ADM4716 Lecture 5: Module V Special Contracts 1 Sales, Consumer Protection, and Debtor Creditor Relations

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Application of the SGA Required Reading:pp. 534-535
1.
Delivery of goods by a third party Required Reading: p.
535
1.
SGA (Sale of Goods Act)Required Reading: pp. 535-538
2.
TRANSFER OF TITLE AND RISK
2.
Conditions and warranties Required Reading: pp. 538-539
1.
Title Required Reading: p. 539
2.
Description Required Reading: pp. 539-540
3.
Fitness and quality Required Reading: p. 540
Casebook, p. 123, Sigurdson et al. v. Hilcrest Service Ltd.
(1976)
4.
Sale by sample Required Reading: pp. 540-541
Casebook, p. 126, Coast Hotels Ltd. v. Royal Doulton
Canada Ltd. (2000)
5.
6.
IMPLIED TERMS
3.
Remedies of the seller Required Reading: pp. 541-542
1.
Remedies of the buyer Required Reading: pp. 542-543
2.
REMEDIES ON DEFAULT
4.
Sales Required Reading: pp. 532-534
1.
Responsibility for goods sold Required Reading: pp. 548-551
Casebook, p. 132, Schryvers and Schryvers v. Richport Ford
Sales Limited et al. (1993)
1.
Unacceptable business practices Required Reading: pp. 551-554
2.
Controlled business practices Required Reading: p. 554
3.
Loan transactions Required Reading: pp. 554-555
4.
Debt collection processes Required Reading: pp. 555-558
5.
Federal legislation Required Reading: pp. 544-548
6.
2.
Traditional methods of securing debt Required Reading:
pp. 502-503
1.
Personal Property Security Act Required Reading: pp.
503-508
Casebook, p. 134, Giffen (Re) (1998)
2.
The Bank Act Required Reading: p. 5113.
Floating charges Required Reading: pp. 511-5124.
Methods of securing debt Required Reading: pp. 501-502
1.
The Bankruptcy and Insolvency Act Required Reading:
pp. 515-516
1.
Priority among creditors Required Reading: pp. 518-5192.
Administering the bankrupt's property and
discharge Required Reading: pp. 519-523
Casebook, p. 143, Grandview Ford Lincoln Sales Ltd. (Re)
(2000)
3.
After discharge of the bankrupt Required Reading: pp.
523-524
Casebook, p. 140, Bank of Montreal v. Giannotti (2000)
4.
Bankruptcy Required Reading: pp. 515-5272.
DEBTOR CREDITOR RELATIONS
3.
Sales1.
Prior to the adoption of the Sale of Goods Act (SGA) by Parliament
in the late 19th century, judges made the rules needed to resolve the
disagreements that arose between parties buying and selling goods
-
In short, the statute changed nothing; the rules remained the
same
The SGA is the codification by the legislator of the rules made by
judges as they decided cases
-
Secondly, since judges were the ones who had to apply the new
legislative rules -- which were the old judge-made rules -- the judges
continued, much in the same fashion as they had before, to apply the
rules that they had previously made
-
The SGA adopts the ideology of freedom of contract and applies it to
the area of sales
-
The statute assumes buyers and the sellers are in positions of equal
strength and have access to the same information
-
First, it is important to identify the scope of the application of
the SGA, i.e., those circumstances when it applies. Secondly,
the SGA provides rules that determine when the transfer of
ownership or title to the goods takes place. Thirdly, it implies
certain terms into the contract of sale about the condition,
quality, and purpose of the goods
Unless terms to the contrary are present in the agreement of sale, the
buyer assumes the risk for the condition of the objects purchased—
because of the doctrine of caveat emptor; let the buyer beware.
However, for reasons of commercial efficacy, the SGA has limited the
application of the rule of caveat emptor by implying certain terms into
the contract
-
Application of the SGAA.
The SGA only applies to tangible property that is not real estate;
it does not apply to intangible property or to choses in action,
such as stocks and bonds
The SGA is limited to the contracts involving the sale of goods.
Goods are a type of property, specifically, tangible property
-
The SGA applies to sales and agreements to sell and not to other
forms of transactions. It applies to transactions where the parties
intend to transfer property and possession of goods from the seller and
the buyer
-
Thirdly, the SGA requires that the consideration provided by the
buyer to the seller be money; in other words, it is the price of the
goods. Consequently, the SGA does not apply to barter transactions
where parties exchange goods with each other, for example, a horse
for a cow. In such a situation, there is no exchange of money between
the parties
-
Fourthly, the SGA may require that the contract be in writing if it
exceeds a certain value. However, this rule does not apply in Ontario.
A purchase order will meet this requirement
-
Transfer of Title and RiskB.
In a sale, title to the goods is transferred from the seller to the buyer at
the time the contract of sale is formed (offer and acceptance). In an
agreement to sell, title is transferred some time later
-
Title is a very important concept in sales because the party that has
title to the goods has ownership, and the party who owns the goods
bears the risk of loss or damage to the goods. When the parties make
an agreement to sell, the agreement is concluded although it will be
executed at a later time. Only when the sale is executed will
ownership change from the seller to the buyer
-
Possession and ownership are not the same thing. For example,
Penelope lends her boat to Rocky. While Penelope has ownership of
the boat, Rocky has possession. If the boat is destroyed while it is in
Rocky’s possession, Penelope will have to bear the loss because she
has title or ownership to the boat, unless the parties have agreed
otherwise since the parties can contract out of the provisions of
the SGA.
-
The buyer will usually arrange in advance to have insurance coverage
effective from the time that it takes title to the goods so that, if the
goods are damaged or lost, the buyer will be compensated for its loss
by the insurance company. Insurance transfers the risk of the loss from
the owner to the insurer
-
Delivery of Goods by a Third Party2.
C.I.F (cost, insurance and freight) contracts;1.
F.O.B (free on board) contracts;2.
C.O.D (cash on delivery) contracts;3.
Bill of lading; and (lading = loading a ship or other vessel with
cargo)
4.
Order bill of lading5.
Normally, a buyer takes possession of goods at the sellers place of
business when the buyer picks them up. However, the goods may be
delivered by a third party, the shipper or carrier. It is important to
determine when the transfer of title takes place in these circumstances,
since, if the goods are damaged or lost in transit, it is the party who
has title to the goods who will bear the loss. Parties can use one of five
methods to govern the transfer of title and risk during transit by a third
party. These methods are:
-
Transfer of title and risk when delivery is made by a third party
The buyer takes
delivery at the
seller's premises.
1.
The buyer is
responsible for the
costs of
transportation.
2.
General Rule
Terms of delivery Party bearing
risk for loss of
merchandise
Party bearing cost of
insurance and freight
Cost, insurance and
freight
Buyer from the
time of delivery
to the Carrier
paid by Sellera.
billed to the
Buyer
b.
Free on board Buyer from the
time of delivery
to the Carrier
Paid by the Buyer
Cash on delivery Seller until
delivery to the
Buyer
Paid by the Buyer
Bill of lading Buyer from the
time of delivery
to the Carrier
Paid by the Buyer
Order bill of lading Seller until
delivery to the
Buyer
Paid by the Buyer
These documents are important because the seller is giving up
possession of the goods to the carrier who will then transport them to
the buyer. If the seller has not been paid at the time it puts the goods
in the hands of the carrier for delivery, it may want to retain title to the
goods in order in ensure that it will be paid before the goods are
handed over to the buyer by the carrier. A C.O.D. contract or an order
bill of lading would achieve this purpose
-
Transfer of Title and Risk
If parties have not specified in the contract when the transfer of title
and risk will take place, the SGA provides five rules for determining
that moment
-
Rules 1 to 4 = specific goods
-
Rule 5 = unascertained goods
-
Specific goods are goods that have been manufactured at the time the
parties enter into the contract; the parties have identified the goods
and have agreed that the contract pertains to these specific goods and
not to other goods that are the same
-
Unascertained goods are goods that are not specific goods
-
Rule 1 Considering the above example, these specific goods are in a
deliverable state; that is, nothing needs to be done to them
by the seller before the buyer will take them. This is an
unconditional contract and title to the goods and risk for
their loss passes when the contract is formed.
Rule 2 Still considering the above example, imagine that Khan al-
Khalili Merchants agrees to hand wash the carpets prior to
delivering them. The seller must do something in order to
put the goods into a deliverable state; something needs to be
done to them before the buyer will take the goods. Title and
risk pass when the work has been done and the buyer has
been notified that the work has been done.
