by contract shopping; giving credit con-
sumers an ally in the form of a public official whose function is
to represent their interests in conflicts with credit grantors; and
limiting and regulating default remedies of credit grantors.
Although experience has shown that no method alone will provide
an acceptable solution, it is becoming increasingly apparent that an
effective legislative programme for consumer protection must neces-
sarily concentrate on regulating the exercise of credit grantors’
default remedies, since it is at this stage in most consumer credit
transactions that much of the product of the gross inequality of
bargaining power between credit grantors and credit consumers
comes to the surface. Added to this is the fact that the general
creditors’ remedies which are available to consumer credit grantors
are quite unsuited to twentieth century attitudes towards consumer
debt. These remedies were developed as part of the legal structure
of a creditor-oriented society which frowned on consumer debt and
* Assistant Professor of Law, University of Saskatchewan. This paper was
presented at the Conference on Comparative Commercial Law held at McGill
University, September 3-5, 1968.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
which accepted with little reservation the principle that the state
should do everything possible to assist creditors in collecting debts
owing to them. The emergence of a credit-dominated society since
the turn of the century has not been accompanied by a recognition
that creditors must share some of the responsibility in cases where
debtors become over-committed and are unable to meet their contract-
ual obligations.
Added to this is the failure on the part of legislators to recognize
the considerable divergence between the theoretical and actual effect
of the exercise of many creditors’ remedies. For example, while gar-
nishment was designed to provide a method of enforcing a money
judgment against a recalcitrant lebtor, frequently its use means that
the debtor loses his job and becomes a burden on society. The en-
forcement of a money judgment by execution against or the fore-
closure of a security interest in the personal property of a debtor
seldom produces much which can be applied toward the reduction
of his debts, notwithstanding that the purpose of these remedies is
to provide an alternative source from which to pay the debts. What
is not taken into account is the fact that used consumer goods have
very little resale value.
Potential hardship is magnified in Canadian jurisdictions because
of antiquated bankruptcy laws which deny to most consumer debtors
the ability to free themselves of an unbearable financial burden
through personal bankruptcy proceedings. In addition, social welfare
systems of most Canadian jurisdictions are quite primitive and still
treat public aid recipients as second class citizens.
In this paper, I will briefly examine some of the more important
remedies on which Canadian credit grantors rely in the event of
default by consumer borrowers and retail instalment purchasers,
hereafter collectively referred to as credit consumers. The two main
sources to which credit grantors look for their remedies are the
general debtor-creditor laws of the jurisdiction in which they carry
on business and the adhesion or standard form contracts which they
use when granting credit.
A. GENERAL DEBTOR-CREDITOR REMEDIES
Although a few Canadian jurisdictions still retain some of the
less refined debt collecting methods, such as imprisonment,’ which
they inherited from medieval England, it is safe to say that their
use is not of a great importance in the context of consumer credit
1See, e.g., Arrest and Examination Act, R.S.N.B. 1952, c. 10, especially ss.
41-47.
McGILL LAW JOURNAL
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transactions. However, every province makes provision for the en-
forcement of money judgments through garnishment of debtors’
income and execution against their property, and it is apparent that
credit grantors have not hesitated to use these remedies in appropriate
situations. Generally speaking, these laws have remained substantially
unaltered for many years, and still retain all of the harshness and
inflexibility embodied in them when they were originally enacted.
However, in fairness to some Canadian legislators, one must mention
that for short periods in Canadian history, particularly during the
Great Depression and drought of the 1930’s, their hearts mellowed
and in a few jurisdictions primarily in Western Canada these laws
were modified by special debtor-relief legislation which was designed
to deal with the abnormal hardships which debtors faced at that
time. More recently, two Canadian provinces, in co-operation with
the Federal Government, have adopted debtor-relief measures which,
interestingly enough, are very similar conceptually and adminis-
tratively to some of the depression legislation. 2 References will
be made to these measures later in this paper.
1. Garnishment
One of the most potent weapons in a Canadian credit grantor’s
arsenal of remedies against defaulting -debtors is the power to require
that a portion of a debtor’s income be seized at source and paid
over to his creditors. Although there is little statistical evidence that
garnishment is widely used by credit grantors, it is unreasonable
to assume that they are ignoring such an effective remedy.
From a credit consumer protection point of view, the major
objections to garnishment proceedings are not with respect to the
conceptual basis of the remedy. If a recalcitrant debtor refuses to
pay a debt, there should be little opposition to the use of a remedy
which provides an efficient method of diverting a portion of his
income to his creditors, provided that he gets enough of it to support
himself and his family. However, the practical application of garnish-
2 After The Orderly Payment of Debts Act, 8 Eliz. II, S.A. 1959, c. 61 was
ruled unconstitutional by the Canadian Supreme Court, (see Reference Re
Validity of the Orderly Payment of Debts Act, [1960] S.C.R. 571;
(19.60), 23
D.L.R. 449)
the Bankruptcy Act was amended to include wage earner plan
provisions. Each province is given the right to adopt or reject these provisions.
If they are adopted, the adopting province is responsible for their administration.
The legislation is presently in force in Alberta and Manitoba. See, Bankruptcy
Act, R.S.C. 1952, c. 14 as amended by 14-15 Eliz. II, c. 32, s. 22; S.0.R./67-192,
Canada Gazette, Part II, vol. 101, No. 8, p. 680 (for Alberta), and S.O.R./67-239,
Canada Gazette, Part II, vol. 101, No. 10, p. 800 (for Manitoba).
No. 1]
THE CREDIT CONSUMER IN TROUBLE
ment proceedings in most Canadian jurisdictions has several un-
acceptable consequences. The most glaring of these are the effect it
may have on his employment, the cost to him and the almost universal
inadequacy of exemptions.
(i) Exemptions
It is elementary economics and basic humanitarianism that a
community which, like Canada, allows to credit grantors complete
freedom in extending consumer credit to the general public, cannot
justify giving to them the power to deprive debtors of adequate
income to support themselves and their families. However, after
examining garnishment exemption legislation in most Canadian
jurisdictions, one must presume that this conclusion has been rejected
or at best ignored by Canadian legislators.
There is very considerable divergence among the various granish-
ment acts with respect to the amount of a debtor’s income which is
exempt from execution and the method of determining such ex-
emption. Exemptions range all the way from unbelieveably parsi-
monious amounts such as a monthly allowance of $35 in New
Brunswick 3 and $125 in Manitoba 4 for a married debtor, regardless
of the number of his dependants, to near-adequate amounts such as
a monthly allowance of $200 for a married debtor plus $40 for each
dependant child in Alberta.5 The legislative neglect in this area is
dramatized by the fact that in some jurisdictions exemption laws
have not been revised for many years. The most glaring instance is
that in Ontario, the largest and wealthiest province in Canada and
one which no doubt has experienced -a tremendous expansion in the
incidence of consumer credit, where garnishment exemption legis-
lation was last amended in 1935.6 It presently provides for an ex-
emption of 70 % of a debtor’s gross income with a minimum exemption
of $2.50 for each working day.7 However, the mere fact that garnish-
ment legislation has been recently amended apparently does not
guarantee adequate exemptions. For example, Newfoundland passed
3 Garnishee Act, R.S.N.B. 1952, c. 97, s. 33, as amended by 9 Eliz. II, S.N.B.
1960, c. 36, s. 3.
