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 This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. Lavery closely monitors the development of class actions dealing with consumer law and is committed to keeping the business community informed of the latest developments in this area of the law by regularly publishing newsletters dealing with new case law or legislative changes which may impact, influence, even transform the practices in this area. The courts of Quebec recently dealt with two issues of interest in the context of two class actions instituted by consumers. The courts: interpreted sections 271 and 272 of the Consumer Protection Act (C.P.A.)1, ruling that a violation of the provisions of the C.P.A. does not systematically give rise to the remedies provided under these two sections, and thereby limiting the remedies available to consumers; and noted that they are flexible in their interpretation of the requirements for authorizing a class action under article 1003 of the Code of Civil Procedure (C.C.P.)2, in particular, in circumstances where it is evident that a significant number of consumers may be members of the group, there is less of a need for the plaintiff to take steps to specifically identify the members as the merchant likely possesses all the relevant information that the court will need to identify the potential members of that group. Breach of an obligation arising from the C.P.A. and possible remedies pursuant to sections 271 or 272 In March 2015, the Superior Court of Québec clarified the scope of sections 271 and 272 C.P.A. in the case of Lacasse v. Banque de Nouvelle-Écosse3. The applicant was seeking the authorization to institute a class action on behalf of all the consumers who had a motor vehicle financed by the Bank of Nova Scotia (the “Bank”) in Quebec since November 22, 2010. The remedy in respect of which the authorization was sought aimed to obtain the reimbursement of the death and disability insurance premiums paid, as well as punitive damages on the grounds that the Bank had failed to treat such insurance premium as a credit charge and, accordingly, had not calculated the credit rate in the contract in accordance with sections 70 (b), 71 and 72 C.P.A. and 54.1 of its implementing regulation. The applicant maintained that this constituted a breach of section 272 C.P.A. While acknowledging that the contract did not disclose the credit rate as a percentage, the Bank argued that this constituted a requirement as to form, that instead section 271 applied, and that the Bank could thus raise in defence the fact that the consumer had suffered no prejudice. Ms. Justice Danielle Mayrand agreed with the Bank and dismissed the motion on the grounds that the applicant had suffered no prejudice. She noted that [TRA NSLATIO N] “section 271 sanctions the failure to comply with requirements as to form at the time of the formation of the consumer contract (for which the consumer may demand the nullity)”4 while section 272 C.P.A. applies to [TRA NSLATIO N] “substantive obligations governing the behaviour of the merchant, irrevocably deems the actions stemming from the behavior to cause a prejudice to the consumer, and authorizes much harsher sanctions such as punitive damages.”5The judge concludes that the applicant had failed to demonstrate that the Bank had contravened section 272 C.P.A.; the omission to calculate and disclose the credit rate in the contract is a breach of paragraph 2 of section 271 C.P.A. which governs the form of a contract of credit. Furthermore, the applicant had not proved that she had suffered a prejudice related to the failure to disclose the credit rate in the contract. In the circumstances of the case, since the interest rate applicable to the amount of the premium was 0%, the failure to disclose the credit rate had no effect on the amount the applicant paid. The applicant had entered into the insurance contract with full knowledge and could neither maintain that she was misled by such omission nor maintain that she would not have entered into the contract if the credit rate had been properly disclosed. COMMENTS While the Court of Appeal recently noted that different facts give rise to each of the remedies under sections 271 and 272 C.P.A. and that their mutually exclusive nature gives to the consumer the choice as to which remedy to pursue,6 the Court in Lacasse limits the scope of this choice, reminding us that not all breaches by a merchant constitute the violation of a substantive obligation giving rise to the remedies