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0133370283 9780133370287
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Instructor’s Manual
Chapter 5
Legislation in the Marketplace

Teaching Suggestions
I usually take about two to three lecture hours on this subject and spend most of that time
on the Sale of Goods and Personal Property Security acts. For the Sale of Goods Act I
first explain what is required for the Act to apply. That is, the Act applies to tangible
moveable goods that are sold for money where title will actually transfer at the time of
the contract or an agreement of sale where title will pass sometime in the future. Then I
explain the purpose of the Act: to imply missing terms into each sale of goods contract. It
is vital at this stage to point out that the parties can contract out of most Sale of Goods
Act terms by clearly stating the terms they do want in the contract. I also point out at this
stage that the Sale of Goods Act applies to all sales of tangible movable goods whether it
is a pencil or a locomotive. As well, I point out that the Act applies to all such sales
whether at the retail or wholesale level and whether individuals or corporations are
involved.

I concentrate on only a few areas of the Act. The first focus area is title and risk. This is
one area where the parties often contract out of the provisions of the Sale of Goods Act. I
go over FOB, CIF and COD contract illustrations. Where the Act is left to apply, the
general principle is that risk follows title.

There are five rules used to determine when title transfers. The first four are reasonably
straight forward, but students often find rule number five difficult to understand. They
often mistake the requirement of assent as another way of saying that notice is required.
However, I point out the difference by giving an example of a car being left with a dealer
to install tires. The brand and tire model will be specified but the selection of the actual
tires will be left to the installer. By leaving the car, the purchaser has assented to that
selection by implication and no notice is required. The other problem students have is
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identifying unascertained goods. These are goods not yet made or where a model has
been chosen from a sample or advertisement but the specific item has yet to be separated
out and designated to that purchase. I also explain what constitutes acceptance under rule
four.

The second major area of focus is the obligations of the seller with respect to title, goods
bought by description, goods bought by sample and requirements of fitness and quality. It
is important to point out that some of these requirements are conditions and some are
warranties. For example, it is a condition that the seller delivers good title but a warranty
that the goods be free from any charge or encumbrance. Goods purchased by description
must match the description and be of merchantable quality and goods bought by sample
must match the sample. When the skill of the seller is relied on to select suitable goods,
the goods must be fit for the use recommended and in general the goods sold by
description must be of merchantable quality. That means they must be fit for their normal

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purpose and free from any defect that would render them unmerchantable. In B.C. the
goods must be durable as well. The courts have established that whenever we are dealing
with a good that has been mass produced so that it is in a box with a description or a
specification sheet, we are buying the product by description and the requirement the
goods are of merchantable quality applies. I also point out that if no price has been agreed
to the purchaser must pay a reasonable price. This statutory provision overrides the basic
contractual requirement of specific consideration. If no date for delivery or time for
payment has been stated, the goods must be delivered within a reasonable time, and
payment made upon delivery. I also mention the unpaid seller’s lien while the goods are
still in his possession, the right to intercept goods in transit (stoppage in transitu) and
under the Bankruptcy and Insolvency Act, the limited right in the event of a bankruptcy to
the return of goods even after delivery.

The discussion of consumer protection legislation will vary to a large extent between
jurisdictions because of the different statutes, but there are usually provisions dealing
with unconscionable transactions, and specific rules dealing with often-abused practices
or businesses. I look at deceptive and misleading trade practices, which are controlled in
all jurisdictions. I also introduce the Federal Competition Act, explaining how it controls
misleading advertising and the various ways that businesses try to restrict or control
competition.

I spend the majority of the time on secured transactions. Security, as it is used here, is
some method employed to give the creditor additional assurance they will be paid even if
the debtor becomes insolvent. This usually involves giving the creditor first claim against
some asset owned by the debtor. I usually distinguish between conditional sales and
chattel mortgages at this stage because they are still used as methods of creating security,
although they are no longer covered by separate statutes. It is important to emphasize that
under the old legislation title to the goods was actually held by the creditor in these
situations, but now it remains with the debtor, even though the rights created in the
creditor are essentially the same.

The current legislation covering situations where personal property is used as security is
the Personal Property Security Act (“PPSA”). There are some differences between
provinces, but the basic principles are the same. The first advantage of the PPSA is that
it creates one statute with one body of rules that covers all situations where personal
property is used as security.

Secondly, the Act expanded the kinds of things that could be used as security. I take care
to explain the difference between attachment and perfection under the Act. I find it best
to approach such transactions in three stages. The first stage is the creation of the
contract naming what is to be used as security, but before any benefits have flowed to
either party. In the second stageattachment takes place where the creditor bestows some
benefit on the debtor. This gives the creditor the right to sue or repossess the security in
the event of a default, but gives no protection against third parties. For this there must be
perfection and this is accomplished in the third and final stage by registration of the
security transaction at the appropriate registry office. Alternatively, perfection can also be

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accomplished by the creditor taking possession of the item used as security. This happens
when dealing with items that don't require the debtor to retain possession such as share
certificates and negotiable instruments. Perfection gives the creditor priority against third
parties. I also go over the process of realizing on the security.

The right of repossession and resale is the next topic for consideration. Students are often
surprised that this can be accomplished as a matter of right simply by employing an agent
or bailiff. No court order is needed but it must be done properly as set out in the Act. The
debtor need not be given notice before repossession, but must be given notice and an
opportunity to redeem the goods before resale. As well, the sale must take place in a
commercially reasonable manner. That usually means at public auction. If these
requirements are not carefully adhered to the creditor can lose the right to sue for any
shortfall after the proceeds of the sale and expenses and may even be required to
compensate the debtor for the lost value on the item improperly sold. In most provinces
the creditor retains the right to sue for any shortfall if the amounts raised by the sale of
the goods don't cover the amounts owing, including the costs incurred in repossession
and resale.