Rule 3 Khan al-Khalili agrees to purchase the whole pile of rugs at
$1 000 per carpet from Mahfouz Carpets. The parties do not
know what the price of the carpets will be until they have
been counted. Title and risk will not pass until this has been
done and the buyer notified.
Rule 4 In a different case, Ruth collects rare and expensive baseball
cards. She asks Mantle Co. to send him on approval a Maris
card. Mantle Co sends her the card on condition that she
either purchase it within 30 days or return it. Ruth examines
the card and places it in her album. A few days later, and
prior to the expiry of the time for acceptance, the card is
damaged when a water pipe bursts. Placing the card in the
album is an act adopting the transaction. Consequently title
and risk have passed to Ruth and she must bear the loss and
pay the cost of the card to Mantle Co.
Rule 5 Returning to the Mahfouz Carpets and Khan al-Khalili
Merchants example, Khan al-Khalili Merchants agrees to
purchase 10 silk rugs which Mahfouz Carpets will
manufacture to Khan al-Khalilis specifications. Since these
rugs do not exist at the time of the formation of the contract,
these are unascertained goods. Transfer of title in the carpets
will occur when the following conditions are met: (1) Goods
whose description match the specifications set by Khan al-
Khalili are manufactured. (2) The goods are in a deliverable
state; that is, nothing else must be done to them. (3) They
are unconditionally affected to the contract; that is, they are
assigned to Khan al-Khalilis contract, with the consent of
the seller and the buyer
Transfer of
title risk
according to
the SGA
The
buyer
takes
delivery
at the
seller's
premise
s
1.
The
buyer is
responsi
ble for
the
costs of
transpor
tation
2.
General Rule
Objects Conditions of
Transfer
Nature State
Sale Rule 1 Specific
Goods
In a
deliverabl
e state.
None. The transfer
occurs when the
contract is made.
Agreement to
Sell
Rule 2 Specific
Goods
Certain
work
must be
done in
order to
put the
goods
into a
deliverabl
e state.
The work has
been done.
1.
And
The buyer has
been notified.
2.
Rule 3 Specific
Goods
In a
deliverabl
e state but
must be
weighed,
measured
, tested,
or
subjected
to some
other
action to
ascertain
the price.
The seller has
weighed,
measured,
tested, or taken
the necessary
action in order
to determine
the price.
1.
And
The buyer has
been notified.
2.
Rule 4 Specific
Goods
(sale or
return)
N/A The buyer
signifies
approval or
acceptance to
the seller or
does another
act adopting the
transaction.
1.
Or
after the
time fixed
for the
return of
the goods,
or
a.
after
expiration
of a
reasonabl
e time if
no time
has been
fixed.
b.
The buyer
retains the
goods without
giving notice of
rejection of the
goods:
2.
Rule 5 Unascer
tained
or
future
goods
(sale by
descript
ion)
N/A
correspon
d to the
descriptio
n,
a.
are in a
deliverabl
e state,
and
b.
are
unconditi
onally
appropriat
ed to the
contract
with the
consent
(either
explicit or
implicit)
of the
buyer and
the seller.
c.
The goods1.
Or
The goods are
delivered to the
buyer, carrier,
or bailee for
transmission to
the buyer, and
the seller does
not reserve the
right of
disposal
2.
Implied Terms
When the parties are unable to find a solution to their disagreement,
the SGA will imply certain terms within the contract of sale. The terms
implied within a contract by the SGA limit the scope of caveat emptor
-
The SGA will imply the following clauses into a contract. The clauses
deal with: (1) conditions and warranties, (2) the seller’s title, (3) sales
by description, (4) the fitness and quality of the goods, (5) sales by
sample, and as (6) price, time, payment and place for delivery.
-
Conditions and Warranties1.
Title2.
Regarding title, according to the SGA, the seller implies that it has the
right to sell the goods; this is a condition. Since this is a major term of
the contract, its breach will allow the buyer to terminate the contract
-
The seller also implies that the buyer will enjoy quiet possession of
the goods; that third parties will not interfere with the buyers right to
use the goods as intended; and that there are no encumbrances on the
goods. These are warranties whose breach only sounds in damages.
The buyer will not be able to terminate the contract but only receive
financial compensation for its losses
-
Description3.
When goods are sold on the basis of description, the SGA implies a
term that the goods supplied by the seller will correspond with the
description. If the sale is by sample and description, all of the goods
must correspond to the description. This is a condition and if it is
breached, the buyer can terminate the contract
-
Fitness and Quality4.
the buyer informs the seller about the particular purpose for which
the goods will be used;
a.
the buyer is relying on the seller's skill or judgment; andb.
these goods are sold by the seller in its normal course of business.c.
According to the SGA, goods are suitable or fit for the purpose for
which they are bought if the following three conditions are met:
Sale by Sample5.
The SGA requires that the bulk of the goods correspond to the sample,
and that they be of merchantable quality. This is a condition whose
breach will allow the buyer to treat the contract as terminated.
However, this condition does not apply if a defect is present in the
sample and an inspection by the buyer would have revealed the defect
-
Other Implied Terms6.
The SGA will also imply terms with regard to price, time, payment
and place for delivery if the parties fail to do so
-
Remedies on Default
Remedies of the Seller1.
In certain cases, it will be able to retake possession of the goods and
resell them to limit the losses suffered
-
Alien is the seller’s right to refuse to deliver goods to the buyer until
the purchase price has been paid. The goods, therefore, secure
payment. However, once the seller has given up possession of the
goods, it cannot retake possession to assert a right of lien. For
example, if the seller transfers the goods to the shipper and does not
retain title, it cannot retake possession and exercise a right of lien for
non-payment. The right of lien only exists so long as the seller does
not give up possession of the goods
-
If the buyer has become insolvent and the carrier is still in possession
of the goods, the seller can order the carrier not to deliver the goods to
the buyer by exercising its right of stoppage in transitu. Moreover, if
the buyer has become bankrupt within 30 days of the delivery of the
goods, the seller can under certain conditions obtain possession of the
goods for the trustee in bankruptcy
-
A seller can also exercise a right of resale. If a seller does so, he or
she can no longer recover the full sale price from a buyer who refused
to take possession, or who took possession but did not pay for the
goods. The seller will only be able to claim the difference between the
price of the goods when they were sold at the original sale price. To
this, the seller will be able to add any costs associated with taking
back possession of the goods and reselling them
-
Once title in the goods has passed to the buyer, the unpaid seller
can sue for the price of the goods if the buyer defaults on payment or
if the buyer refuses to take possession of the goods
-
Remedies of the Buyer2.
The buyer of defective goods will have recourse to the remedies
provided by the implied terms in the SGA
These remedies are generally those already available in contract
law. For a breach of a condition, the buyer has the option of
treating the contract as terminated and to have returned any
money paid to the seller. For a breach of a warranty, the buyer
must perform the contract and may only seek damages for its
losses. In the case of an unique object which cannot be easily
replaced, the buyer can ask for specific performance.
SGA does not provide any remedies to the buyer
-
Consumer Protection2.
The SGA is redolent of liberalism and individualism; it presupposes
that all parties have equal bargaining power and the required
knowledge to make sound decisions
-
Responsibility for Goods SoldA.
Consumer protection takes away the right of the parties to contract out
of the SGA
-
Consequently, the conditions and warranties that the SGA implies into
contracts for the sale of goods form part of all consumer transactions
covered by the SGA
-
Sellers can't contract out of their responsibility through the use of
exemption clauses
-
In order to get around the requirement of privity, courts
developed the concept of negligence. This allows parties who
are reasonably foreseeable and have suffered a loss to sue a
manufacturer or supplier
The doctrine of Privity of Contract still poses a problem for consumer
protection. According to this doctrine, only the parties to the contract
can sue on the contract
-
In order to recover damages in negligence, the injured party must
prove that the other party was at fault. The advantage to suing in
contract is that the injured party need not prove fault; rather, the
injured party needs only prove that the contract was breached.
-
Other provinces have done away with the requirement of privity
altogether in cases of warranties for fitness
It may then recover substantial damages if the circumstances warrant
it. In some provinces, the benefit of the requirement that goods are fit
for the purpose has been extended to parties who it is reasonably
foreseeable would use the product. In these cases, the scope of privity
has been broadened
-
Unacceptable Business PracticesB.