4 The Garnishment Act, R.S.M. 1954, c. 97, s. 6.
5 Rhle 565(1), Consolidated Rules of the Supreme Court, O.C. 716/44, con-
solidated by Alta. Reg. 561/57, as amended by Alta. Reg. 473/62 and Alta. Reg.
316/66, Alberta Gazette, vol. 62, No. 18, p. 729.
6 See, The Wages Amendment Act, 25 Geo. V, S.O. 1935, c. 73, s. 2 (which
changes the minimum exemption from $15 for each pay period to $2.50 per
working day.)
7 The Wages Act, R.S.O. 1960, c. 421, s. 7(1).
McGILL LAW JOURNAL
[Vol. 15
a new garnishment act in 1967 which provides for an exemption of
$175 per month for a married person supporting four or more
dependants.5
A few acts give power to a court to set exemptions which may
vary from the statutory amounts in cases where a special application
is made to it. 9 However, the appearance of flexibility which such a
provision gives is in most cases an illusion. Most consumer debtors
who find themselves in default and subject to garnishment pro-
ceedings are unlikely to make any attempt to seek greater protection,
even if they are aware that it may be obtained, because of the well-
recognized financial and dispositional obstacles faced by most low
income people when litigation of any kind is involved.
All jurisdictions adopt one or other or a combination of the
traditional methods of setting exemptions: specified dollar exemption,
percentage of income exemption or percentage of income exemption
with a minimum dollar exemption. While the latter is likely superior
to either of the other two methods in that it combines a degree of
flexibility with a guaranteed minimum, it requires frequent revision,
a weakness common to all three. If garnishment is to be used to
an issue which will be raised
enforce consumer credit obligations –
the Canadian experience would lead one
later on in this paper –
to conclude that it is necessary to tie the amount of exemption to
some factor which at any given point accurately reflects the cost of
maintaining a decent standard of living. While we can thank our
United States neighbours for providing us with a precedent for this
type of legislation, it would likely be unwise to follow too closely
their provisions which tie exemptions to minimum wage levels.10
Where minimum wage legislation exists in Canada, it is too often
ignored as much as is garnishment legislation.
The picture would not be complete without a brief reference to
the recently enacted wage earner plan legislation contained in the
Bankruptcy Act and adopted by two provinces.” The Act provides
that when a consolidation order is being prepared by the court clerk,
he shall determine the amounts, if any, to be paid into court by the
8 See, The Attachment of Wages Act, S.N. 1966-67, No. 46, s. 2 (2) (b).
9 See e.g., The Wages Act, R.S.O. 1960, c. 421, s. 7(3).
10 See, Uniform Consumer Credit Code, 5.105 (Final Draft) (hereinafter re-
ferred to as U.C.C.C.) and Consumer Credit Protection Act, 1968, Public Law
90.321, 82 Stat. 146, s. 303 (a), passed by the United States Congress on May 22,
1968, to come into effect July 1, 1970. Both tie the amount of exemption to the
national minimum wage established by the Fair Labor Standards Act of 1938,
as -amended, U.S.C., tit. 29, s. 206 (a) (1).
11 See, supra, n. 2.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
applicant debtor, for distribution to his creditors. 12 Consequently, the
clerk is given a free hand to set the debtors exemptions and he can
pattern the exemption to the individual needs of the debtor. In this
limited situation, the inadequacies of existing provincial wage
exemption legislation can be avoided.
(ii) Costs of Garnishment
Following the rule that a judgment debtor must pay all party-
and-party court costs, debtors against whom garnishment proceedings
have been taken must pay the substantial court costs necessarily
incidental to such proceedings. If
this rule is to be retained, it
follows that the least expensive method of getting a debtor’s non-
exempt income into his creditors’ hands should be used. Unfortunately
garnishment legislation in Canadian jurisdictions with one minor
exception ‘1 does not embody this principle. 14
No jurisdiction makes provision for continuing garnishment
orders which avoid extra costs involved in issuing a new summons
each time the debtor is to be paid. Nor are debtors protected against
multiple garnishments which merely escalate costs without increasing
the amount available to satisfy their debts.’ 5
(iii) Interference with Employment
The one criticism of Canadian garnishment laws which cannot
be met by measures short of prohibiting its use as a collection remedy
in cases where wage earners are involved is that too often garnish-
ment proceedings in which employers are garnishees result in
dismissal of employee-debtors. This being the case, it is not difficult
to recognize that the true value of garnishment to Canadian credit
grantors lies not in the amounts which can be realized through the
actual mechanism of the remedy, but in the coersive power it places
12 R.S.C. 1952, c. 14, s. 176 (1) (b), as amended by 14-15 Eliz. II, S.C. 1966-67,
c. 32, s. 22.
I3 See Garnishee Act, R.S.N.B. 1952, c. 97, ss. 2(1), 4(3) (which prohibits the
use of garnishment proceedings where the amount originally owing exceeds $40
and where the amount remaining due exceeds $80).
14 For example, in Saskatchewan the minimum legal costs, exclusive of service
of process costs, payable by a debtor against whom a judgment for $300 is
obtained and whose salary is attached is approximately $80.50 up to and including
the first garnishment. For each garnishment thereafter the costs are approxi-
mately $29.00. See, The Revised Rules of Court of the Province of Saskatchewan,
1961, Tariff of Costs, schedules I B, II B.
15 For an example of garnishment legislation which minimizes court costs
without prejudicing debtors or creditors in any way, see N.Y. C.P.L.R. s. 5231
(McKinney 1963).
McGILL LAW JOURNAL
[Vol. 15
in their hands. Those who argue for the retention of garnishment
in such circumstances must accept the conclusion that performance
of consumer debt obligations is of sufficient importance to society
that credit grantors be allowed to retain the power to place defaulting
debtors in fear of losing their jobs. They must ignore the personal
hardship to debtors and the social wastage which often results from
the exercise of this power.
There is no indication that other Canadian jurisdictions plan to
adopt measures similar to those contained in Quebec legislation 10
or those recently enacted in the United States which make it illegal
for an employer to dismiss an employee because his wages have been
attached. 17 It is difficult to be optomistic about the possible success
of this type of legislation in view of difficulties involved in establish-
ing an employer’s motives for dismissing an employee.
The direct relation between effective collection remedies and the
availability of credit to certain segments of the public is often raised
in opposition to the suggestion that wage garnishment be withdrawn
as a remedy in consumer credit transactions involving wage earners.
This is particularly so in jurisdictions where credit grantors are
deprived of the ability to take security
in the form of wage
assignments. Although credit grantors often refuse to admit that the
damage to high risk credit consumers which may result from the
use of harsh enforcement remedies often outweighs the social utility
in granting them credit, it is important to recognize that the consumer
credit industry must have effective remedies to deal with credit
consumers who are able, but unwilling to pay.
A possible solution to the problem of achieveing the desired
balance may be found in the concept of wage earner plans. Legislation
16 Art. 650 C.C.P. (which makes an employer liable in damages to an employee
dismissed or suspended because his wages or salary is seized by garnishment).
17 See, e.g., Conn. Gen. Stat. (1958), 52-361 (h) (which makes an employer
liable to an employee for losses suffered if he is discharged, disciplined or sus-
pended because of garnishment unless his wages have been garnished seven or
more times); Hawaii Rev. Laws (1955), c. 90A, Part III, Laws 1967, Act No.