I also briefly discuss builder’s liens explaining the holdback provision and how it benefits
both the homeowner and the subtrade suppliers and workers.

I also go over guarantees explaining how this is a contingent liability instead of a primary
one. If the guarantor is required to pay in the event of a default, he steps into the shoes of
the creditor taking over all rights that the creditor has against the debtor. I also point out
that the guarantor has all the same defenses against the creditor that the debtor has
(except infancy). Finally, I point out that the creditor has an obligation not to weaken the
position of the guarantor and so any further transactions between the creditor and debtor
that have that effect and is done without the consent of the guarantor relieves the
guarantor of that obligation.

The final topic covered is bankruptcy, although there is often not enough time to deal
with it adequately. I distinguish between insolvency and bankruptcy pointing out that
with bankruptcy the property of the debtor is actually transferred to a trustee in
bankruptcy. This can take place voluntarily (an assignment) or involuntarily where the
creditor obtains a receiving order from the court. The creditor must show that an act of
bankruptcy has taken place, which is usually simply showing that the debtor was not able
to meet his obligations with his creditors. Such acts may also be failure to honour a
Division One or Division Two proposal or the commission of some bankruptcy offense,
such as giving one creditor a preference or transferring assets to a spouse or friend, to
keep them out of the hands of the creditors. The commission of such a bankruptcy
offense can result in criminal penalties. The trustee's job is to realize as much as possible
from the assets for the creditors. I point out the difference between secured, preferred and
unsecured creditors, and their relative rights when a bankruptcy takes place. After a
period of time an individual who has gone bankrupt can apply to be discharged. The
application is now automatic in most cases. If no conditions are placed in the discharge
the bankrupt is totally discharged from his debts. This means he is forgiven of those debts

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and even if he were to win a lottery the next day he would not have to pay them. Note
that there are some exceptions to such a discharge including maintenance and support
obligations to a spouse or children and student loans for the first 10 years. Note that a
corporation will not be discharged after the bankruptcy process. I also mention the
alternative to bankruptcy, a Division One proposal applies to a corporation or someone
who owes more than $75,000 and a Division Two proposal covers an individual owing
less than that amount.

The Division One proposal is more formal and complex but both involve the debtor
making a proposal to the creditors to pay the debt or a portion of it and if accepted and
properly performed the debt is discharged and bankruptcy avoided. If the proposal is not
approved or not properly performed this is an act of bankruptcy and will support the
application by the creditor for a receiving order. I also mention the federal Company
Creditors Arrangement Act that provides large corporations protection from creditors
while they rearrange their affairs.

Chapter Summary

Statutes modify business law

Sale of goods
Sale of Goods Act supplies missing terms
For the Act to apply, goods must be transferred /sold
Under the act risk follows title, except in the case of CIF, FOB, COD, and Bill of Lading
Five rules determine when title transfers
Breach of condition ends contractual obligations.
Breach of warranty does not end contractual obligations
Obligations of seller under the Act:
- To deliver good title
- To deliver quiet possession
- To deliver goods free of liens
Goods must match description or sample
Goods must be of merchantable quality
Goods must be fit for the purpose purchased where recommendation of seller relied on
Limited warranties try to override these obligations
Exemption clauses must be clear and brought to purchaser’s attention
If the purchaser defaults, the seller can stop goods in transit
If bankruptcy, seller has limited right to recover goods

Consumer protection
Both federal and provincial consumer protection legislation
Consumer goods must be of minimum quality
Abusive and deceptive trade practices are controlled
Unconscionable transactions are controlled
Salespersons’ statements form part of the contract
Abusive merchants subject to fine, injunction, and loss of licence

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Cooling off period for door-to-door sales

Pyramid schemes and referral selling are prohibited
True cost of borrowing must be disclosed
Powerful government agencies enforce rules
Non-government agencies also help consumers
The federal Competition Act controls anti-competitive merchandising and advertising
practices
Conspiracies including bid rigging and price fixing that unduly lessen competition are
prohibited
Pyramid selling schemes are prohibited and are criminal offenses
Deceptive marketing schemes including misleading advertising and false bargain prices
are prohibited, as are practices such as bait and switch and double ticketing
Other questionable business practices such as predatory pricing and mergers lessening
competition are controlled.

Secured transactions
Security arrangements assure creditor of repayment
Real property and personal property used as security
PPSA accommodates all forms of personal property as security
In a conditional sale the seller is a creditor
Chattel mortgage involves title going to creditor as security
Now all forms of personal property used as security are covered by PPSA
Now title remains with the borrower
Attachment gives the creditor rights against the debtor
Perfection by registration
Perfection gives the creditor rights to security good against all subsequent claimants
Perfection by possession
Creditor has the right to repossess and resell upon default
Court order not needed to repossess
But force cannot be used
Creditor must give the debtor notice and the opportunity to redeem the goods before
resale
If resale is properly handled, in most provinces the creditor has the right to sue for deficit
Builders’ liens protect contractors, subtrades, workers, and suppliers
Guarantee: One person agrees to pay if debtor does not
Guarantor has the same defenses as debtor (except infancy)
Guarantor steps into the shoes of the creditor upon payment
Guarantor not liable if agreement terms are changed without his permission.