Most provinces have adopted legislation by which misleading or false
statements made prior to the formation of a contract to persuade
people to purchase an object are now part of the contract
-
By incorporating such statements, the injured party can now obtain
damages or recission of the contract
-
Legislation has also been adopted which limits the amount of interest
which can be changed. These statutes apply to the borrowing of
money and not to credit purchases
-
Controlled Business PracticesC.
e.g. Door-to-door sales, legislation gives the consumer what is called a
"cooling off period". During this period, the consumer may cancel the
contract for any reason (10 days)
-
However, where referral selling is used, it is forbidden to give
“any advantage, benefit or gain to the buyer or prospective buyer
for doing anything that purports to assist the seller in finding or
selling to another prospective buyer” R.S.O. 1990, c. C-31, s.
37(2). Consequently, the consumer cannot make a profit or
lower the purchase price of the object by providing the
salesperson with names and addresses of family and friends.
This practice, it is thought, will better enable a buyer to resist
pressure from a salesperson to provide such information
In Ontario, referral selling is not prohibited
-
Loan TransactionsD.
Whenever anyone borrows money, the lender must disclose the actual
cost of borrowing the money. In order to better control the activities of
moneylenders, the government requires that moneylenders be
registered. Credit reporting agencies are also usually required to be
registered
-
Debt Collection ProcessesE.
Must be registered with the government
Debt collection agencies collect, on behalf of a creditor, money owed
by a debtor. The debt collection agency is normally paid from the
money that it collects. Financial necessity can lead such agencies to
use many unsavoury means to collect. Such tactics include
importuning a person's employer or members of his family. This
reality has, in turn, led to the adoption of various statutes in order to
protect the consumer from excessive and unreasonable pressure.
-
Federal LegislationF.
The Competition Act is meant to ensure competition in the
marketplace. It regulates mergers, and the competition tribunal will
intervene when a merger unreasonably limits competition.
-
The Act also prohibits certain anti-competitive practices which unduly
restrict competition. These practices include predatory pricing,
discriminatory allowance, etc.
-
Other federal legislation, such as the Food and Drug Act,
the Hazardous Products Act, the Explosives Act, the Pest Control
Act and the Motor Vehicle Safety Act, is meant to regulate the sale
and use of dangerous products. The goal of other legislation, such as
the Weights and Measures Act, the Consumer Packaging Act and
the Textile Labelling Act, is to provide accurate information to
consumers to enable them to make enlightened decisions
-
Debtor-Creditor Relations3.
The smooth functioning of the credit system is largely dependent on
the confidence of creditors that their debtors will reimburse them and,
if not, that they have access to means that will ensure that they are
reimbursed
-
In either case, the creditor can sue if the debtor breaches his or
her promise to pay the sum owed; this remedy is only effective if
the debtor has property that can be seized and sold
Credit is usually created in one of two ways: (1) A creditor lends a
sum of money to a debtor who promises to repay the debt at a later
date. (2) A purchaser obtains goods from a seller and promises to pay
for them at a later date
-
Methods of Securing DebtA.
A debtor-creditor relationship arises when one party (the debtor)
agrees to pay a sum of money on a certain day to a second party (the
creditor)
-
In a simple transaction, the creditor will advance funds to the debtor
who will use them to purchase something from a third party, and will
then resell the object for a profit to a fourth party. The debtor will
reimburse the creditor from the proceeds of the sale
-
One method of providing assurance is to give the creditor the right to
take possession of some identified property of the debtor if the debtor
defaults (to provide security).
-
Real: Land, buildings, or fixtures
Chattels are physical objects while choses in action
represent rights to things. A car, a chair, and a full basket
are chattels; cheques, stocks and bonds are choses in
action. Personal property may also be given as security for
a debt
For example, Opal wants to borrow money from
Warbucks in order to purchase some gold to make
some jewellery. Warbucks agrees on condition that
Opal give him security in some pieces of equipment that
she has. Warbucks is a secured creditor. However,
Warbucks will want to ensure that no one else has
taken the equipment as security before him. If Mrs.
Prior has already taken a security interest in the
equipment, Mrs. Prior will have a first right to
reimbursement from the proceeds of the sale of the
equipment. If Warbucks seizes the equipment and sells
it, Warbucks will have to reimburse Mrs. Prior first,
and only then will he be able to reimburse himself.
Before advancing funds to Opal, Warbucks will want to
ensure (1) that he can get and maintain a security
interest in something that Opal owns and (2) that no
one has an interest with priority over his interest
regarding the secured object.
Personal: Any form of property that is not real property and is
divided into chattels (or goods) and choses in action
Property: Real or personal
-
Creditors are consequently concerned with two questions: creating and
maintaining a security interest and ensuring priority for their security
interest
-
Traditional Methods of Securing DebtI.
Pledged property = collateral security because it is collateral or
incidental to the main contract
Security interest can be created using either real or
personal property
Mortgage is a common method of financing the purchase
of land and the construction of buildings. Importantly, a
mortgage secures the mortgagee's (creditor's) loan to the
mortgagor (debtor)
Personal property can also be used as a security for a wide
variety of transactions
The creditor is said to have a security interest in the property
In a secured transaction, the debtor guarantees that his or her
obligation will be fulfilled by pledging property.
-
Pledge or Pawn -- A creditor took physical possession of property that
secured a loan and returned it to the debtor only when the loan was
repaid
-
Conditional Sale -- The seller (creditor) transfers possession of
the goods to the buyer (debtor) but retains title to the goods until
it has been paid by the buyer. The buyer, in possession of the
goods, can sell them and use the proceeds of the sale to pay the
seller
Chattel Mortgage -- The debtor already has possession of the
goods and transfers title to the creditor. When the debtor sells
the goods to a third party, it will use the proceeds to reimburse
the creditor
Two methods play with the concepts of possession and title:
-
In a conditional sale, the goods that are the object of the sale also offer
the security for the transaction; in a chattel mortgage, any goods
owned by the debtor can be used for security and the funds obtained
used to purchase other goods. In the example of Warbucks and Opal,
Wabucks was taking a chattel mortgage on the equipment, and Opal
was using the funds to buy some gold from a third party. Finally, in a
conditional sale, the seller is also the creditor; in a chattel mortgage,
the creditor can be either the seller or a third party
-
In a conditional sale and a chattel mortgage, the debtor may sell the
goods, thereby providing security for the debt to a third-party
purchaser. The creditor will be able to seize the goods from the third-
party purchaser if it has registered its security interest with the
appropriate agency
-
For example, let us return to the case of Khan al-Khalili
Merchants. Imagine that Mahfouz Carpets has sold a rug
on credit to Smith. It can assign this account to Khan al-
Khalili Merchants. Khan al-Khalili then has the same
rights to collect as Mahfouz does. This method of securing
debt does not rely on goods but on money owed. The first
two methods, chattel mortgages and conditional sales, used
goods as security
The debtor, who is owed money by third parties, gives to the
creditor the right to collect the amounts owed; it assigns its
rights to its accounts receivable to its creditor and thus repays its
loan
Another method of securing the creditor's interest is assignment of
accounts
-
The debtor has possession of the chattel and may sell it to an
unsuspecting third party who believes that it is purchasing the
chattel from its rightful owner. The creditor must then have
some means of protecting its interest in the chattel which secures
the reimbursement of the debt and some meant of retaking
possession of the chattel, even if it has been transferred to a third
party, if the debtor defaults on its payments
Leasing -- Separates ownership and possession. The owner/lessor has
title to the chattel but transfers possession for a period of time through
a lease to the lessee. The owner rents the chattel to the renter. In
consideration to the possession of the chattel, the lessee makes
periodic payments to the owner/lessor
-
Personal Property Security ActII.
PPSA applies to all transactions that, in substance, create a
security interest in personal property, and where the debtor and
creditor have consented to its creation. The secured party
registers its security interest by filing a financing statement with
the Personal Property Security Registry
The PPSR is computerized and broadly accessible from various
points, thus allowing parties who want to deal with personal
property to consult the registry and to determine who the owner
is and who, if anyone, has a security interest in the personal
property
First, the debtor and creditor must create the security
interest by consenting to its creation. The security interest
is created by a contract and the parties must have agreed to
the formation of the security interest through a process of
offer and acceptance
Second, the security interest must attach to the object or
the collateral. In order for the security interest to attach,
two things must occur: the debtor must acquire an
ownership interest in the object and the creditor must grant
the credit offered to the debtor. For example, a bank lends
money to a customer to purchase a car. It has performed its
part of the bargain; it has lent the money. The security
interest will not attach, however, until the customer
purchases the car; that is, until the customer acquires an
ownership interest in the object. On the other hand, if the
customer already owns the car at the time of the loan,
attachment will occur as soon as the bank lends the
customer the money.