285 (which makes it an offence to discharge an employee on the grounds that
his employer was summoned as a garnishee in a cause where the employee is
the debtor); N.Y. C.P.L.R., s. 5252 (McKinney 1963)
(which makes an employer
liable in damages to any employee who is discharged or laid off because an
income execution has been served. The protection is not available if more than
one income execution against an employee is served within a twelve month
period). Also see U.C.C.C., 5.106 (which makes dismissal of an employee because
of garnishment or attempted garnishment by a creditor an offence); Consumer
Credit Protection Act, 1968, supra, n. 10, s. 304(a)
(which makes it an offence
for an employer to dismiss an employee because his earnings have been subject
to garnishment for any one debt).
No. 1]
THE CREDIT CONSUMER IN TROUBLE
establishing wage earner plans has been in operation in Quebec
for many years 18 and has been revived in Manitoba and Alberta.’ 9
It is sufficient to note, for our purposes, that a wage earner plan
provides a method which allows honest credit consumers who can pay
their debts if given a reasonable opportunity, to obtain relief from
creditor-harassment while they are repaying their debts on an
instalment basis.
2. Execution Against Property Other Than Wages
As with garnishment, one of the most important aspects, from
a credit consumer protection point of view, of money judgment
execution laws in Canadian jurisdictions is the liberality of their
exemption provisions. Every jurisdiction has accepted the principle
that debtors should be protected by having certain basic property
which is necessary for the maintenance of them and their families
exempt from seizure under writs of execution.20 However, few have
been consistent enough to recognize that debtors’ needs change from
time to time necessitating periodic re-examination of exemption
provisions.2 ‘ Generally speaking, exemption laws of Canadian juris-
dictions are quite inadequate and require revision so as to bring
them in line with the present need of judgment debtors. 22
The relevant legislation in all jurisdictions states exemptions
in one of two ways: by designating as exempt specific items of
property belonging to debtors, sometimes with a maximum value
limit on the items; 23 or by setting a dollar value for exempt property
and allowing a debtor to choose items he wishes to retain so long
as their total value does not exceed the maximum. 24
The frequency with which execution is relied upon by Canadian
credit grantors to enforce consumer credit obligations is also not
documented. However, at least in jurisdictions where exemptions
are not adequate it is likely that the remedy is not being ignored.
While a sale of used consumer goods by a sheriff is likely to produce
little by way of proceeds which can be applied to a judgment debt, the
18 See arts. 652-659 C.C.P.
19 Supra, n. 2.
20 0nly four Canadian provinces provide for homestead exemptions: Alberta,
British Columbia, Manitoba and Saskatchewan.
1933. See The Memorials and Executions Act, 23 Geo. V, S.N.B. 1933, c. 39.
21 For example, the relevant New Brunswick legislation was last amended in
22 An extreme case is that of Prince Edward Island. Under the Judgment and
Execution Act, R.S. P.E.I. 1951, c. 78, s. 26(1) limits the total value of exempt
property to $100.
23 See, e.g., The Exemptions Act, R.S.S. 1965, c. 96, s. 2.
24 See, e.g., Execution Act, R.S.B.C. 1960, c. 135, s. 25.
McGILL LAW JOURNAL
[VCol. 15
coercive effect of a threatened seizure of necessaries often can be
used to enforce direct payment from a defaulting debtor.
A serious criticism of most Canadian executions law, more basic
than inadequacy of exemptions, is that the use of the remedy against
low income debtors often fails to accomplish much more than to
create hardship for them without doing much to satisfy their
obligations. This results from the fact that most of the consumer
goods such debtors are likely to own have very little resale value,
particularly when they are sold at a sheriff’s sale. Under these
circumstances the remedy is being used as a punishment rather than
an alternative source from which their debts can be satisfied. If
execution is retained in its present form, we must adopt a new
theoretical basis for its existence.
In addition to the use of wage earner plans in appropriate cases,
a partial solution to the above-noted problems may be found in the
principle of judicial supervision of the use of execution as a collection
remedy in consumer credit transactions. Two Canadian jurisdictions
have adopted this approach, applying it to all seizures of personal
property under writs of execution.25 Procedurally, this legislation
provides that when a sheriff makes a seizure under a writ of
execution, he is required to give the judgment debtor a form
entitled “Notice of Objection to Removal of Goods” in addition to
a notice of seizure. 26 If the debtor signs and returns the form within
a specified period of time, the goods seized cannot be sold without
a court order, which must be sought by the execution creditor.27
The court deals with the matter in a summary hearing, and is given
wide powers to make such disposition of the case as it deems proper .28
In making his determination, a judge is able to introduce flexibility
in exemption provisions without the need for amended exemptions
legislation. In addition, he can hear expert evidence with respect
to the availability of a market for the goods seized and decide
whether or not a sale is justified.
2 5 Alberta and the Northwest Territories. See The Seizures Act, R.S.A. 1955,
c. 307, as amended by 14 Eliz. II, S.A. 1965, c. 87, 17 Eliz. II, S.A. 1968, c. 92;
Seizures Ordinance, 0. & R.N.W.T. 1959, (1st session), c. 8. Judicial discretion
in setting debtors’ exemptions is also provided for in Saskatchewan legislation.
See The Limitation of Civil Rights Act, R.S.S. 1965, c. 103, s. 25. However, unlike
the Alberta and Northwest Territories provisions,
it requires the debtor to
make a special application to the court for relief. This considerably impairs the
effectiveness of the legislation, and it is seldom used.
26 The Seizures Act, supra, n. 25, s. 25.
27Ibid., ss. 27(l), 29.
28 Ibid., s. 29.
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THE CREDIT CONSUMER IN TROUBLE
B. CONTRACTUAL PROVISIONS AFFECTING
REMEDIES OF CREDIT GRANTORS
1. Contractual Provisions Insulating Assignees of Instalment Sales
Obligations from Defences of Buyers
One of the most controversial issues arising out of the various
attempts in North American jurisdictions, particularly in the United
States, to protect credit consumers concerns the position of assignees
of retail instalment sales obligations. Briefly stated, the basic North
American pattern for the financing of retail instalment sales of
consumer goods and services, with the exception of sales made under
revolving credit accounts or with credit cards, involves the sale and
assignment of consumer instalment sales contracts by retail sellers
to sales finance companies or banks. In order to avoid the common
law rule that an assignee of a contract is subject to all the contractual
obligations of his assignor, special clauses are included in instalment
sales contracts, usually called cut-off clauses, under which instalment
purchasers recognize that their contracts are to be assigned and that
the assignees are to be free of all defences or claims they may have
against the sellers with whom they contracted. In many situations
an additional attempt is made to insulate the assignees and facilitate
the prosecution of claims against defaulting buyers by the use of
promissory notes in the original transactions between the instalment
sellers and the buyers. These notes, which are usually for the financed
amount of the contract price, are endorsed by the sellers to the
purchasers of the consumer obligations. The intended end result is
that the financing organizations are the holders in due course of
negotiable instruments and assignees of contracts which give them
a defence-free position when they seek to enforce payment either
by an action on the contracts or foreclosure of security interests,
if any.
The consequences of such an arrangement to buyers can be very
damaging. In most cases the only effective remedy a buyer has in
the event that the seller does not fully perform his obligations under
the sales contract is to withhold payment of the balance of the
purchase price. However, he is prevented from doing so under this
type of arrangement. He must pay the financing organization the
total balance owing and pursue any remedy he may have against
the seller. This is likely to be little consolation when the seller has
gone out of business, is not worth suing or is a door-to-door salesman
who has long since disappeared.