Bankruptcy and Insolvency

Bankruptcy involves transfer of debtor’s assets to a trustee
Assignment is voluntary, but bankruptcy may also be forced by a receiving order.
Must be act of bankruptcy to obtain receiving order
Trustee distributes assets:
- First to secured creditors
- Then to preferred creditors

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- Finally to unsecured creditors

Some possessions are exempt
Bankruptcy offences prohibited and penalized
Discharge ends obligations
Note exceptions
Corporations do not survive bankruptcy
Division Two proposal is an alternative for individuals
Division One proposal is an alternative to bankruptcy for a company
CCAA also provides alternative to bankruptcy for company
Receivership is not bankruptcy

Questions for Review

1. Explain the role played by the Sale of Goods Act and the qualifications that must
be met for the Act to apply to a particular transaction.

Answer: The Sale of Goods Act supplies terms that the parties may not think to include
when they entered into their contract. Most can be modified or excluded by clear written
agreement between the parties. Goods must be involved, and they must be actually
transferred for monetary consideration.

2. How is the person who bears the risk determined under the Sale of Goods Act?
Explain how this can be modified by the parties.

Answer: Either the parties specify FOB, COD, CIF or that risk follows title.

3. Explain the five rules that determine when title will pass under the Sale of Goods
Act.

Answer:
Situation Rule Result

The sale of specific goods in a #1 Title transfers immediately upon

deliverable state creation of the contract of sale.

The sale of specific goods needing #2 Title transfers when work is done
Repairs, etc. and the purchaser is notified.

The sale of specific goods needing #3 Title transfers when this is done
to be weighed or measured and the purchaser is notified.

The sale of goods on approval #4 Title transfers to the purchaser with

- Notification to seller of approval
- Passage of a reasonable time
- Treatment of goods as the
purchaser’s own

The sale of goods that are not yet #5 Title transfers when goods are
selected (from many) or not yet unconditionally committed to contract

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made at the time of contract with assent (expressed or implied)

4. Explain the obligations imposed on a seller with respect to title, sale by sample
and description, fitness and quality, and merchantable quality.

Answer:

Seller’s obligations Seller must deliver property/good title. Condition

with respect to title Seller must deliver quiet possession. Warranty
Goods must be free of charge or encumbrance. Warranty

When goods bought Goods must correspond to description. Condition

by description

Purchaser relies Goods must be reasonably fit for purpose Condition

on advice of seller required.

When goods bought Goods must be of merchantable quality. Condition

by description

When goods bought Goods must correspond to sample and Condition

by sample be free of hidden defects.

5. Discuss the nature of limitation or exemption clauses and their effect on the
provisions of the Sale of Goods Act.

Answer: They are effective if clearly expressed in writing in the sale agreement (often
called a limited warranty). In some jurisdictions when consumer transactions are
involved, such exemption clauses that try to overturn the Sale of Goods Act provisions
with respect to fitness and quality are void.

6. Describe the abusive business practices that are controlled by trade practices or
business practices acts. Describe how the statutes’ provisions are enforced.

Answer: These usually deal with misleading and deceptive practices such as false
statements about the products or support for them. Unconscionable practices where
people are taken advantage because of a particular vulnerability can also be overturned or
set aside. The inappropriate conduct can be treated as an offense and prosecuted as a
provincial offense and in some cases civil actions can be brought by the victims.

7. Explain what is meant by a cooling-off period and explain how pyramid and
referral selling schemes are controlled under consumer protection legislation.

Answer: Referral selling involves giving a discount when the purchaser provides a list of
names for the seller to contact. Pyramid sales involve multi-level organizations where
people buy into the organization and the money is distributed up the chain, much like a
chain letter. These are generally prohibited. A cooling-off period gives purchaser of a

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service or product a specified period of time to cancel the contract. If the purchase price
has already been paid and/or goods received, they must be returned.

8. Explain the purpose of a prospectus, how it is issued and what must be included.

Answer: A prospectus is to provide enough information about a corporation so that a

prospective purchaser can make a “fully informed” decision about purchasing securities
being offered by that company: e.g. shares, bonds or debentures. In doing so, the
document allows sellers and buyers to make informed and efficient investment decisions.
As such, a prospectus will contain not only audited financial statements, but
also information with relation to the rights included in the security being sold, the
natureof the business, any major undertakings, what assets are held, information about
directors and officers of the corporation, and any other material information that might
affect the value of the securities. There is also a requirement that the prospectus be
certified by the chief executive officer, chief financial officer and directors of the
corporation, as well as by promoters, guarantors, and underwriters if involved, making
them responsible and subject to penalty if the prospectus contains any inaccurate or
misleading information

9. Explain who is an insider, what controls are placed on them and why.

Answer: Insiders include directors and officers of companies, shareholders holding over
10% of the shares (in Ontario), others designated as insiders by the legislation and all
those in a special relationship to the company who are aware of confidential information
not available to the public because of their position, including bankers, lawyers,
accountants and the like. Such persons are subject to special regulation to ensure that they
do not use information not otherwise available to the general public to manipulate the
value and trading of securities offered by the corporations in which such persons have
that confidential knowledge.

10. Explain the purpose of the federal Competition Act, and list five competition
offenses

Answer: The Competition Act controls anti-competitive merchandising and advertising

practices such as predatory pricing (low prices are used to drive competitors out of
business); anti-competitive mergers; agreement between competitors to control prices;
bid rigging; and misleading advertising.

11. Explain what is meant by bid rigging, double ticketing, and predatory pricing.

Answer: Bid rigging involves competitors conspiring to control the bids for a particular
project. Double ticketing involves two prices being put on an item and the seller charging
the higher price. Predatory pricing involves one supplier selling a product below cost to
drive another supplier out of business.
12. List and explain five deceptive marketing practices, and explain how they are
treated differently from offences against competition.