Third, the secured transaction must be perfected.
Perfection occurs when the financing statement is filed or
the creditor takes possession of the security
Three stages in the creation of a security interest: Creation,
attachment, and perfection
The Personal Property Security Act (PPSA) puts into place a common
set of rules to control the registration of transactions where personal
property is used as security. While various types of security interests
still exist, the patchwork system of registration that existed previously
has been replaced by a single uniform system
-
A security interest is created once all three steps are complete, and the
first party to complete all three will have priority over other creditors.
Priority is a right to go before others who have the same right in
respect to the same subject-matter and to exercise that right to the
exclusion of the others. The secured creditor has the first right to be
paid if and when the assets listed on the financing statement are sold.
Where more than one party registers a financing statement affecting
the same asset, the one that completes all three steps first will have
priority over other secured creditors. In short, the race goes to the
swiftest
-
Upon default by the debtor, the secured creditor has its normal
remedies at common law and whatever other recourse the contract
may have created. The secured creditor may repossess the collateral
security, but must do so without breaking the law. It must take care of
the goods and keep them in good repair
-
If the creditor chooses to sell the goods, it must follow the procedure
set out in the Act. If the sale of the collateral security does not cover
the secured debt, the creditor may sue the debtor for the amount still
owing. Any surplus from the sale must be handed over to the debtor.
Secondly, the creditor may choose to keep the goods
-
Instead of selling them. In this case, the debtor does not owe any
further money to the creditor, and the creditor gives up any claim for
any deficiency against the debtor. However, before the creditor can
dispose of the collateral security, notice must be given to the debtor,
and to other creditors, if any, of its right to redeem to pay the amount
owing and redeem the seized collateral
-
The Bank ActIII.
The Bank Act functions like the PPSA, but it is federal rather than
provincial legislation. It has its own registration system according to
which banks register their security interests in the property of their
debtors. Only banks can become secured creditors under the Bank Act.
Any other creditor must register under the PPSA
-
Floating ChargesIV.
Afloating charge allows a debtor to deal with assets without
interference from the creditor as long as the debtor complies with the
terms of the loan agreement
-
Consequently, the debtor can sell the collateral security and pass good
title to the purchaser. This allows the debtor to buy the material, use it
as collateral security to finance the purchase or manufacture of goods,
to manufacture goods with the material, to sell the manufactured
goods, and to use the proceeds of the sale to purchase more material to
manufacture more goods. The charge does not attach but floats over
the collateral security until the debtor breaches one of its obligations
to the creditor. At that moment, the creditor steps forward and the
charge crystallizes; that is, it attaches to the goods. The secured
creditor can then seize the goods in satisfaction of the debt
-
BankruptcyB.
Occurs when a debtor becomes unable to pay his or her debts as they
become due. It triggers a response by which the assets of the debtor
are liquidated in order to pay creditors. Insolvency is simply the
descriptor of the state of a debtor who is unable to pay his/her debts as
they become due
-
The Bankruptcy and Insolvency Act1.
An insolvent debtor can be forced into bankruptcy by one of its
creditors if it can show to the court that the debtor has
committed an act of bankruptcy
It will then obtain a bankruptcy order against the debtor, or they
may voluntarily place itself into bankruptcy by making an
assignment
(BIA) governs the process of liquidation of a debtor's assets
-
e.g. The trustee will arrange for the distribution of the debtor's
assets or the proceeds from the sale of the assets to the creditors
Upon bankruptcy, the assets of the debtor are transferred to a trustee
in bankruptcy who manages them for the benefit of all creditors
-
Div. 1 Proposals -- Significant debtors, total claims greater than
$75,000
Consumer or Div. 2 Proposals -- Total claims against are less
than $75,000
Alternative to bankruptcy = proposal; procedure which allows the
insolvent debtor to avoid bankruptcy
-
Corporations can also avail themselves of the Companies’ Creditors
Arrangement Act to rearrange their affairs without having to go into
bankruptcy
-
Priority Among Creditors (Payouts according to their priority)2.
Three types of creditors
-
Secured Creditors -- Absolute priority in the amount of the asset used
as security
A.
If the sale of the asset does not cover the total amount owed, the
secured creditor ranks as an unsecured creditor for the balance of the
unpaid debt
If the trustee in bankruptcy still has the goods, they will be
returned to the creditors
Creditors who have supplied goods may ask for the return of the
goods within 30 days of their delivery
Preferred Creditors -- Will be paid from any funds that are left after
the claims of the satisfaction of the secured creditors from the secured
assets
B.
The preferred creditors must be paid in full in the order provided in
the BIA, that is each preferred creditor must be paid in full before the
next preferred creditor is paid
First to be paid = funeral expenses of a deceased debtor. If funds left,
expenses and fees of the trustee in bankruptcy will be paid in full
Next to be paid will be claims for unpaid wages, subject to certain
conditions. Then the following claims will be paid in order: municipal
taxes, arrears in rent for a limited period of time; some direct costs of
creditors in starting the action in bankruptcy against the debtor;
workers’ compensation, employment insurance, income tax, and other
claims of the Crown
General Creditors -- Paid on a pro rata basis from the proceeds of the
remaining assets (proportional)
C.
Administering the Bankrupt's Property3.
The trustee in bankruptcy will examine the debtor’s dealings
with its assets within the previous year to determine whether the
debtor has tried to hide certain assets from creditors
The trustee may also recover property which the bankrupt has
transferred to others if they are a settlement or fraudulent
preference as set out in the BIA
Trustee in bankruptcy has power; takes control of all the debtor's
assets including bank accounts, accounts receivable, stocks, bonds,
vehicles, and properties, and home
-
In such a case, the trustee in bankruptcy can seize the property.
A fraudulent preference occurs when (1) a payment or transfer
of property to a creditor is made (2) within three months prior to
the bankruptcy (3) by an insolvent debtor (4) in order to give
that creditor a financial advantage over the other creditors (5)
where the creditor was aware of the impending bankruptcy
Settlement -- A transaction for which no consideration has been given
to the insolvent party to the creditor; however the intention is to give
that creditor a financial advantage
-
Discharging the Bankrupt4.
Any assets that the discharged bankrupt subsequently acquires
cannot be seized by former creditors to satisfy their former debts
Discharge puts an end to any outstanding claims that the creditors may
still have. The discharged bankrupt is then in position to make a fresh
start
-
A bankrupt corporation is dissolved. A new corporation may be
formed with the same name, but it will be a different corporation than
the previous one
-
Module V: Special Contracts 1: Sales, Consumer
Protection, and Debtor Creditor Relations
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Application of the SGA Required Reading:pp. 534-5351.
Delivery of goods by a third party Required Reading: p.
535
1.
SGA (Sale of Goods Act)Required Reading: pp. 535-5382.
TRANSFER OF TITLE AND RISK2.
Conditions and warranties Required Reading: pp. 538-5391.
Title Required Reading: p. 5392.
Description Required Reading: pp. 539-5403.
Fitness and quality Required Reading: p. 540
Casebook, p. 123, Sigurdson et al. v. Hilcrest Service Ltd.
(1976)
4.
Sale by sample Required Reading: pp. 540-541
Casebook, p. 126, Coast Hotels Ltd. v. Royal Doulton
Canada Ltd. (2000)
5.
Other Implied Terms Required Reading: p. 5416.
IMPLIED TERMS3.
Remedies of the seller Required Reading: pp. 541-5421.
Remedies of the buyer Required Reading: pp. 542-5432.
REMEDIES ON DEFAULT4.
Sales Required Reading: pp. 532-5341.
Responsibility for goods sold Required Reading: pp. 548-551
Casebook, p. 132, Schryvers and Schryvers v. Richport Ford
Sales Limited et al. (1993)
1.
Unacceptable business practices Required Reading: pp. 551-5542.
Controlled business practices Required Reading: p. 5543.
Loan transactions Required Reading: pp. 554-5554.
Debt collection processes Required Reading: pp. 555-5585.
Federal legislation Required Reading: pp. 544-5486.
Consumer Protection Required Reading: p. 5442.
Traditional methods of securing debt Required Reading:
pp. 502-503
1.
Personal Property Security Act Required Reading: pp.
503-508
Casebook, p. 134, Giffen (Re) (1998)
2.
The Bank Act Required Reading: p. 5113.