The argument in favour of the financing organization’s position
is not without persuasive force. It often is based on the fact that if
McGILL LAW JOURNAL
[Vol. 15
the sales transaction had been financed by a loan made directly to
the buyer, no one would suggest that the lender should be prejudiced
by any dispute between the seller and the buyer. It is argued that
there is no good legal or policy reason for drawing a distinction
between these two commonly used consumer finance methods. What
is overlooked in this argument is the fact that in most cases in which
a consumer buyer is defrauded or sold inferior quality goods or
services by an unscrupulous or insolvent vendor, the transaction
would not have been possible unless this simple method of financing
was available. If prospective purchasers were required to go to a
bank or a small loans company to obtain cash, they would be more
likely to obtain some financial counselling from the lending organiza-
tion. In addition they would be given an opportunity to have a second
thought about the transaction away from the high-pressure influence
of the seller. Very often the success of unscrupulous sellers depends
upon their ability to obtain a purchaser’s signature to a document after
a skillful and often false sales talk. However, the factor which weighs
heaviest against the argument advanced by the sales finance industry
is that it is best able to control unscrupulous or financially unsound
credit sellers. If sales finance organizations refuse to purchase
chattel paper from credit sellers who have a reputation for transiency
or for sharp practice or who do not have sufficient financial backing
to sustain a solvent business enterprise, the number of such sellers
would be greatly reduced. The contention that this type of supervision
and control is possible is supported by the fact that there already
exists a close relationship between credit sellers and sales finance
organizations which purchase their chattel paper. It would not be
unrealistic to require the latter to investigate sellers in the same
manner and to the same extent that they often investigate prospective
purchasers.
While the legal structure of this method of financing was
early sanctioned by the Canadian Supreme Court29 and for many
years was substantially unchallenged
in all but one Canadian
jurisdiction,30 recent developments
in several other jurisdictions
indicate that this is not likely to continue to be the case. Following
2 9Killoran v. Monticello State Bank, (1921), 61 S.C.R. 528, (1921), 57 D.L.R.
359.
30 See, Limitations of Civil Rights Act, R.S.S. 1965, c. 103, s. 18 which bars a
seller from suing for the balance of the purchase price of goods sold on an
instalment basis. The legislation has been held to prevent any holder of a note
given in conjunction with a sale to which it applies who is aware of the cir-
cumstances out of which the note arose from enforcing any claims based on the
note, either because of his imputed knowledge of the payee’s defective title, or
because he is deemed to have knowledge that there is no consideration for the
No. 1]
THE CREDIT CONSUMER IN TROUBLE
the lead taken by several courts in jurisdiction in the United States,3′
a few Canadian courts have refused to accept without question the
claim to a defence-free status made by sales finance organizations.
Although they have not been as ouvert in their acceptance of the
public policy arguments in favour of buyers as their counterparts
in the United States,3 2 there is little doubt that this is an important
factor in their approach.
A common element in every case in which a sales finance company
has been found not to be a holder in due course of the promissory
note is the conclusion that the course of dealings between the company
and the seller were such that in effect they were carrying on a
common business venture. Accordingly, the sales finance company
could not claim to occupy the position of an independent, innocent
third party traditionally required by the law merchant as a condition
of a holder in due course status.33 The findings of fact upon which
these courts have based their conclusion that a common business
venture exists indicate that several factors are relevant to this
determination. The seller’s use in the sales transaction of form
contracts and notes which comtemplate assignment of the contract
and endorsement of the note to a particular sales finance company
which supplied them, while not itself crucial, is a frequently noted
indicia of the fatal relationship. 34 Findings that, before a sale to
a particular buyer was made by the seller, the approval of the
maker’s promise. See, C.A.C. v. Fisher, [1958] S.C.R. 546, at pp. 557-558; Crescent
Finance Corp. V. Olesen, (1958), 13 D.L.R.
(2d) 557 (Sask. C.A.); Traders
Finance Corp. v. Casselman, [1960] S.C.R. 242.
3′ See, e.g., Mutual Finance Co. v. Martin, 63 So. 2d 649 (Fla. S.C., 1953);
Commercial Credit Co. v. Childs, 1a7 S.W. 2d 260 (Ark. S.C., 1940); Com-
mercial Credit Corp. v. Orange County Machine Works, 214 P. 2d 819 (Cal.
S.C., 1950).
32 See, e.g., Mutual Finance Co. v. Martin, supra, n. 31, at p. 653, in which
the Supreme Court of Florida observed:
“We think the buyer – Mr. and Mrs. General Public –
should have some
protection somewhere along the line. We believe the finance company is
better able to bear the risk of the dealer’s insolvency than the buyer and in
a far better position to protect his interests against unscrupulous and in-
solvent dealers.”
33 See, Federal Discount Corp. v. St. Pierre, (1962), 32 D.L.R. (2d) 86 (Ont.
C.A.); Citizens Finance Co. v. Sanford, (1964), 43 D.L.R. (2d) 206 (Ont. H.C.);
Rand Investments Ltd. v. Bertrand, (1966), 58 D.L.R. (2d) 372 (B.C.S.C.);
Keelan v. Norray Distributing Ltd., (1967), 62 D.L.R. (2d) 466 (Man. Q.B.);
Interprovincial Building Credits Ltd. v. Soltys, (1967), 64 D.L.R. (2d) 194 (Man.
Q.B.). However, see Imperial Oil v. Fortier, (1968), 70 D.L.R. (2d) 290 in which
the Quebec Court of Queen’s Bench, Appeal Side, refused to adopt the common
business venture approach.
34 Ibid.
McGILL LAW JOURNAL
[Vol. 15
sales finance company was sought; 35 that the seller and the sales
finance company have common corporate officers; 3 that they dealt
with each other very frequently,37 or that the finance company
provided wholesale financing to the seller,38 were relied on in several
decisions.
While judicial innovation is welcomed in this area, a satisfactory
solution can be found only in legislation. In those jurisdictions where
courts are relied upon to give the necessary protection, uncertainty
and confusion often results. If sales finance organizations are careful
enough to avoid close connections with seller, they will likely be
found to be a holder in due course of negotiable notes. Accordingly,
it would be completely fortuitous if a particular purchaser
is
protected.
jurisdiction over the elements
Unfortunately, Canadian legislatures have been very slow to
recognize the problems created by this form of credit granting. This
may be explained partially by the fact that the Canadian Constitution
divides legislative
involved. The
negotiable instruments aspect of the matter falls within the legislative
power of the Federal Government 3 9 while jurisdiction over its
contractual aspect belongs to the provinces. 40 With the exception of
the Province of Saskatchewan where instalment sellers and their
assignees have no right to demand payment of the balance of the
purchase price of goods sold under a retail instalment sales contract
which involves the taking of a security interest in goods sold,41 only
one jurisdiction, Manitoba, has taken effective legislative steps to
protect instalment buyers. 42 The effect of the Manitoba legislation is
to make assignee of instalment sales contracts subject to the same
35 See, e.g., Keelan v. Norray Distributors Ltd., supra, n. 33.
36 See, e.g., Federal Discount Corp. v. St. Pierre, supra, n. 33; Rand Invest-
ments Ltd. v. Bertrand, supra, n. 33.
37 See, e.g., Federal Discount Corp. V. St. Pierre, supra, n. 33; Rand Invest-
ments Ltd. v. Bertrand, supra, n. 33; Interprovincial Building Credits Ltd. V.
Soltys, supra, n. 33.
3 8 See, Interprovincial Building Credits Ltd. v. Soltys, supra, n. 33.