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Answer: Deceptive marketing practices involve directly misleading the consumer

whereas offenses against competition usually involve suppliers working with or against
competitors to unduly restrict competition in the marketplace. The following are
examples of deceptive marketing practices:
• False and misleading representations
• Warranty or performance claims not supported by tests; unsupported tests and
testimonials
• Bargain prices not supported by goods sold at regular prices
• Selling at a higher price than advertised
• Bait and switch selling
• Failure to disclose chances and value of prizes in a contest
• Failure to base contestants on skill or at random
13. What kinds of matters are reviewable by the Competition Tribunal? What is the
purpose of such a review?
Answer: The object of the review is to stop the practice and may include the imposition
of penalties. Examples include:
• False and misleading representations
• Warranty or performance claims not supported by tests
• Unsupported tests and testimonials
• Bargain prices not supported by goods sold at regular prices
• Bait and switch tactics
14. Indicate other federal statutes that have a consumer protection aspect to them.

Answer: Food and Drug Act, the Hazardous Products Act,

15. Explain what is meant by a secured transaction, indicating the special position of the
creditor. Who holds title under the Personal Property Security Act.

Answer: A secured transaction involves the debtor giving the creditor some extra
assurance that they will be paid. This is usually done by giving the creditor some priority
claim to property in the event of default. Unlike the earlier situations with a conditional
sale or chattel mortgage, under the provisions of the Personal Property Security Act, the
debtor retains title to the goods until the creditor takes steps to exercise its security
interest in the goods.

16. Distinguish between attachment and perfection, and describe how perfection can
be accomplished.

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Answer: Attachment takes place when the creditor gives some value under the contract.
Perfection gives the creditor priority against third parties and requires registration or
taking possession of the property designated as security.

17. Describe the rights of the creditor when there is a default under the Personal
Property Security Act. What must the creditor do to protect his or her right to sue for a
deficit?

Answer: The creditor has the right to repossess and resell the goods used as security in
the event of default. The debtor must be given notice and a chance to redeem the goods,
and they must be sold in a commercially reasonable manner to get a fair price.

18. Explain the significance of a holdback under the builders’ liens or construction
lien statutes.

Answer: This is a portion of the amount owed to the builder, supplier or contractor, (for
example 10%) that is withheld to satisfy any claims presented later by unpaid workers or
suppliers. If this is withheld and made available for such obligations, the property owner
will have no further obligations to the claimants even where the amount claimed exceeds
the amount held back.

19. Distinguish between an indemnity and a guarantee.

Answer: The term indemnity isn’t used in the text but refers to the difference between
someone who cosigns a contract and a guarantor. With an indemnity the parties are co-
debtors and each equally obligated on the debt. In contrast, a guarantee is a contingent
obligation where the obligation of the guarantor is secondary and arises only when there
is a default.

20. Explain the position of a guarantor with respect to the debtor’s obligations and
how those obligations are affected by subsequent dealings between the parties.

Answer: This is a contingent obligation where the obligation of the guarantor is

secondary and arises only when there is a default. If the creditor agrees to new terms
without agreement and additional consideration to the guarantor, the guarantor is freed
from his obligations.

21. Distinguish between insolvency and bankruptcy; between an assignment and a

receiving order; and explain the role of a trustee in bankruptcy.

Answer: Insolvency is being unable to pay your outstanding debts in a timely manner (or
in accordance with the payment schedules stipulated for such debts). Bankruptcy is the
process whereby your assets are transferred to a trustee in bankruptcy for the benefit of
your creditors. An assignment in bankruptcy is a voluntary transfer of your property to a

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trustee whereas a receiving order is a forced transfer of those assets imposed on you by
your creditors through the courts. The trustee in bankruptcy takes over those assets of the
debtor and sells them or otherwise deals with them so as to get as much as possible for
them and then distribute the proceeds to the creditors

22. Distinguish between an act of bankruptcy and a bankruptcy offence.

Answer: An act of bankruptcy is necessary in order to force a person into bankruptcy.

This could simply be failure to pay obligations as they become due. A bankruptcy
offence involves wrongdoing such as fraud, hiding property or lying to the trustee with
respect to asset and the like. Such bankruptcy offenses can also be acts of bankruptcy
triggering the right to obtain a receiving order.

23. Explain the positions of secured, preferred, and unsecured creditors in the event of
a bankruptcy.

Answer: Secured creditors have a claim against some asset and can take that asset or be
paid its value before any other claims under bankruptcy. Preferred creditors are paid next:
e.g. funeral expenses, claims for rent or employee claims for wages up to a limited
amount. If there is anything left after secured and preferred creditors have been paid, that
remainder is distributed on a percentage basis to the unsecured or general creditors.

24. Explain the effect of a discharge on the bankrupt.

Answer: When a bankrupt is discharged they no longer are obligated to pay their debts.
They are free to start over. Note that a few obligations such as student loans, fines and
family support obligations will survive a bankruptcy.

25. Explain the difference between the provisions of the Division One and Division
Two proposals.

Answer: Division Two proposals are made by individuals owing less than $75,000. If
accepted by the creditors and honoured bankruptcy can be avoided. Division One
proposals are made with respect to corporations or individuals owing more than $75,000.
This is a more complex process but if accepted by the creditors and honoured, bankruptcy
can be avoided.