Floating charges Required Reading: pp. 511-5124.
Methods of securing debt Required Reading: pp. 501-5021.
The Bankruptcy and Insolvency Act Required Reading:
pp. 515-516
1.
Priority among creditors Required Reading: pp. 518-5192.
Administering the bankrupt's property and
discharge Required Reading: pp. 519-523
Casebook, p. 143, Grandview Ford Lincoln Sales Ltd. (Re)
(2000)
3.
After discharge of the bankrupt Required Reading: pp.
523-524
Casebook, p. 140, Bank of Montreal v. Giannotti (2000)
4.
Bankruptcy Required Reading: pp. 515-5272.
DEBTOR CREDITOR RELATIONS3.
Sales1.
Prior to the adoption of the Sale of Goods Act (SGA) by Parliament
in the late 19th century, judges made the rules needed to resolve the
disagreements that arose between parties buying and selling goods
-
In short, the statute changed nothing; the rules remained the
same
The SGA is the codification by the legislator of the rules made by
judges as they decided cases
-
Secondly, since judges were the ones who had to apply the new
legislative rules -- which were the old judge-made rules -- the judges
continued, much in the same fashion as they had before, to apply the
rules that they had previously made
-
The SGA adopts the ideology of freedom of contract and applies it to
the area of sales
-
The statute assumes buyers and the sellers are in positions of equal
strength and have access to the same information
-
First, it is important to identify the scope of the application of
the SGA, i.e., those circumstances when it applies. Secondly,
the SGA provides rules that determine when the transfer of
ownership or title to the goods takes place. Thirdly, it implies
certain terms into the contract of sale about the condition,
quality, and purpose of the goods
Unless terms to the contrary are present in the agreement of sale, the
buyer assumes the risk for the condition of the objects purchased—
because of the doctrine of caveat emptor; let the buyer beware.
However, for reasons of commercial efficacy, the SGA has limited the
application of the rule of caveat emptor by implying certain terms into
the contract
-
Application of the SGAA.
The SGA only applies to tangible property that is not real estate;
it does not apply to intangible property or to choses in action,
such as stocks and bonds
The SGA is limited to the contracts involving the sale of goods.
Goods are a type of property, specifically, tangible property
-
The SGA applies to sales and agreements to sell and not to other
forms of transactions. It applies to transactions where the parties
intend to transfer property and possession of goods from the seller and
the buyer
-
Thirdly, the SGA requires that the consideration provided by the
buyer to the seller be money; in other words, it is the price of the
goods. Consequently, the SGA does not apply to barter transactions
where parties exchange goods with each other, for example, a horse
for a cow. In such a situation, there is no exchange of money between
the parties
-
Fourthly, the SGA may require that the contract be in writing if it
exceeds a certain value. However, this rule does not apply in Ontario.
A purchase order will meet this requirement
-
Transfer of Title and RiskB.
In a sale, title to the goods is transferred from the seller to the buyer at
the time the contract of sale is formed (offer and acceptance). In an
agreement to sell, title is transferred some time later
-
Title is a very important concept in sales because the party that has
title to the goods has ownership, and the party who owns the goods
bears the risk of loss or damage to the goods. When the parties make
an agreement to sell, the agreement is concluded although it will be
executed at a later time. Only when the sale is executed will
ownership change from the seller to the buyer
-
Possession and ownership are not the same thing. For example,
Penelope lends her boat to Rocky. While Penelope has ownership of
the boat, Rocky has possession. If the boat is destroyed while it is in
Rocky’s possession, Penelope will have to bear the loss because she
has title or ownership to the boat, unless the parties have agreed
otherwise since the parties can contract out of the provisions of
the SGA.
-
The buyer will usually arrange in advance to have insurance coverage
effective from the time that it takes title to the goods so that, if the
goods are damaged or lost, the buyer will be compensated for its loss
by the insurance company. Insurance transfers the risk of the loss from
the owner to the insurer
-
Delivery of Goods by a Third Party2.
C.I.F (cost, insurance and freight) contracts;1.
F.O.B (free on board) contracts;2.
C.O.D (cash on delivery) contracts;3.
Bill of lading; and (lading = loading a ship or other vessel with
cargo)
4.
Order bill of lading5.
Normally, a buyer takes possession of goods at the sellers place of
business when the buyer picks them up. However, the goods may be
delivered by a third party, the shipper or carrier. It is important to
determine when the transfer of title takes place in these circumstances,
since, if the goods are damaged or lost in transit, it is the party who
has title to the goods who will bear the loss. Parties can use one of five
methods to govern the transfer of title and risk during transit by a third
party. These methods are:
-
Transfer of title and risk when delivery is made by a third party
The buyer takes
delivery at the
seller's premises.
1.
The buyer is
responsible for the
costs of
transportation.
2.
General Rule
Terms of delivery Party bearing
risk for loss of
merchandise
Party bearing cost of
insurance and freight
Cost, insurance and
freight
Buyer from the
time of delivery
to the Carrier
paid by Sellera.
billed to the
Buyer
b.
Free on board Buyer from the
time of delivery
to the Carrier
Paid by the Buyer
Cash on delivery Seller until
delivery to the
Buyer
Paid by the Buyer
Bill of lading Buyer from the
time of delivery
to the Carrier
Paid by the Buyer
Order bill of lading Seller until
delivery to the
Buyer
Paid by the Buyer
These documents are important because the seller is giving up
possession of the goods to the carrier who will then transport them to
the buyer. If the seller has not been paid at the time it puts the goods
in the hands of the carrier for delivery, it may want to retain title to the
goods in order in ensure that it will be paid before the goods are
handed over to the buyer by the carrier. A C.O.D. contract or an order
bill of lading would achieve this purpose
-
Transfer of Title and Risk
If parties have not specified in the contract when the transfer of title
and risk will take place, the SGA provides five rules for determining
that moment
-
Rules 1 to 4 = specific goods
-
Rule 5 = unascertained goods
-
Specific goods are goods that have been manufactured at the time the
parties enter into the contract; the parties have identified the goods
and have agreed that the contract pertains to these specific goods and
not to other goods that are the same
-
Unascertained goods are goods that are not specific goods
-
Rule 1 Considering the above example, these specific goods are in a
deliverable state; that is, nothing needs to be done to them
by the seller before the buyer will take them. This is an
unconditional contract and title to the goods and risk for
their loss passes when the contract is formed.
Rule 2 Still considering the above example, imagine that Khan al-
Khalili Merchants agrees to hand wash the carpets prior to
delivering them. The seller must do something in order to
put the goods into a deliverable state; something needs to be
done to them before the buyer will take the goods. Title and
risk pass when the work has been done and the buyer has
been notified that the work has been done.
Rule 3 Khan al-Khalili agrees to purchase the whole pile of rugs at
$1 000 per carpet from Mahfouz Carpets. The parties do not
know what the price of the carpets will be until they have
been counted. Title and risk will not pass until this has been
done and the buyer notified.
Rule 4 In a different case, Ruth collects rare and expensive baseball
cards. She asks Mantle Co. to send him on approval a Maris
card. Mantle Co sends her the card on condition that she
either purchase it within 30 days or return it. Ruth examines
the card and places it in her album. A few days later, and
prior to the expiry of the time for acceptance, the card is
damaged when a water pipe bursts. Placing the card in the
album is an act adopting the transaction. Consequently title
and risk have passed to Ruth and she must bear the loss and
pay the cost of the card to Mantle Co.
Rule 5 Returning to the Mahfouz Carpets and Khan al-Khalili
Merchants example, Khan al-Khalili Merchants agrees to
purchase 10 silk rugs which Mahfouz Carpets will
manufacture to Khan al-Khalilis specifications. Since these
rugs do not exist at the time of the formation of the contract,
these are unascertained goods. Transfer of title in the carpets
will occur when the following conditions are met: (1) Goods
whose description match the specifications set by Khan al-
Khalili are manufactured. (2) The goods are in a deliverable
state; that is, nothing else must be done to them. (3) They
are unconditionally affected to the contract; that is, they are
assigned to Khan al-Khalilis contract, with the consent of
the seller and the buyer
Transfer of
title risk
according to
the SGA
The
buyer
takes
delivery
at the
seller's
premise
s
1.
The
buyer is
responsi
ble for
the
costs of
transpor
tation
2.
General Rule
Objects Conditions of
Transfer
Nature State
Sale Rule 1 Specific
Goods
In a
deliverabl
e state.
None. The transfer
occurs when the
contract is made.