under section 272 C.P.A. Merchants who enter into contracts with consumers must remain mindful of the consequences of remedies based on section 271 and 272 C.P.A., such as compensatory and punitive damages, but must also know that the nature of the alleged breach sets up their remedy, and that defences under section 271 C.P.A. are available, as said section does not create an irrevocable presumption of prejudice. Criteria for instituting a class action in the context of the C.P.A. In the case of Martel v. Kia Canada Inc.,7 the main goal of the appellant was to purchase an economy car. Nevertheless, her dealer recommended preventive maintenance on account of the rigorous climate of Quebec in addition to the maintenance described in the “Normal Maintenance Program” set out in the owner’s manual she had been provided with when purchasing the vehicle. The appellant performed the preventative maintenance for the purpose of keeping the manufacturer’s warranty in good standing, but she considered that she had purchased the vehicle on the basis of misleading information and filed a motion to be authorized to institute a class action. The trial judge dismissed her motion on the ground that she had failed to demonstrate that all conditions of article 1003 (a), (c) and (d) C.C.P. were satisfied. As to article 1003 (c) and (d), the judge reproached her for not having attempted to search for other consumers who had suffered a similar prejudice and could have been included in the group. The court found that she had not demonstrated the existence of a group whose members would have similar issues to raise before the courts and whom she was nonetheless seeking to represent. The Court of Appeal of Quebec allowed the appeal and repeated what had been said in Fortier v. Meubles Léon8, that is, that the legal and evidentiary thresholds to get past the authorization stage before the Quebec courts are rather low. The Court of Appeal relied on the principles set out by the Supreme Court of Canada in the cases of Infineon9 and Vivendi10, according to which [TRANSLATION] “The judge’s function at the authorization stage is one of screening motions to ensure that defendants do not have to defend against untenable claims on the merits”11, meaning that the applicant has demonstrated serious colour of right and that he or she has a defendable case. Therefore, the burden at the authorization stage is not one of proof but rather only of demonstration. Furthermore, all the members of the group are not required to view the prejudice suffered in the same way. The assessment of the prejudice for authorization purposes is objective and not subjective in respect of each consumer involved in the action. Thus, the appellant was not required to demonstrate that the decision to purchase the vehicle or not was based in any way on the fact that the frequency of preventive maintenance was an important criteria for her, but also for other consumers of this same vehicle. The Court of Appeal also relied on this occasion on a principle derived from the case of Lévesque v. Vidéotron12 suggesting that the higher the number of consumers in a similar situation the more it is proper to draw some inferences, more particularly to presume that the merchant who is sued [TRANSLATION] “possesses the data necessary to estimate the number of consumers affected by the action and that [the merchant] is in the best position to identify them”13. COMMENTS This decision of the Court of Appeal follows the trend from the last few years whereby the requirements of article 1003 C.C.P., reviewed at the stage of the class action authorization, must be analysed in a flexible and liberal manner. Thus, it seems that in certain cases, an applicant who seeks authorization to institute a class action will not be required to show that he or she took steps to identify consumers who dealt with the merchant in similar circumstances. 1 Consumer Protection Act, CQLR c. P-40.1. 2 Code of Civil Procedure, CQLR, c. C-25. 3 2015 QCCS 890. 4 Lacasse v. Banque de Nouvelle-Écosse, 2015 QCCS 890, par. 22. 5 Id., par. 25. 6 Dion v. Compagnie de services de financement Primus, 2015 QCCA 333. 7 2015 QCCA 1033. 8 Fortier v. Meubles Léon, 2014 QCCA 195, par. 65-70; cited in Lacasse c. Banque Nationale de Nouvelle-Écosse, préc., note 3. 9 Infineon Technologies AG v. Option consommateurs, 2013 CSC 59, par. 59-61. 10 Vivendi Canada Inc. v. Dell’Aniello, 2014 CSC 1. 11 Prec., note 10, par. 37. 12 Lévesque c. Vidéotron s.e.n.c., 2015 QCCA 205, par. 27. 13 Prec., note 7, par. 35.