Questions for Further Discussion

1. The purpose of the Sale of Goods Act is to imply terms into any contract of sale where
the parties have not specifically agreed otherwise. In some provinces a few of these terms
are imposed and any attempt to override them is void. Some other provinces accomplish
the same result through separate consumer protection legislation. Consider whether the
parties should be able to contract out of any of the terms of the Sale of Goods Act. Should
such restrictions apply to both consumer and business transactions? Should there be any
provision of the Sale of Goods Act that the parties cannot limit in this way? Should there

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be a distinction made between consumer and commercial transaction? Consider also

consumer legislation generally. Should such legislation ever interfere with the parties’
rights to have whatever terms they deem appropriate in a contract, whether it relates to a
consumer transaction or not? Do such restrictions unduly interfere with the commercial
process?

Comment: This question relates to how much freedom to contract people ought to have.
Should terms be imposed upon them or should they be free to agree to whatever terms
they choose adjusting the consideration paid in terms of the risks assumed or not
assumed? If the terms of the Sale of Goods Act are made mandatory so that they cannot
contract out of them, it would certainly change the nature of doing business and that’s a
fundamental consideration when looking at this question. Most people don’t have too
much of a problem with freedom to change the implied terms of the Act when large
corporations are involved and purchasing raw materials or equipment at a wholesale
level. But when there is an imbalance, as is the cases between consumers and retailers,
many people feel that the protections set out in the Sale of Goods Act specifically related
to fitness and quality ought to be mandatory. Certainly some provinces have done this
within the Sale of Goods Act itself or in other consumer protection legislation. The results
are the same; the merchant is liable to the consumer no matter what kind of exemption
clause is included in their limited warranty. The debate then is whether this is a good
thing or does it interfere too much with the marketplace and the rights of the parties to
negotiate their own terms.

2. In Canada the regulation of the securities industry is provincial whereas in the US it is

federal. Would we be better off with a federal securities regulator? The purpose of such
regulations is to create a level playing field. This is done by controlling the use of insider
trading. Is this an interference with the marketplace? Would it be better to reduce the
control of the use and disclosure of such information and restrict control to fraud, market
manipulation and misleading information?

Comment: The first part of this question highlights the present movement and debate in
government and financial sectors in Canada seeking a uniform federal regulation system.
Not surprisingly, several provinces are unwilling to give up their constitutional right to
regulate financial sectors within their geographic borders and many national financial
businesses would prefer a single consistent regime for all their operations throughout
Canada. The fact that a small group of specially placed individuals have access to the
type of confidential information that can be used to improperly manipulate a free and
informed market is the primary reason such regulation is deemed necessary even though
it is an intrusion to the private affairs of corporations. In other words, a free and efficient
marketplace is a fully and honestly informed marketplace.

3. Does the process of taking collateral security unfairly assist secured creditors over
unsecured creditors? Does the requirement of registration sufficiently answer any
criticism? In your answer consider the process of bankruptcy and how secured creditors
are given preferred treatment, often leaving an unsecured creditor with nothing.

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Comment: There are great advantages to creating secured transactions from the point of
view of the secured creditor, but these advantages are obtained at the expense of other
creditors. While there are protections in place that are supposed to protect these other
creditors, such as notification through the registration requirement, not all of these
disadvantaged creditors are effectively protected. For example, a judgment creditor or
supplier will normally not be able to take advantage of such notification and in a
bankruptcy after the secured creditors have been paid there is often nothing left for the
other creditors. The question here is why should a secured creditor be able to put itself
into a position to collect first leaving little or nothing for the other claimants? Think of a
secured creditor having a registered security against a debtor’s car, the owner of which
then negligently hits a pedestrian. If the debtor has no assets other than the car, why
shouldn't that go to the injured pedestrian rather than the secured creditor.

4.Competition lies at the heart of the capitalist enterprise. Is government regulation

necessary, and does it achieve intended aims? What are some of the negative impacts of
regulating competition? What other methods of controlling competition might be more
effective?
Comment: This question deals with the general question of whether business people are
better off unregulated and free to do whatever they want letting the marketplace control
abuses. Many argue that these statutory controls simply hamper efficient commercial
activity. The other side of course is to look at recent abuses. Like most of these
discussion questions the problem is to determine just where the appropriate balance is.

5. Consider the bankruptcy process. It seems to be inconsistent with every principle of

fundamental contract law and commercial relations. Is it fair to the creditors and to the
debtor? What about discharge? Should debtors be allowed to escape their obligations in
this way? Can you come up with a better alternative? Why prohibit student loans from
being discharged through bankruptcy? Should there be other exceptions?

Comment: The stated objective with the bankruptcy process is to preserve as much of the
debtors assets for the creditors and then to give the debtor a chance to start over free from
the burden of impossible debt. There is little argument with respect to the first objective
but many balk at the second, especially when they realize that even if the debtor wins a
lottery shortly after discharge he will not be required to make good on those former debts.
Is there any place for such a process in our legal system? Are we just going soft on dead
beats? Why shouldn't debtors be held to their obligations? This is really just a discussion
examining the opposing social arguments to forgiving the debt of such debtors. In the
past we used debtor's prisons. Today we have gone so far as to forgive the debt. Is there a
middle ground? Students can get quite animated in this discussion especially when the
topic of student loans is introduced were student loans are treated differently.

Cases for Discussion

1. Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, (2008) 238 O.A.C. 130

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Mr. Mustapha suffered considerable trauma when replacing a used jug of water with a
new one he discovered dead flies in his sealed jug of water. He had a particular
sensitivity to this and suffered an unusual reaction. When he complained to the water
producer they offered him a few free water bottles and the cleaning of his dispenser as
settlement. He was offended and sued. Explain the basis of his complaint and the likely
outcome. What do you think should be the remedy Mr. Mustapha should receive, if
anything? How would it affect your answer to discover that Mr. Mustapha suffered an
unusual reaction becoming argumentative and edgy, losing his sense of humour and
could no longer drink bottled water?