Agreement to
Sell
Rule 2 Specific
Goods
Certain
work
must be
done in
order to
put the
goods
into a
deliverabl
e state.
The work has
been done.
1.
And
The buyer has
been notified.
2.
Rule 3 Specific
Goods
In a
deliverabl
e state but
must be
weighed,
measured
, tested,
or
subjected
to some
other
action to
ascertain
the price.
The seller has
weighed,
measured,
tested, or taken
the necessary
action in order
to determine
the price.
1.
And
The buyer has
been notified.
2.
Rule 4 Specific
Goods
(sale or
return)
N/A The buyer
signifies
approval or
acceptance to
the seller or
does another
act adopting the
transaction.
1.
Or
after the
time fixed
for the
return of
the goods,
or
a.
after
expiration
of a
reasonabl
e time if
no time
has been
fixed.
b.
The buyer
retains the
goods without
giving notice of
rejection of the
goods:
2.
Rule 5 Unascer
tained
or
future
goods
(sale by
descript
ion)
N/A
correspon
d to the
descriptio
n,
a.
are in a
deliverabl
e state,
and
b.
are
unconditi
onally
appropriat
ed to the
contract
with the
consent
(either
explicit or
implicit)
of the
buyer and
the seller.
c.
The goods1.
Or
The goods are
delivered to the
buyer, carrier,
or bailee for
transmission to
the buyer, and
the seller does
not reserve the
right of
disposal
2.
Implied Terms
When the parties are unable to find a solution to their disagreement,
the SGA will imply certain terms within the contract of sale. The terms
implied within a contract by the SGA limit the scope of caveat emptor
-
The SGA will imply the following clauses into a contract. The clauses
deal with: (1) conditions and warranties, (2) the seller’s title, (3) sales
by description, (4) the fitness and quality of the goods, (5) sales by
sample, and as (6) price, time, payment and place for delivery.
-
Conditions and Warranties1.
Title2.
Regarding title, according to the SGA, the seller implies that it has the
right to sell the goods; this is a condition. Since this is a major term of
the contract, its breach will allow the buyer to terminate the contract
-
The seller also implies that the buyer will enjoy quiet possession of
the goods; that third parties will not interfere with the buyers right to
use the goods as intended; and that there are no encumbrances on the
goods. These are warranties whose breach only sounds in damages.
The buyer will not be able to terminate the contract but only receive
financial compensation for its losses
-
Description3.
When goods are sold on the basis of description, the SGA implies a
term that the goods supplied by the seller will correspond with the
description. If the sale is by sample and description, all of the goods
must correspond to the description. This is a condition and if it is
breached, the buyer can terminate the contract
-
Fitness and Quality4.
the buyer informs the seller about the particular purpose for which
the goods will be used;
a.
the buyer is relying on the seller's skill or judgment; andb.
these goods are sold by the seller in its normal course of business.c.
According to the SGA, goods are suitable or fit for the purpose for
which they are bought if the following three conditions are met:
Sale by Sample5.
The SGA requires that the bulk of the goods correspond to the sample,
and that they be of merchantable quality. This is a condition whose
breach will allow the buyer to treat the contract as terminated.
However, this condition does not apply if a defect is present in the
sample and an inspection by the buyer would have revealed the defect
-
Other Implied Terms6.
The SGA will also imply terms with regard to price, time, payment
and place for delivery if the parties fail to do so
-
Remedies on Default
Remedies of the Seller1.
In certain cases, it will be able to retake possession of the goods and
resell them to limit the losses suffered
-
Alien is the seller’s right to refuse to deliver goods to the buyer until
the purchase price has been paid. The goods, therefore, secure
payment. However, once the seller has given up possession of the
goods, it cannot retake possession to assert a right of lien. For
example, if the seller transfers the goods to the shipper and does not
retain title, it cannot retake possession and exercise a right of lien for
non-payment. The right of lien only exists so long as the seller does
not give up possession of the goods
-
If the buyer has become insolvent and the carrier is still in possession
of the goods, the seller can order the carrier not to deliver the goods to
the buyer by exercising its right of stoppage in transitu. Moreover, if
the buyer has become bankrupt within 30 days of the delivery of the
goods, the seller can under certain conditions obtain possession of the
goods for the trustee in bankruptcy
-
A seller can also exercise a right of resale. If a seller does so, he or
she can no longer recover the full sale price from a buyer who refused
to take possession, or who took possession but did not pay for the
goods. The seller will only be able to claim the difference between the
price of the goods when they were sold at the original sale price. To
this, the seller will be able to add any costs associated with taking
back possession of the goods and reselling them
-
Once title in the goods has passed to the buyer, the unpaid seller
can sue for the price of the goods if the buyer defaults on payment or
if the buyer refuses to take possession of the goods
-
Remedies of the Buyer2.
The buyer of defective goods will have recourse to the remedies
provided by the implied terms in the SGA
These remedies are generally those already available in contract
law. For a breach of a condition, the buyer has the option of
treating the contract as terminated and to have returned any
money paid to the seller. For a breach of a warranty, the buyer
must perform the contract and may only seek damages for its
losses. In the case of an unique object which cannot be easily
replaced, the buyer can ask for specific performance.
SGA does not provide any remedies to the buyer
-
Consumer Protection2.
The SGA is redolent of liberalism and individualism; it presupposes
that all parties have equal bargaining power and the required
knowledge to make sound decisions
-
Responsibility for Goods SoldA.
Consumer protection takes away the right of the parties to contract out
of the SGA
-
Consequently, the conditions and warranties that the SGA implies into
contracts for the sale of goods form part of all consumer transactions
covered by the SGA
-
Sellers can't contract out of their responsibility through the use of
exemption clauses
-
In order to get around the requirement of privity, courts
developed the concept of negligence. This allows parties who
are reasonably foreseeable and have suffered a loss to sue a
manufacturer or supplier
The doctrine of Privity of Contract still poses a problem for consumer
protection. According to this doctrine, only the parties to the contract
can sue on the contract
-
In order to recover damages in negligence, the injured party must
prove that the other party was at fault. The advantage to suing in
contract is that the injured party need not prove fault; rather, the
injured party needs only prove that the contract was breached.
-
Other provinces have done away with the requirement of privity
altogether in cases of warranties for fitness
It may then recover substantial damages if the circumstances warrant
it. In some provinces, the benefit of the requirement that goods are fit
for the purpose has been extended to parties who it is reasonably
foreseeable would use the product. In these cases, the scope of privity
has been broadened
-
Unacceptable Business PracticesB.
Most provinces have adopted legislation by which misleading or false
statements made prior to the formation of a contract to persuade
people to purchase an object are now part of the contract
-
By incorporating such statements, the injured party can now obtain
damages or recission of the contract
-
Legislation has also been adopted which limits the amount of interest
which can be changed. These statutes apply to the borrowing of
money and not to credit purchases
-
Controlled Business PracticesC.
e.g. Door-to-door sales, legislation gives the consumer what is called a
"cooling off period". During this period, the consumer may cancel the
contract for any reason (10 days)
-
However, where referral selling is used, it is forbidden to give
“any advantage, benefit or gain to the buyer or prospective buyer
for doing anything that purports to assist the seller in finding or
selling to another prospective buyer” R.S.O. 1990, c. C-31, s.
37(2). Consequently, the consumer cannot make a profit or
lower the purchase price of the object by providing the
salesperson with names and addresses of family and friends.
This practice, it is thought, will better enable a buyer to resist
pressure from a salesperson to provide such information
In Ontario, referral selling is not prohibited
-
Loan TransactionsD.
Whenever anyone borrows money, the lender must disclose the actual
cost of borrowing the money. In order to better control the activities of
moneylenders, the government requires that moneylenders be
registered. Credit reporting agencies are also usually required to be
registered
-
Debt Collection ProcessesE.
Must be registered with the government
Debt collection agencies collect, on behalf of a creditor, money owed
by a debtor. The debt collection agency is normally paid from the
money that it collects. Financial necessity can lead such agencies to
use many unsavoury means to collect. Such tactics include
importuning a person's employer or members of his family. This
reality has, in turn, led to the adoption of various statutes in order to
protect the consumer from excessive and unreasonable pressure.
-
Federal LegislationF.
The Competition Act is meant to ensure competition in the
marketplace. It regulates mergers, and the competition tribunal will
intervene when a merger unreasonably limits competition.
-
The Act also prohibits certain anti-competitive practices which unduly
restrict competition. These practices include predatory pricing,
discriminatory allowance, etc.