39 See, British North America Act, 1867, 30-31 Vict., 1867, c. 3, s. 91 (18).
40 Ibid., s. 92(13).
41 See, supra, n. 30.
42 Very little protection in this regard is given to instalment purchasers by
legislation recently enacted in British Columbia and Ontario which requires an
instalment seller to deliver with the note he assigns to a finance company a
copy of the instalment sales contract or a statement which discloses the credit
terms of the transaction. Notice of executory consideration does not alter the
position of a holder in due course. See Consumer Protection Act, 1546 Eliz. II,
S.B.C. 1967, c. 14, s. 15; Consumer Protection Act, 14-15 Eliz. II, S.O. 1966,
c. 23, s. 27.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
obligations, liabilities and duties of the assignor.43 Whether or not
these provisions will be interpreted in such a way as to affect a
sales finance company’s claim to holder in due course status remains
to be seen.
Due to the considerable confusion presently existing, the overall
Canadian picture is generally unsatisfactory from any point of view.
What is needed is a concerted federal-provincial legislative effort to
provide the necessary protection for instalment buyers. 44 A wide
range of possible approaches is available, judging from the number
of different kinds of provisions designed to deal with the problem
which have been adopted by jurisdictions in the United States.45
However, it is unlikely that measures other than those which subject
assignees of instalment obligations to all of the defences available
against their assignors will be satisfactory from a consumer protection
point of view.
2. Secured Consumer Credit Transactions
Security has traditionally played an important part in Canadian
consumer credit granting. The ability to rely on a security interest
in the property of a credit consumer in the event of default by him
is frequently the most valuable remedy that a credit grantor has.
As has been the case with other creditor remedies, the unregulated
use of secured consumer credit transactions has resulted in socially
unacceptable consequences for some credit consumers, and community
intervention has become necessary.
43 See The Consumers’ Credit Act, 14 Eliz. II, S.M. 1965, c. 15, s. 12. The
section goes farther than is necessary in that it subjects an assignee to his
assignor’s liabilities and obligations in addition to subjecting him to defences
good against his assignor.
44The problem was on the agenda of two federal-provincial conferences held
in December of 1966 and April of 1967.
45 See, e.g., Cal. Civil Code, ss. 1804.2, 1810.9 (West, 1964) (which nullifies the
legal effect of cut-off clauses and prohibits the use of promissory notes); N.Y.
Pers. Prop. L., ss. 403(1), 40&(3) (a) (McKinney, 1962) (which prohibits the use
of promissory notes, but gives an assignee a defence-free position if purchaser
does not complain of a defect in the seller’s performance within fifteen days of
being notified of the assignment); Pa. Stat. Ann. (1966 supp.), tit. 69, s. 1402
(which gives a forty-five day period for the purchaser to complain of defects);
Md. Ann. Code (1957), art. 83, ss. 130(d), 147 (which prohibit cut-off clauses
and allow the use of notes which are identified as notes arising out of instal-
ment sales contracts and which do not protect the assignee against the buyer
defences); Ill. R.S., c. 1.21 1/2, s. 517; U.C.C.C. 2.404. Alternative B (which
allows an assignee to claim a defence-free position if the purchaser has not
notified it of the seller’s default in performance within 30 days and if the
assignee can meet certain conditions of independence and good faith).
McGILL LAW JOURNAL
[Vol. 15
(i)
Security Interests in Necessaries
Canadian legislators have been very hesitant to place limitations
on the type of property in which security interests may be taken by
consumer credit grantors. This is difficult to explain in view of
the universal acceptance of the principle that certain basic items
of property necessary for the support of a debtor and his family
should be placed out of the reach of his creditors seeking to enforce
a money judgment through writs of execution. In most jurisdictions,
a credit grantor can take a security interest in these same items, and
in the event of default by the debtor he can realize on it. The most
common type of agreement involving a security interest in necessaries
is a blanket chattel mortgage over all of a credit consumer’s assets,
often taken by small loans companies.
Three Canadian jurisdictions have enacted legislation which is
an exception to the general Canadian pattern. The Exemptions Acts
of both Saskatchewan and Alberta 46 prohibit the enforcement of
chattel mortgage security interests in property which is exempt from
seizure under a writ of execution. With minor exceptions, prohibition
does not extend to purchase money security interests and security
interests given to secure the purchase of necessaries. The Manitoba
Bills of Sale Act 47 is considerably more limited in scope in this regard
since it limits the prohibition to security interests in exempt property
when taken to secure antecedent or future debt.
The policy of withdrawing the prohibition against the enforcement
of security interests in exempt items when a purchase of necessaries
is involved considerably weakens the effectiveness of legislation,
making available to credit grantors and credit consumers an easy
method of avoiding its provisions. Unless exemptions provisions in
a jurisdiction are so liberal as to include items of property which are
not required by a prospective credit consumer for the continued
maintenance of himself and his family, the taking of a security
interest in an otherwise exempt item to secured credit to purchase
necessaries merely jeopardizes the prospective borrower’s interest
in one item necessary for his support for the purchase of another.
Once a prospective borrower is in the position of having to encumber
necessaries to purchase other necessaries,
is likely that his
circumstances are such that social aid is the only answer to his
problem.
it
46 See Exemptions Act, R.S.A. 1955, c. 104, s. 4; Exemptions Act, R.S.S. 1965,
c. 96, s. 3.
47 R.S.M. 1954, c. 17, s. 35.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
(ii) Additional Security
instalment sellers
Other than the above-noted provinces which prohibit credit
grantors from taking security interests, other than purchase-money
security interests, in necessaries, only one Canadian jurisdiction,
Ontario, has adopted legislative measures specifically designed to
to demand from
limit the ability of retail
purchasers additional security either at the time of contracting or
during the currency of the purchase agreements. The Personal
Property Security Act 4
8 of Ontario restricts the effectiveness of
after-acquired property clauses when consumer goods are involved
by invalidating any security interest in such goods unless the debtor
acquires rights in them within ten days after the secured party has
given value. The Consumer Protection Act 49 of Ontario makes
unenforceable any provision in a retail instalment sales contract
which purports to create security interests in property of the
purchaser other than that sold under the contract.50
(iii) Revolving Credit Accounts,
Add-on and Consolidation Contracts
A very serious deficiency in credit consumer protection pro-
grammes in all Canadian jurisdictions is the failure to recognize
the full implications of the use by credit grantors of multiple-stage
credit agreements. 51 Revolving credit and
loan agreements are
becoming very common in most jurisdictions in Canada and problems
of consumer protection peculiar to this type of transaction are likely
to become prevalent in the very near future.
Canadian credit grantors are completely free to use multiple-
purchase instalment contracts which have the effect of giving to
48 15-16 Eliz. II, S.O. 1967, c. 73, s. 13(2) (b).
49 14-15 Eliz. II, S.0. 1966, c. 2S, s. 19.
50 The obscure wording of section 14 of The Personal Property Security Act
of Ontario, supra, n. 48 which states: “A purchase-money security interest in
consumer goods does not attach to any collateral other than such goods”
in
addition to invalidating security interests taken by retail instalment sellers except
security interests taken in the goods they sell, may also invalidate security inter-
ests taken by lenders in borrowers’ property other than that purchased with the
loans. “Purchase-money security interest” is defined in the section 1(s) of the
Act as “a security interest that is, (i) taken or reserved by the seller of the
collateral to secure payment of all or part of its price, or (ii) taken by a
person who gives value that enables the debtor to acquire rights in or the use
of the collateral, if such value is applied to acquire such rights.”