Decision: While the court of appeal found that the injuries and psychological impact
suffered by Mr. Mustapha was real and significant they found that such a result was not
reasonably foreseeable. They concluded that it was not reasonably foreseeable that a
person of reasonable robustness and fortitude would likely suffer such a psychiatric
injury from this experience. The Supreme Court of Canada agreed with this decision
finding that although there was a breach of a duty to supply uncontaminated water to the
plaintiff and injury resulted in fact that injury was not the result of the act in law. The
injury was imaginable but was not reasonably foreseeable and was therefore too remote
and the action failed. With respect to his claim for breach of contract the resulting
damage could not have been in the contemplation of the parties when they entered into
the contract and so were also too remote within the context of contract law.

2. Royal Bank of Canada v. Head West Energy Inc., 2007 ABQB 154 (CanLII),
75 Alta. L.R. (4th) 263

Harrison Western Canadian Inc. leased several trailers from Wells Fargo Equipment
Finance Company. These leases were registered as secured transactions under the Alberta
Personal Property Security Act in April and May of 2004 against Harrison Western
Canadian Inc. at the appropriate registry. In July of that year Harrison Western changed
its name to Head West. Subsequently, Head West became indebted to the Royal Bank,
which secured that indebtedness with a general claim against the company’s assets and
registered that secured claim under the P.P.S.A. at the appropriate registry. Head West
became insolvent and was taken over by a receiver, and the trailers were sold for $401
760. Both Wells Fargo and the Royal Bank claimed those funds. Which creditor was
entitled to the funds and why?

Decision:
In the normal course, the first creditor to register (perfect) its security interest has first
priority to the assets and any funds realized upon their sale. However, this case illustrates
an important practical point about registration in the event the debtor changes its name in
the course of operations. Not surprisingly, corporate name changes are common enough
that PPSA legislation requires such debtors to inform its creditors of such changes and
then those creditors must “amend’ their registered security agreements with the registry
so that subsequent potential creditors can search the registry under the new name of the
debtor to find any earlier security agreements. In this situation Wells Fargo failed to

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amend its registered security agreements in a timely fashion after being notified of the
name change and lost its priority to the secured assets to the Royal Bank as a result.

3. Royal Bank of Canada v. Samson Management & Solutions Ltd., 2013

ONCA 313 (CanLII)

Brasseur operated a business (Sampson Management and Solutions) in need of financing.

He arranged a line of credit with the Royal Bank for $150 000. Both he and his wife
(Cusack) signed guarantees in support of the loan. The amount was raised to $250 000
for which new guarantees were signed by both Braseur and his wife. Additional loans
were arranged first for $500 000 and then $750 000. These new lines of credit were
guaranteed by Brasseur, but not by his wife; nor did she consent to them. The Samson
business failed in 2011 and the Royal Bank demanded payment from both Brasseur on
the basis of his $750 000 and from his wife Cusack for her $250 000 guarantee. Explain
what arguments she could raise in her defence.
Would your answer change if the wording of the guarantee she signed allowed for further
indebtedness and she had received independent legal advice?
Decision:
This case provides a good example of how a guarantor in Ms. Cusack’s position can
“contract out” of her rights not to be bound by a guarantee if the underlying loan
obligation materially changes without her knowledge and agreement. In this case the
Court agreed that the substantial increase in the original loan amounts done without her
knowledge and agreement constituted such a material alteration. However, she was not
released from her guarantee obligation as the documents she executed made it clear that
she would continue to be bound on both the original loan arrangement and any future
loan arrangement that may be made in the future, even if those loan arrangements were
for greater amounts and higher interest rates. As such, Ms. Cusack’s lack of attention to
that provision in the guarantee left her liable on her guarantee to the amount of $25,000
despite the serious and material change to the underlying loan obligation of the company.

5. R. v. Clarke Transport Canada Inc. (1995) 130 D.L.R. (4th) 500 (Ont. Gen.
Div.)
A group of five companies provided freight forwarding services through container
shipments in the Toronto area. They would take orders from customers, charge on the
basis of weight, fill a container with those orders, and transport the goods by rail. All five
agreed to control prices. They exchanged information and promised not to undercut each
other’s prices. Explain how their conduct would be viewed under the Competition Act.
What arguments might they raise in their defence?
Decision: The court found that in this case there was clear evidence of price maintenance
or price control, but they also found that there was lots of competition remaining. There
was in fact a considerable amount of competition from other forms of rail shipment,
highway transport and other methods of transporting goods and so competition was not
lessened unduly and no offence had been committed under the act. Note that the judge
noted that this was based on poor evidence and had he been presented with better
evidence he may well have come to a different conclusion.

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The Judge specifically stated: “I wish to make it perfectly clear that my decision is
dependent solely upon the evidence adduced. I am not at all certain that I would have
come to the same conclusion had the Crown been able to establish that the pool car
operators did indeed have a captive audience, which in turn provided them with a
significant share of business in the relevant market. Instead, I was presented with no
evidence of market share and with the inconclusive and less than reliable evidence of a
handful of shippers, whose testimony the Crown sought to bolster by way of expert
evidence which proved equally unreliable and inconclusive.”
7. Jen-Zam Enterprises Inc. v. Mehrabian 2006 CanLII 17753 (ON S.C.) 148
A.C.W.S. (3d) 712

Mehrabian traded in a Toyota 4Runner on a new Subaru Legacy, receiving a $14 000
credit. It turned out later that the 4Runner was stolen. This action is brought by the
automobile dealer (Jen-Zam) to recover the $14 000 from Mehrabian. Mehrabian takes
the position that he is completely innocent, knowing nothing of the vehicle being stolen.
Assuming that he is innocent and sold the vehicle not knowing it was stolen; explain the
arguments available to the parties as to their respective legal positions and the likely
outcome of the action.