-
Other federal legislation, such as the Food and Drug Act,
the Hazardous Products Act, the Explosives Act, the Pest Control
Act and the Motor Vehicle Safety Act, is meant to regulate the sale
and use of dangerous products. The goal of other legislation, such as
the Weights and Measures Act, the Consumer Packaging Act and
the Textile Labelling Act, is to provide accurate information to
consumers to enable them to make enlightened decisions
-
Debtor-Creditor Relations3.
The smooth functioning of the credit system is largely dependent on
the confidence of creditors that their debtors will reimburse them and,
if not, that they have access to means that will ensure that they are
reimbursed
-
In either case, the creditor can sue if the debtor breaches his or
her promise to pay the sum owed; this remedy is only effective if
the debtor has property that can be seized and sold
Credit is usually created in one of two ways: (1) A creditor lends a
sum of money to a debtor who promises to repay the debt at a later
date. (2) A purchaser obtains goods from a seller and promises to pay
for them at a later date
-
Methods of Securing DebtA.
A debtor-creditor relationship arises when one party (the debtor)
agrees to pay a sum of money on a certain day to a second party (the
creditor)
-
In a simple transaction, the creditor will advance funds to the debtor
who will use them to purchase something from a third party, and will
then resell the object for a profit to a fourth party. The debtor will
reimburse the creditor from the proceeds of the sale
-
One method of providing assurance is to give the creditor the right to
take possession of some identified property of the debtor if the debtor
defaults (to provide security).
-
Real: Land, buildings, or fixtures
Chattels are physical objects while choses in action
represent rights to things. A car, a chair, and a full basket
are chattels; cheques, stocks and bonds are choses in
action. Personal property may also be given as security for
a debt
For example, Opal wants to borrow money from
Warbucks in order to purchase some gold to make
some jewellery. Warbucks agrees on condition that
Opal give him security in some pieces of equipment that
she has. Warbucks is a secured creditor. However,
Warbucks will want to ensure that no one else has
taken the equipment as security before him. If Mrs.
Prior has already taken a security interest in the
equipment, Mrs. Prior will have a first right to
reimbursement from the proceeds of the sale of the
equipment. If Warbucks seizes the equipment and sells
it, Warbucks will have to reimburse Mrs. Prior first,
and only then will he be able to reimburse himself.
Before advancing funds to Opal, Warbucks will want to
ensure (1) that he can get and maintain a security
interest in something that Opal owns and (2) that no
one has an interest with priority over his interest
regarding the secured object.
Personal: Any form of property that is not real property and is
divided into chattels (or goods) and choses in action
Property: Real or personal
-
Creditors are consequently concerned with two questions: creating and
maintaining a security interest and ensuring priority for their security
interest
-
Traditional Methods of Securing DebtI.
Pledged property = collateral security because it is collateral or
incidental to the main contract
Security interest can be created using either real or
personal property
Mortgage is a common method of financing the purchase
of land and the construction of buildings. Importantly, a
mortgage secures the mortgagee's (creditor's) loan to the
mortgagor (debtor)
Personal property can also be used as a security for a wide
variety of transactions
The creditor is said to have a security interest in the property
In a secured transaction, the debtor guarantees that his or her
obligation will be fulfilled by pledging property.
-
Pledge or Pawn -- A creditor took physical possession of property that
secured a loan and returned it to the debtor only when the loan was
repaid
-
Conditional Sale -- The seller (creditor) transfers possession of
the goods to the buyer (debtor) but retains title to the goods until
it has been paid by the buyer. The buyer, in possession of the
goods, can sell them and use the proceeds of the sale to pay the
seller
Chattel Mortgage -- The debtor already has possession of the
goods and transfers title to the creditor. When the debtor sells
the goods to a third party, it will use the proceeds to reimburse
the creditor
Two methods play with the concepts of possession and title:
-
In a conditional sale, the goods that are the object of the sale also offer
the security for the transaction; in a chattel mortgage, any goods
owned by the debtor can be used for security and the funds obtained
used to purchase other goods. In the example of Warbucks and Opal,
Wabucks was taking a chattel mortgage on the equipment, and Opal
was using the funds to buy some gold from a third party. Finally, in a
conditional sale, the seller is also the creditor; in a chattel mortgage,
the creditor can be either the seller or a third party
-
In a conditional sale and a chattel mortgage, the debtor may sell the
goods, thereby providing security for the debt to a third-party
purchaser. The creditor will be able to seize the goods from the third-
party purchaser if it has registered its security interest with the
appropriate agency
-
For example, let us return to the case of Khan al-Khalili
Merchants. Imagine that Mahfouz Carpets has sold a rug
on credit to Smith. It can assign this account to Khan al-
Khalili Merchants. Khan al-Khalili then has the same
rights to collect as Mahfouz does. This method of securing
debt does not rely on goods but on money owed. The first
two methods, chattel mortgages and conditional sales, used
goods as security
The debtor, who is owed money by third parties, gives to the
creditor the right to collect the amounts owed; it assigns its
rights to its accounts receivable to its creditor and thus repays its
loan
Another method of securing the creditor's interest is assignment of
accounts
-
The debtor has possession of the chattel and may sell it to an
unsuspecting third party who believes that it is purchasing the
chattel from its rightful owner. The creditor must then have
some means of protecting its interest in the chattel which secures
the reimbursement of the debt and some meant of retaking
possession of the chattel, even if it has been transferred to a third
party, if the debtor defaults on its payments
Leasing -- Separates ownership and possession. The owner/lessor has
title to the chattel but transfers possession for a period of time through
a lease to the lessee. The owner rents the chattel to the renter. In
consideration to the possession of the chattel, the lessee makes
periodic payments to the owner/lessor
-
Personal Property Security ActII.
PPSA applies to all transactions that, in substance, create a
security interest in personal property, and where the debtor and
creditor have consented to its creation. The secured party
registers its security interest by filing a financing statement with
the Personal Property Security Registry
The PPSR is computerized and broadly accessible from various
points, thus allowing parties who want to deal with personal
property to consult the registry and to determine who the owner
is and who, if anyone, has a security interest in the personal
property
First, the debtor and creditor must create the security
interest by consenting to its creation. The security interest
is created by a contract and the parties must have agreed to
the formation of the security interest through a process of
offer and acceptance
Second, the security interest must attach to the object or
the collateral. In order for the security interest to attach,
two things must occur: the debtor must acquire an
ownership interest in the object and the creditor must grant
the credit offered to the debtor. For example, a bank lends
money to a customer to purchase a car. It has performed its
part of the bargain; it has lent the money. The security
interest will not attach, however, until the customer
purchases the car; that is, until the customer acquires an
ownership interest in the object. On the other hand, if the
customer already owns the car at the time of the loan,
attachment will occur as soon as the bank lends the
customer the money.
Third, the secured transaction must be perfected.
Perfection occurs when the financing statement is filed or
the creditor takes possession of the security
Three stages in the creation of a security interest: Creation,
attachment, and perfection
The Personal Property Security Act (PPSA) puts into place a common
set of rules to control the registration of transactions where personal
property is used as security. While various types of security interests
still exist, the patchwork system of registration that existed previously
has been replaced by a single uniform system
-
A security interest is created once all three steps are complete, and the
first party to complete all three will have priority over other creditors.
Priority is a right to go before others who have the same right in
respect to the same subject-matter and to exercise that right to the
exclusion of the others. The secured creditor has the first right to be
paid if and when the assets listed on the financing statement are sold.
Where more than one party registers a financing statement affecting
the same asset, the one that completes all three steps first will have
priority over other secured creditors. In short, the race goes to the
swiftest
-
Upon default by the debtor, the secured creditor has its normal
remedies at common law and whatever other recourse the contract
may have created. The secured creditor may repossess the collateral
security, but must do so without breaking the law. It must take care of
the goods and keep them in good repair
-
If the creditor chooses to sell the goods, it must follow the procedure
set out in the Act. If the sale of the collateral security does not cover
the secured debt, the creditor may sue the debtor for the amount still
owing. Any surplus from the sale must be handed over to the debtor.
Secondly, the creditor may choose to keep the goods
-
Instead of selling them. In this case, the debtor does not owe any
further money to the creditor, and the creditor gives up any claim for
any deficiency against the debtor. However, before the creditor can
dispose of the collateral security, notice must be given to the debtor,
and to other creditors, if any, of its right to redeem to pay the amount
owing and redeem the seized collateral
-
The Bank ActIII.