G1 Revolving loan and credit agreements have not been entirely ignored however.
Interest disclosure legislation in most jurisdictions contains provisions dealing
with them. See, e.g., The Cost of Credit Disclosure Act, 16 Eliz. II, S.S. 1967,
c. 85, s. 4.
McGILL LAW JOURNAL
[Vol. 15
them a security interest in all of the goods purchased under such
contracts. Frequently, most of these agreements are drawn in such
a way as to continue the entire security interest so long as a balance
is owing on any of the items purchased. Default in a payment at
any stage of the contract’s existence may result in foreclosure of
the security interest in all of the collateral, since payment of the total
purchase price of any single item does not extinguish security
interest in it. 52
(iv) Wage Assignments
In view of the similarity between credit practices in the United
States and those in Canada it seems unusual that the abuses of
wage assignments which became widespread in many jurisdictions
in the United States during the early part of this century,53 judging
from the lack of public reaction, do not seem to have been as
prevalent in Canada. Only two Canadian jurisdictions 5 have adopted
legislation designed to protect wage earners from the potentially
disastrous consequences often resulting from the use of wage assign-
ments to secure consumer credit.
The many abuses generally associated with the use of wage
assignments, particularly those involving the assignment of future
wages, in consumer credit transactions frequently have been describ-
ed. Four major objections to this form of securing consumer debt
are usually singled out. A wage assignment often involves the
assignment of a wage earner’s entire future income. This introduces
the possibility that he will be -deprived of a means of maintaining
himself and his family or will be induced to frequently change his
job or to quit work altogether in order to avoid enforcement of the
assignment. It also places into the hands of the assignee a great deal
of power over the wage earner which can be used to force his
submission to the assignee’s demands regardless of their justice or
legality. The latter abuse is further facilitated by the fact that unless
wage assignments are contested in courts, they ordinarily do not
involve the participation of legal agencies of society. Consequently
a wage earner’s interests can be ignored and fraud, deception and
sharp practice will go unnoticed. As is the case with garnishment,
the effect that the remedy may have on a wage earner’s employment
is likely its most objectionable feature. A wage assignment, when
52 For an example of the abuses which can arise from the use of this type of
contract, see Williams V. Walker-Thompson Furniture Co., 350 F. 2d 445
(D.C.C.A., 1965).
53 See, Fortas, Wage Assignments in Chicago, (1933), 42 Yale L.J. 526.
54 Manitoba and Ontario.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
enforced, necessarily involves the assignor’s employer who may decide
that the assignor is not worth the trouble and expense incidental to
processing the assignment.
Attempts at providing solutions to some of these problems are
contained in Manitoba legislation.5 5 A wage earner’s improvidence
is sought to be controlled by provisions which require that his wife
consent in writing to an assignment of future wages before the
assignment is valid. Commenting on corresponding provisions in
legislation of several jurisdictions in the United States, one observer
noted that the only value such a provision is likely to have is to
prevent the use of wage assignments to secure debts owing to
mistresses.5 G In addition,
the
approach, very common in the United States, that an employer be
given a veto over his employees’ ability to assign their wages.
Presumably, if an employer consents, he is unlikely to dismiss an
employee for giving an assignment of his wages.
legislation adopts
the Manitoba
After retaining for many years legislative provisions which
provided a wage assignment exemption, 57 the Ontario legislature
accepted the conclusion that the problems arising out of wage
assignments could not be solved by measures other than complete
prohibition of their use.58 In view of the fact that a growing number
of jurisdictions in the United States which have had extensive
experience in attempting to regulate wage assignments have come
to this conclusion, 59 it is likely the only workable solution.
(v)
Insecurity Acceleration Clauses
Only one jurisdiction, Saskatchewan, has adopted
legislation
which prohibits the use of contractual provisions in retail instalment
sales contracts which give instalment sellers the right to arbitrarily
accelerate buyers’ obligations under such contracts. 60 This fact gives
little cause of alarm because Canadian courts have taken a hostile
55 Law of Property Act, R.S.M. 1954, c. 128, s. 33.
56 Fortas, loc. cit., supra, n. 53, at p. 558.
57 The Wages Act, R.S.O. 1960, c. 421, s. 7(6), as amended by 9-10 Eliz. II,
S.O. 1960-61, c. 103, s. 1.
58 Ibid., as amended by 17 Eliz. II, S.O. 1968, c. 142, s. 1 (assignment to credit
unions are exempted from the prohibition).
59 See, e.g., Conn. Gen. Stat. Rev., ss. 52.361 (g), 36.236; D.C. Code Ann. (1961),
tit. 28, s. 2305(a); ND. Code Ann., ss. 13-03-17, 12-03-22. Also see, U.C.C.C.
2.410, 3.403.
60 Conditional Sales Act, R.S.S. 1.965, c. 393, s. 26. The Personal Property
Security Act of Ontario, 15-16 Eliz. II, S.O. 1967, c. 7a, s. 18, requires good faith
in the exercise of the right to accelerate payment or performance under- an
insecurity clause.
McGILL LAW JOURNAL
[Vol. 15
attitude toward insecurity clauses and have substantially limited their
effect. Most courts will allow acceleration under an insecurity clause
only when the secured party acts in good faith and upon facts
which actually make the debt insecure. 61
(vi) Enforcement of Security Interests in Collateral
Following
the basic modern pattern for secured business
transactions, must secured consumer credit agreements contemplate
that in the event of default by the credit consumer the credit grantor
will be entitled to have the collateral seized and sold, and the
proceeds of the sale will be applied to the debt. If there is an excess
over the balance owing, it is to be returned to the credit consumer;
if there is a deficiency between the amount owing and the sale
proceeds the credit consumer must pay it.
However, some very important differences exist between a
transaction and a secured consumer credit
secured business
transaction. One of the most significant of these is the above-noted
fact that due to the very rapid resale value depreciation of consumer
goods and the high cost of foreclosing security interests in them, a
sale of seized or repossessed consumer goods in which a security
interest has been taken often yields little which can be applied to
reduction of the debt secured. Consequently, foreclosure of the
security interest results in double loss to the defaulting credit
consumer who must repay most of the debt but lose the goods in which
the security interest was taken. In comparison, used production
machinery or new inventory frequently retains its resale value.
Another difference results from the fact that it is very difficult to
ensure that a sale of collateral seized by a credit grantor is carried
out honestly and efficiently so as to maximize proceeds and minimize
the size of the deficiency claim. The amounts involved in business
transactions are usually sufficient to justify judicial proceedings
to attack a dishonest or improvident foreclosure sale. However this
is seldom the case in consumer credit transactions. To a limited
extent these differences have been recognized in several Canadian
jurisdictions.
Legislative measures designed to protect retail instalment pur-
chasers were adopted in a few Canadian jurisdictions prior to the
turn of the century. Following the equitable rules of redemption
which were developed by the courts to protect mortgagors and which
still remain substantially uncodified in most Canadian jurisdictions,
these measures were designed to protect the buyer’s “equity” in the
61 See, e.g., Sawyer-Massey Co. v. Dagg, (1911), 18 W.L.R. 612 (Sask. C.A.).
No. 1]
THE CREDIT CONSUMER IN TROUBLE
goods purchased from oppressive foreolosures by sellers.6 2 The modern
versions of this legislation require that in the event of default by
the purchaser, the seller must hold the repossessed goods for a specific
period of time after seizure during which the purchaser can redeem. 3
Two jurisdictions have adopted legislation expressly giving the
buyer a right to redeem by paying the amount in default exclusive
of the operation of an acceleration clause.64 Judicial disagreement
still exists on the question as to whether or not buyers in other
Canadian jurisdictions have this right.61 Before the seller can resell
the collateral and look to the buyer for the deficiency, he must serve
a notice on him within a specified period of time before the fore-
closure sale. The notice must contain specified information of a
kind important to a buyer who wishes to redeem. 66 Four jurisdictions
have taken steps to avoid the rigidity of black-letter redemption
provisions by providing for judicial regulation of enforcement rights
of certain types of secured parties.67 This approach ensures that
debtors will be given every reasonable opportunity to redeem when
it appears that redemption is likely to be a reality.