Decision: This case provides a good illustration of the common law doctrine known by
the phrase nemo dat quod non habet: no one can transfer a better title to goods than he
himself possesses. As such, between two innocent parties, Jen-Zam and Mr. Mehrabian,
Mr. Mehrabian bears the loss as he cannot provide trade-in value by providing a stolen
car belonging to someone else. As a result, the Court ruled that Mr. Mehrabian must pay
Jen-Zam an additional $14,000.00 as the stolen car has been seized by the police and
returned to the lawful owner.

Sample Examination Questions

Multiple Choice Questions

1. In which of the following will the title to the goods pass to the buyer at the time of
contract?
a. Mrs. Jones calls the Bay and asks them to send out the blanket advertised on p. 3
of its flyer. The Bay agrees and takes her credit card number.
b. Mary picks out a leather briefcase and leaves it with the seller so that initials can
be engraved on it. She paid by cheque.
c. ABC Co. buys all the chemicals contained in a drum marked "A" but the price has
to be ascertained by measuring the number of litres in the drum.
d. Williams, at Antiques Unlimited, contracts for the desk he selected and arranges
to have it delivered to his office tomorrow and to be paid for in one month.
e. While at the Bay, Preston decides to buy the style of sofa he sees on display. He
pays by cash and the store arranges to have one sent from its warehouse directly
to Preston's home.

Answer: D

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2. The Sale of Goods Act adds a number of implied terms to a sale-of-goods transaction.
Which one of the following statements is not an implied term under the Sale of Goods
Act?
a. The seller promises the buyer good title
b. The buyer is promised satisfaction or the right to get his money back
c. Where the buyer tells the dealer in those goods what he wants them for and relies
on the seller to provide them, the goods must be reasonably fit for that purpose
d. Goods sold by description must be of merchantable quality
e. Where goods are sold by sample, the bulk must match the sample.

Answer: B

3. Colson went to Logon Drugs and bought some light bulbs for the hallways of his new
apartment building. A tenant asked for one and Colson gave him one but told him he was
responsible for getting his own from now on. The bulb, manufactured by Burnaby Brite,
Ltd. and sold to Logon Drugs by Dandy Distributors Ltd., was defective, improperly
made. It exploded and caught some curtains on fire. The tenant's apartment suffered
$6,000 damage; he had to move out. He couldn't live there while repairs were being
undertaken and had no choice but to find another place. It would take three weeks to get
the apartment liveable again. On these facts which of the following is false?
a. The tenant could sue Logon Drugs for breach of contract or negligence because
his loss was caused by the defective light bulb.
b. Logon Drugs had not really caused the damage, but it could still be sued by
Colson for breach of contract.
c. Logon Drugs cannot sue the manufacturer for breach of contract even though the
manufacturer was at fault.
d. Logon Drugs could sue Dandy Distributors for breach of contract although it was
not at fault for the damage.
e. The manufacture could be sued in contract by Dandy Distributors, but could be
sued by others only for the tort of negligence.

Answer: A

4. (Modify for your province) Which of the following statements does not accurately
state the law with respect to the provisions of the Trade Practices Act or the Consumer
Protection Act?
a. The court will consider all the surrounding circumstances in determining whether
or not an act or practice is unconscionable.
b. Where a consumer has been subject to a deceptive or unconscionable act or
practice, he may recover damages and be granted an order for rescission.
c. In consumer transactions generally there is a cooling-off period of seven days in
which the consumer can call off the deal.
d. Where a supplier engages in a deceptive or unconscionable act, he may be subject
to both fines and jail.

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e. A deceptive or unconscionable supplier may also lose his right to carry on

business in the province.

Answer: C

5. With regard to bankruptcy and debt collection, which of the following is false?
a. The Bankruptcy and Insolvency Act provides for a procedure for an insolvent
debtor to make a proposal to his creditors which may or may not result in
bankruptcy for the debtor.
b. Both fraudulent conveyance and fraudulent preferences acts (change for
jurisdiction) attempt to prohibit the debtor from delaying, hindering or defrauding
the creditor.
c. Corporations which go into receivership may not be involved in bankruptcy; the
receivership may be based on contract.
d. The commission of a bankruptcy offence could prevent a bankrupt debtor from
being discharged.
e. Any assets obtained by a discharged bankrupt can still be claimed by former
creditors who placed the former bankrupt into bankruptcy.

Answer: E

6. Your brother wants to borrow $8,000 from the Bank of Britannia and has asked if you
would guarantee the loan. You have been told the following with regard to guarantees.
Which of the following statements is false?
a. As guarantor you can use any defense against the bank that your brother could
use.
b. A guarantor becomes the primary debtor as soon as the guaranty is signed.
c. You, as guarantor, may be relieved of your obligation if the bank does anything to
weaken your position through subsequent dealings with the debtor, e.g. by
agreeing with your brother to increase the amount without your consent.
d. If he defaulted on his payments and you had to pay the debt to the bank, you
would be subrogated to the rights of the bank, i.e. you would get the bank's right
to sue your brother.
e. A legally enforceable guarantee must satisfy all the elements required to create a
binding contract.