The Bank Act functions like the PPSA, but it is federal rather than
provincial legislation. It has its own registration system according to
which banks register their security interests in the property of their
debtors. Only banks can become secured creditors under the Bank Act.
Any other creditor must register under the PPSA
-
Floating ChargesIV.
Afloating charge allows a debtor to deal with assets without
interference from the creditor as long as the debtor complies with the
terms of the loan agreement
-
Consequently, the debtor can sell the collateral security and pass good
title to the purchaser. This allows the debtor to buy the material, use it
as collateral security to finance the purchase or manufacture of goods,
to manufacture goods with the material, to sell the manufactured
goods, and to use the proceeds of the sale to purchase more material to
manufacture more goods. The charge does not attach but floats over
the collateral security until the debtor breaches one of its obligations
to the creditor. At that moment, the creditor steps forward and the
charge crystallizes; that is, it attaches to the goods. The secured
creditor can then seize the goods in satisfaction of the debt
-
BankruptcyB.
Occurs when a debtor becomes unable to pay his or her debts as they
become due. It triggers a response by which the assets of the debtor
are liquidated in order to pay creditors. Insolvency is simply the
descriptor of the state of a debtor who is unable to pay his/her debts as
they become due
-
The Bankruptcy and Insolvency Act1.
An insolvent debtor can be forced into bankruptcy by one of its
creditors if it can show to the court that the debtor has
committed an act of bankruptcy
It will then obtain a bankruptcy order against the debtor, or they
may voluntarily place itself into bankruptcy by making an
assignment
(BIA) governs the process of liquidation of a debtor's assets
-
e.g. The trustee will arrange for the distribution of the debtor's
assets or the proceeds from the sale of the assets to the creditors
Upon bankruptcy, the assets of the debtor are transferred to a trustee
in bankruptcy who manages them for the benefit of all creditors
-
Div. 1 Proposals -- Significant debtors, total claims greater than
$75,000
Consumer or Div. 2 Proposals -- Total claims against are less
than $75,000
Alternative to bankruptcy = proposal; procedure which allows the
insolvent debtor to avoid bankruptcy
-
Corporations can also avail themselves of the Companies’ Creditors
Arrangement Act to rearrange their affairs without having to go into
bankruptcy
-
Priority Among Creditors (Payouts according to their priority)2.
Three types of creditors
-
Secured Creditors -- Absolute priority in the amount of the asset used
as security
A.
If the sale of the asset does not cover the total amount owed, the
secured creditor ranks as an unsecured creditor for the balance of the
unpaid debt
If the trustee in bankruptcy still has the goods, they will be
returned to the creditors
Creditors who have supplied goods may ask for the return of the
goods within 30 days of their delivery
Preferred Creditors -- Will be paid from any funds that are left after
the claims of the satisfaction of the secured creditors from the secured
assets
B.
The preferred creditors must be paid in full in the order provided in
the BIA, that is each preferred creditor must be paid in full before the
next preferred creditor is paid
First to be paid = funeral expenses of a deceased debtor. If funds left,
expenses and fees of the trustee in bankruptcy will be paid in full
Next to be paid will be claims for unpaid wages, subject to certain
conditions. Then the following claims will be paid in order: municipal
taxes, arrears in rent for a limited period of time; some direct costs of
creditors in starting the action in bankruptcy against the debtor;
workers’ compensation, employment insurance, income tax, and other
claims of the Crown
General Creditors -- Paid on a pro rata basis from the proceeds of the
remaining assets (proportional)
C.
Administering the Bankrupt's Property3.
The trustee in bankruptcy will examine the debtor’s dealings
with its assets within the previous year to determine whether the
debtor has tried to hide certain assets from creditors
The trustee may also recover property which the bankrupt has
transferred to others if they are a settlement or fraudulent
preference as set out in the BIA
Trustee in bankruptcy has power; takes control of all the debtor's
assets including bank accounts, accounts receivable, stocks, bonds,
vehicles, and properties, and home
-
In such a case, the trustee in bankruptcy can seize the property.
A fraudulent preference occurs when (1) a payment or transfer
of property to a creditor is made (2) within three months prior to
the bankruptcy (3) by an insolvent debtor (4) in order to give
that creditor a financial advantage over the other creditors (5)
where the creditor was aware of the impending bankruptcy
Settlement -- A transaction for which no consideration has been given
to the insolvent party to the creditor; however the intention is to give
that creditor a financial advantage
-
Discharging the Bankrupt4.
Any assets that the discharged bankrupt subsequently acquires
cannot be seized by former creditors to satisfy their former debts
Discharge puts an end to any outstanding claims that the creditors may
still have. The discharged bankrupt is then in position to make a fresh
start
-
A bankrupt corporation is dissolved. A new corporation may be
formed with the same name, but it will be a different corporation than
the previous one
-
Module V: Special Contracts 1: Sales, Consumer
Protection, and Debtor Creditor Relations
Sunday,)June)26,)2016 2:08)PM
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Application of the SGA Required Reading:pp. 534-5351.
Delivery of goods by a third party Required Reading: p.
535
1.
SGA (Sale of Goods Act)Required Reading: pp. 535-5382.
TRANSFER OF TITLE AND RISK2.
Conditions and warranties Required Reading: pp. 538-5391.
Title Required Reading: p. 5392.
Description Required Reading: pp. 539-5403.
Fitness and quality Required Reading: p. 540
Casebook, p. 123, Sigurdson et al. v. Hilcrest Service Ltd.
(1976)
4.
Sale by sample Required Reading: pp. 540-541
Casebook, p. 126, Coast Hotels Ltd. v. Royal Doulton
Canada Ltd. (2000)
5.
Other Implied Terms Required Reading: p. 5416.
IMPLIED TERMS3.
Remedies of the seller Required Reading: pp. 541-5421.
Remedies of the buyer Required Reading: pp. 542-5432.
REMEDIES ON DEFAULT4.
Sales Required Reading: pp. 532-5341.
Responsibility for goods sold Required Reading: pp. 548-551
Casebook, p. 132, Schryvers and Schryvers v. Richport Ford
Sales Limited et al. (1993)
1.
Unacceptable business practices Required Reading: pp. 551-5542.
Controlled business practices Required Reading: p. 5543.
Loan transactions Required Reading: pp. 554-5554.
Debt collection processes Required Reading: pp. 555-5585.
Federal legislation Required Reading: pp. 544-5486.
Consumer Protection Required Reading: p. 5442.
Traditional methods of securing debt Required Reading:
pp. 502-503
1.
Personal Property Security Act Required Reading: pp.
503-508
Casebook, p. 134, Giffen (Re) (1998)
2.
The Bank Act Required Reading: p. 511
3.
Floating charges Required Reading: pp. 511-512
4.
Methods of securing debt Required Reading: pp. 501-502
1.
The Bankruptcy and Insolvency Act Required Reading:
pp. 515-516
1.
Priority among creditors Required Reading: pp. 518-519
2.
Administering the bankrupt's property and
discharge Required Reading: pp. 519-523
Casebook, p. 143, Grandview Ford Lincoln Sales Ltd. (Re)
(2000)
3.
After discharge of the bankrupt Required Reading: pp.
523-524
Casebook, p. 140, Bank of Montreal v. Giannotti (2000)
4.
Bankruptcy Required Reading: pp. 515-527
2.
DEBTOR CREDITOR RELATIONS3.
Sales
1.
Prior to the adoption of the Sale of Goods Act (SGA) by Parliament
in the late 19th century, judges made the rules needed to resolve the
disagreements that arose between parties buying and selling goods
-
In short, the statute changed nothing; the rules remained the
same
The SGA is the codification by the legislator of the rules made by
judges as they decided cases
-
Secondly, since judges were the ones who had to apply the new
legislative rules -- which were the old judge-made rules -- the judges
continued, much in the same fashion as they had before, to apply the
rules that they had previously made
-
The SGA adopts the ideology of freedom of contract and applies it to
the area of sales
-
The statute assumes buyers and the sellers are in positions of equal
strength and have access to the same information
-
First, it is important to identify the scope of the application of
the SGA, i.e., those circumstances when it applies. Secondly,
the SGA provides rules that determine when the transfer of
ownership or title to the goods takes place. Thirdly, it implies
certain terms into the contract of sale about the condition,
quality, and purpose of the goods
Unless terms to the contrary are present in the agreement of sale, the
buyer assumes the risk for the condition of the objects purchased—
because of the doctrine of caveat emptor; let the buyer beware.
However, for</