Likely the most troublesome aspect of the foreclosures of a
security interest in consumer goods is the above-noted fact that very
frequently the credit consumer suffers a double loss. The goods are
seized and sold, and because little which can be applied to the debt
62 See, e.g., Conditional Sales Act, 51 Vict., S.O. 1888, c. 19, ss. 4, 5.
63 Conditional Sales Act, R.S.S. 1965, c. 393, s. 16(1).
64 Ibid., s. 27. In Quebec, 1561g C.C. provides that the buyer has a right to
redeem the repossessed goods upon paying the balance of the sale price. See Trem-
blay v. Tremblay, [1949] B.R. 539. Furthermore, under 1561h C.C., the buyer
and/or any of his creditors retain the right to pay the instalments due to the
seller and to take back the thing sold, provided such right be exercised within
twenty days of repossession. See Jett v. G6ngreux Motor Ltd., [1958] C.S. 187.
These provisions apply to every sale, promise of sale and conditional lease of
moveable property. See 1561j, and Tremblay v. Tremblay and Jett v. Gin6reux
Motor Ltd.
65 See, e.g., Peresluka v. General Motors Acceptance Corp., (1966), 56 D.L.R.
(2d) 717 (Man. Q.B.), compare Delta Acceptance Corp. v. Novitz, (1968), 67
D.L.R. (2d) 208 (Ont. County Ct.).
06 Conditional Sales Act, R.S.S. 1965, c. 393, ss. 16(3)-16(6).
67 See Seizures Act, R.S.A. 1955, c. 307, ss. 25-29, 48 (applicable to all secured
credit transactions where a security interest is taken in the debtors chattel
property); Seizures Ordinance, 0. & R.N.W.T. 1959, (1st sess.) c. 8, ss. 2, 16-20;
Consumer Protection Act, 15-1o Eliz. II, S.B.C. 1967, c. 14, s. 18 (applicable to
all secured instalment sales contracts); Limitation of Civil Rights Act, R.S.S.
1965, c. 103, s. 19 (applicable only to agricultural implements, farm truck and
certain basic household items). The two former Acts are superior from a con-
sumer protection point of view in that a debtor need not make application himself
for relief, whereas under the latter two this is necessary.
McGILL LAW JOURNAL
[Vol. 15
in Saskatchewan
legislation which
is realized from the sale, a very large deficiency claim must be
satisfied. Various methods have been adopted by Canadian juris-
dictions to meet this problem. Likely the most extreme measure is
limits retail
that contained
instalment sellers’ remedies to repossession of the goods sold.”
Although there is no empirical evidence to indicate that as a result
in
of this legislation retail instalment sellers are more careful
selecting credit risks, it is apparent that instalment purchasers are
completely protected against large deficiency claims. On the other
hand, the legislation makes no allowance for situations where
instalment purchasers will suffer loss from the repossession of goods
where a relatively small amount of the purchase price is still owing.
Legislation in Alberta, Manitoba, Newfoundland and Quebec requires
retail instalment sellers to elect between proceeding against defaulting
instalment purchasers by seizure of the goods sold or by obtaining
judgment against them for the balance owing without repossession
of the goods. 69 The effect of this legislation is a substantial reduction
in loss to instalment purchasers in that no deficiency judgment can
be claimed if the seller repossesses, and the purchaser can keep the
goods if a judgment for the balance owing is sought. The Consumer
Protection Act of Ontario contains the only specific provision
designed to prevent loss to instalment purchasers in cases where
they are in default after having paid a substantial portion of the
purchase price of the goods in which a security interest has been
taken.70 However, as noted above,
rights of
instalment sellers are subject to judicial scrutiny in four jurisdictions,
and repossession rights may be altered by a court in appropriate
circumstances.
the enforcement
While most Canadian jurisdictions have enacted legislation which
substantially limits the enforcement rights of secured retail instal-
ment sellers few have taken significant steps to regulate the
foreclosure of security interests taken in consumer loan transactions.71
Some basic differences exist between a secured loan and a secured
credit sales transaction. However, what most Canadian legislators
68 Limitation of Civil Rights Act, R.S.S. 1965, c. 103, s. 18.
69 Conditional Sales Act, R.S.A. 1955, c. 54, s. 19, amended by 14 Eliz. II. S.A.
1965, c. 15, s. 3; The Consumers’ Credit Act, 14 Eliz. II, S.M. 1965, c. 15, s. 4;
Conditional Sales Act, S.N. 1955, No. 62, s. 12; art. 1561f C.C.P. (the section
has a very limited scope of application. See art. 1561j).
7o 14-15 Eliz. II, S.O. 1966, c. 23, s. 20 (two-thirds).
71 The similarity of the problems arising out of the two types of credit trans-
actions has been partially recognized in Alberta and the Northwest Territories
which provide for the same type of judicial supervision over foreclosure of
security interests taken under both types of transactions. See supra, n. 67.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
have failed to recognize is that many of the problems of consumer
protection arising out of the foreclosure of security interests in
consumer goods are common to both transactions. For example, the
double loss problem resulting from the lack of a market for used
consumer goods is just as acute in cases where the foreclosed security
interest was part of a loan transaction as it is where it is part of
a credit sales transaction.
C. POLICING UNCONSCIONABILITY
IN CONSUMER CREDIT TRANSACTIONS
Legislation which gives to courts the power to examine consumer
credit agreements which come before them for enforcement and to
regulate the exercise of credit grantors’ remedies arising from them
so as to avoid oppression of credit consumers, seems to be a logical
extension to a programme of public scrutiny and control of socially
undesirable practices of credit grantors. Recent legislative develop-
ments in several Canadian jurisdictions indicate that this fact is
being recognized.
The appearance of unconscionable transactions relief legislation
in Canadian jurisdictions considerably pre-dates similar developments
in the United States. The Money Lenders Act 72 of Ontario passed
in 1912 provided a pattern for legislation which now exists in all
provinces. 73 These acts give wide powers to the courts to police
against usury and harsh and unconscionable results which otherwise
would result from the enforcement of consumer credit contracts.7 4
722 Geo. V, S.O. 1912, c. 30, ss. 5-8. Notwithstanding the early enactment of
the Ontario Legislation, nation-wide option of it did not occur until the Supreme
Court of Canada ruled that it was within the legislative jurisdiction of the
provinces. See Attorney-General for Ontario v. Barfried Enterprises Ltd., [1963]
S.C.R. 570.