Answer: B

7. Identify the one factor not required with respect to the attachment and perfection of a
secured creditor's security interest.
a. The creditor must either have registered the interest or have taken possession of
the collateral.
b. The creditor must have agreed to be governed by the applicable legislation.
c. The creditor must have given some value to the debtor.
d. The item of collateral must be identified either by the creditor's possession of it or
by a statement signed by the debtor.

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e. The debtor must have legal rights in the collateral.

Answer: B

8. Which one of the following statements about the Personal Property Security Act is
false?
a. This legislation applies to all present and future transactions (whatever form they
might take) where personal property is given as security interest to enforce an
obligation.
b. Unless a creditor in a secured transaction covered by this Act takes steps to
"attach and perfect" his security interest, he could lose that interest to someone
outside the contract.
c. In a situation where a debtor fraudulently attempts to transfer property that he has
given as security, the Act is designed to protect both the secured creditor and the
innocent third party.
d. If a secured creditor fails to register his security interest in the Personal Property
Registry, he loses his rights against the debtor.
e. If someone suspects that an item of personal property has been given as security
by a particular person, he can search the Registry to see if that is true.

Answer: D

Short Answer Questions

1. What types of transactions does the Sale of Goods Act apply to?

Answer: The contract must anticipate the transfer of goods, either now or sometime in
the future, for a monetary consideration.

2. Joe left his car at Harry’s tire store and asked Harry to put on a particular model of tire
from his stock onto the vehicle while he went into his office in town. During the day, the
tires were installed on the car and he returned that evening to pick them up. At what
point did title on those tires transfer?

Answer: This is Rule #5. Title transfers when the goods have been unconditionally
appropriated and there is the assent of the other party of such appropriation. In this case,
by leaving the car knowing that Harry would choose the tires and put them on, he had
assented to the selection; therefore, title transferred when Harry put the tires on Joe's rims
and on the vehicle.

3. Explain what obligation the Sale of Goods Act puts on the seller with respect to fitness
and quality?

Answer: The Act implies a condition into the contract that the goods will be of
merchantable quality when sold by description and where bought for a particular purpose,
the goods must be fit for that purpose.

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4. Explain what kind of protection is provided by the Trade Practices Act (Unfair
Practices Act, Business Practices Act depending on the jurisdiction).

Answer: This legislation prohibits and provides remedies for misleading the deceptive
statements in that they become part of the contract of sale and the purchaser can sue for
breach of contract. Note that this answer will vary with jurisdictions.

5. Explain three significant contributions of the Federal Competition Act.

Answer:

1. To control mergers and other agreements between businesses which have the
tendency to restrict or limit competition.
2. To restrict or control certain anti-competitive abusive trade practices such as
predatory pricing.
3. To control or prevent and provide remedies for misleading advertising, double
ticketing, etc.

6. Explain the primary purpose of the Personal Property Security Act.

Answer: It is to bring all of the various different methods of using personal property to
secure debt under one process and one Act.

7. Distinguish between attachment and perfection under the Personal Property

Security Act.

Answer: The creditor's rights under the Personal Property Security Act are said to attach
against the chattel, or anything used as security when the contract is executed or partially
executed, for example, when the money is advanced. Perfection, however, gives rights to
the creditor against third parties and that takes place when the secured transaction is
registered or where the creditor obtains possession of the thing he used as security.

8. Owen borrowed money from a credit union, guaranteed by his father, to buy a car.
The credit union also registered a security interest under the Personal Property Security
Act against the vehicle. Owen defaulted and, instead of repossessing the vehicle, the
credit union demanded payment from the father. Explain the legal position of the father
under these circumstances.

Answer: The credit union has every right to demand payment from the father instead of
repossessing the car. Once the father pays, however, he “steps into the shoes” of the
credit union and has the right to repossess the car and have it sold, just as the credit union
did.

9. Explain two methods for a debtor becoming bankrupt.

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Answer: Voluntary assignment where the debtor chooses to go to a trustee in bankruptcy

and voluntarily assign his assets to that trustee, and a receiving order where the creditors
go to court and obtain a receiving order whereby the assets of the debtor are forcibly
transferred to a trustee in bankruptcy and the proceeds from their sale is then distributed
to the creditors.

10. Explain the role of the trustee in bankruptcy proceedings.

Answer: The function of the trustee is to receive the assets of the debtor, to deal with
them in such a way so that as much as possible is realized from them, and then those
funds are distributed to the creditors.

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Essay Topics

1. Discuss the significance of the Sale of Goods Act in our market-based economy.

2. Explain the significance of a “manufacturer's warranty” for products such as a

camera and a computer and why it’s necessary with respect to the Sale of Goods
Act.

3. Discuss the consumer protection legislation in place in your province in terms of

its effectiveness and purpose.

4. Explain the advantages and disadvantages of the registration requirement in a

secured transaction situation. In your answer, deal with the changes imposed by
the Personal Property Security Act.

5. Explain how in a creditor/debtor transaction the exposure of a guarantor is limited

and his rights protected.

6. Discuss the objectives of the Bankruptcy and Insolvency Act and how well those
objectives are obtained.

7. Discuss the bankruptcy and insolvency process from the point of view of the
creditor, indicating how that creditor's interests are or are not protected.

8. Discuss the impact of federal competition act on the business climate of Canada.

9. Consider the offences, and other prohibited and reviewable practices under the
Competition Act as well as the tools used to enforce those provisions and discuss
the effectiveness of the act in meeting its objectives.

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