73See Unconscionable Transactions Act, 13 Eliz. II, S.A. 1964, c. 99; Con-
sumer Protection Act, 15-16 Eliz. II, S.B.C. 1967, c. 14, ss. 17-20; Unconscionable
Transactions Relief Act, 1S Eliz. II, S.M. 1964, c. 13 (2nd Sess); Unconscionable
Transactions Relief Act, 13 Eliz. II, S.N.B. 1964, c. 14; Unconscionable Trans-
actions Relief Act, 10-11 Eliz. II, S.N. 1962, No. 38; Unconscionable Transactions
Relief Act, 13 Eliz. II, S.N.S. 1964, c. 12, amended by 15 Eliz. II, S.N.S. 1966, c.
83; Unconscionable Transactions Relief Act, R.S.O. 1960, c. 410; Unconscionable
Transactions Relief Act, 13 Eliz. II, S.P.E.I. 1964, c. 35; Unconscionable Trans-
actions Relief Act, 16 Eliz. II, S.S. 1967, c. 86; art. 1040c C.C.
74 See, e.g., The Unconscionable Transactions Relief Act, R.S.O. 1960, c. 410,
s. 2 provides:
“Where in respect of money dent, the court finds that, having regard to the
risk and to all the circumstances, the cost of the loan is excessive and that
the transaction is harsh and unconscionable, the court may, (a) re-open the
transaction and take an account between the creditor and the debtor; (b)
McGILL LAW JOURNAL
[Vol. 15
Although there is a great deal of similarity among the various acts,
a few basic differences give, to some a much wider scope. Five
Acts apply to both lender and vendor credit transactions; 75 the
remaining five likely apply only to the former. Under eight Acts, a
court can intervene only where it finds that “the cost of the loan is
excessive and the transaction
is harsh and unconscionable”.70
Accordingly, if the credit charge is reasonable but the other terms
of the transaction, such as the provision with respect to repayment
or the rights of the lender in the event of default by the borrower,
are harsh and unconscionable, the court will not have power to give
the necessary relief. Only two Acts give power to a court to relieve
against a harsh consequence to a credit consumer arising out of the
enforcement of a consumer credit transaction. 7 Under all other Acts,
the consequence must be harsh and unconscionable. Only one Act
gives power to a court to prevent harsh and unconscionable conse-
quences whether such consequences would result from the exercice
of a seller’s rights provided for in the contract or would result from
the exercise of rights eminating from some other source.78 Three
Acts provide a small degree of protection to a credit consumer against
the claim by an assignee of the obligation that he took it without
notice of some factor which renders the transaction harsh or
unconscionable. 9 They require that unless the debtor signs an
notwithstanding any statement or settlement of account or any agreement
purporting to close previous dealings and create a new obligation, re-open
any account already taken and relieve the debtor from payment of any sum
in excess of the sum adjudged by the court to be fairly due in respect of the
principal and cost of the loan;
(c) order the creditor to repay any such
excess if the same has been paid or allowed on the account by the debtor;
(d) set aside either wholly or in part or revise or alter any security given
or agreement made in respect of the money lent, and if the creditor has
parted with the security. order him to indemnify the debtor.”
75 The Nova Scotia, Prince Edward Island and Saskatchewan Acts define the
term “money lent” to include inter alia, “credit granted to or on account of any
person in any transaction that, whatever its form may be, is substantially one
of credit granting.” The British Columbia Act leaves no doubt on this point.
See ss. 2, 18. In Quebec, article 1040d C.C. provides: “A seller with a right of
redemption is deemed a borrower for the purposes of the three preceding articles.
So also is a buyer with a term, by instalment or subject to a condition, and a
possessor with a promise of sale or option to purchase…”
76 Alberta, British Columbia. New Brunswick, Newfoundland, Nova Scotia,
Ontario, Prince Edward Island, Quebec.
77 Manitoba and Saskatchewan.
78 Consumer Protection Act, 15-16 Eliz. II, S.B.C., c. 14, s. 20. It is difficult to
understand why the section applies to instalment seller and not to consumer
lenders also.
79Manitoba, Nova Scotia, Saskatchewan.
No. 1]
THE CREDIT CONSUMER IN TROUBLE
acknowledgement before a solicitor stating that he is aware of the
significance of the financial terms of the agreement, an assignee is
presumed to have knowledge of all the circumstances surrounding
the transaction.
Notwithstanding the inadequacies of much of this legislation, the
concept of a flexible system of judicial control over consumer credit
transaction has been introduced by it, and further developments in
this direction can be expected. Although it is very unlikely that this
approach alone, in the absence in specific legislative regulation, can
provide the necessary protection, its usefulness as a method of
avoiding oppression
in the peripheral situations where specific
regulation is impractical or where such regulation has not kept up
with new developments is apparent.
CONCLUSION
Present Canadian laws affecting credit consumers are quite
unsatisfactory from a consumer protection viewpoint. They are
unnecessarily complex and often contradictory. Many of them are
based on archaic concepts and reflect a lack of understanding on the
part of judges and legislators of the problems involved. Since they
are the product of an ad hoc method of dealing with the problems
of consumer protection
they fail to provide a systematic and
integrated approach.80 Being a part of this structure, laws which
establish and regulate credit grantors’ remedies in the event of
default by credit consumers suffer from the same deficiencies.
Canadian legislators and credit grantors have been slow to
to recognize that while the consumer credit industry needs adequate
collection remedies, there is no social utility in the use of remedies
which may have disastrous consequences for defaulting credit
consumers. Too often Canadians have looked upon consumer credit
as a substitute for an economic system which guarantees to the poor
a decent standard of living. Accordingly, they have accepted that
harsh remedies are needed for the protection of credit grantors who
deal with high-risk credit consumers. What is often overlooked is
80 A welcomed departure from this pattern is contained in the Proposed Draft
Act Respecting the Protection of Consumers, April, 1967, prepared by a special
committee appointed by the Attorney-General for Manitoba. The Draft Act is a
code of credit consumer protection laws containing provisions dealing with un-
conscionable transactions relief, disclosure of costs of borrowing, prepayment
privileges, relief against acceleration and forfeiture, time sales, chattel fore-
closure, direct sellers, assignees, a consumer protection bureau and licencing of
credit grantors.
McGILL LAW JOURNAL
[Vol. 15
the fact that the exercise of these remedies frequently forces credit
consumers against whom they are used to cease being productive
members of society or to seek relief through bankruptcy. It remains
as true now as at any other time in history that credit should be
granted only where it can be repaid either voluntarily or through
a collection remedy which does not cause undue economic hardship
to a credit consumer and which does not deprive him of the ability
to support himself and his family.
However, there is plenty of room for optimism. Canadians are
now entering a new era of consumer protection.8′ The problems
associated with consumer credit are being studied,82 suggestions are
being made and legislative experiments are being carried out.8 3
Likely the most important aspect of developments in this area is
that the credit consuming public is rapidly becoming more sophisticat-
ed. Pressure is being placed on the leaders of Canadian society to
provide solutions to problems which have been ignored by them
for many years.
81 For a survey of the entire Canadian consumer credit picture, see Ziegel, J.,
Consumer Credit Regulation: A Canadian Consumer-Oriented View Point, (1968),
68 Colum. L. Rev. 488.
82 See, for example, Final Report of the Select Committee of the Ontario
Legislature on Consumer Credit, 1965; Royal Commission on the Cost of
Borrowing Money, Cost of Credit and Related Matters in the Province of Nova
Scotia, Interim Report, 1964, Final Report, 1965; Report on Consumer Credit of
the Select Joint Committee of the Senate and House of Commons on Consumer
Credit and Cost of Living, February, 1967.
83 For a comprehensive list of recent credit consumer protection legislation,
see Ziegel, supra, n. 81, at p. 489, n. 3.