On April 20, 2015, the National Assembly adopted An Act mainly to implement certain provisions of the Budget Speech of 4 June 2014 and return to a balanced budget in 2015-2016 (S.Q. 2015, c. 8). Some of the many amendments introduced by that statute (the “Act”) pertain to the securing of debts in Quebec. We have prepared this newsletter to inform you about important changes to consider in connection with financing transactions. COMMERCIAL FINANCING: HYPOTHECS IN FAVOUR OF A FONDÉ DE POUVOIR (ARTICLE 2692 OF THE CIVIL CODE OF QUÉBEC) Since coming into force in 1994, this article of the Civil Code of Québec (the “Civil Code” or “C.C.Q.”) has frequently been used in connection with syndicated loans, to enable new lenders that join the syndicate (following an assignment made as part of the syndication of a credit facility, for example) or enable creditors of future obligations (under credit arrangements that involve many advances and repayments, for example) to benefit from a hypothec granted to a person representing the creditors: the fondé de pouvoir. It was mandatory that hypothecs granted pursuant to article 2692 C.C.Q. secure the payment of bonds (debentures) or other titles of indebtedness, and be created by notarial deed en minute. In syndicated loans not involving the issuance of bonds or other titles of indebtedness, a common process was to have the borrower, or another grantor, issue a debenture and then pledge it in order to benefit from the provisions of article 2692 C.C.Q. The amendments to article 2692 C.C.Q., in force since April 21, have, among other things: eliminated the need to issue and pledge debentures (without forbidding this practice) by allowing the hypothec to directly secure the performance of obligations created under the terms of credit agreements; specified the process for appointing and replacing the fondé de pouvoir (now called the hypothecary representative); and confirmed that the hypothec must be created by notarial deed en minute, unless it is a movable hypothec with delivery. Borrowers and lenders alike will benefit from these amendments to article 2692 of the Civil Code, which simplify the taking of security, notably in connection with syndicated loans, or financing arrangements made abroad. HYPOTHECS WITH DELIVERY ON CERTAIN MONETARY CLAIMS The Act introduces a new and more efficient way, inspired by US law, to create a security on sums of money, and gives that security a preferred rank. The security is on sums of money credited to a financial account (such as a deposit account held by a financial institution), on amounts given as security to a third person (an individual, or a legal person that can be, but need not be, a financial institution), or on a sum of money which the secured creditor owes the person creating the security. In all cases, the collateral is a claim held by the party creating the security (the “monetary claim”). Like all other hypothecs, the secured obligation can be the obligation of the person creating the security, or the obligation of a third person. The security is a pledge (or “movable hypothec with delivery”) that can be set up against third persons without being published in the Register of Personal and Movable Real Rights, and the “delivery” is effected by the “control” which the creditor must obtain over the monetary claim. If the secured monetary claim is payable by the secured creditor to the person creating the security, control is obtained when that person consents to his claim’s securing the performance of an obligation toward such creditor. If the secured monetary claim is owed by a third person, control is obtained either by entering into a control agreement with that third person, under which such person agrees, among other things, to comply with the secured creditor’s instructions, without the additional consent of the person creating the security (though the third person is not required to enter into such an agreement) or by becoming the holder of the financial account whose credit balance is the monetary claim. It is important to note that neither the consent of the person creating the security (the grantor) nor the consent of the third person need be given in writing. However, it is preferable to obtain such consent in writing, to establish the parties’ intent. The Act also establishes the rank of hypothecs on monetary claims. It states that a movable hypothec with delivery, effected by control of a monetary claim obtained by a creditor, ranks ahead of any other movable hypothec encumbering that claim, from the time that control is obtained, regardless of when that other hypothec is published (and this includes movable hypothecs without delivery, published in the Register of Personal and Movable Real Rights) and it specifies ranking where several movable hypothecs with delivery encumber the same monetary claim (article 2713.8 of the Civil Code). The new article 3106.1 C.C.Q. should be pointed out as well. It specifies the law that will govern the validity of a security encumbering a monetary claim, as well as the publication of the security and the effects of such publication, depending on whether that law has been expressly specified in an act governing the claim. Although the amendments introducing a new system of hypothecs with delivery on certain monetary claims will only come into force on January 1, 2016, section 372 of the Act specifies that certain movable hypothecs with delivery effected by the creditor obtaining control of a monetary claim may not be cancelled or declared unenforceable against third persons on the grounds that control of the claim was obtained before January 1, 2016. It is therefore very much in creditors’ interests to consider acquiring now control over a monetary claim, even if it is only valid as of January 1, 2016. It is more than likely that financial institutions will need to adjust their practices to these new approaches.

The Lavery GO inc. Program team is happy to inform you that the Autorité des marchés financiers(AMF) announced yesterday the implementation of an equity crowdfunding exemption which allows startups to raise up to $500,000 in capital per year. Under this exemption, startups whose head office is located in Quebec may offer their shares to public investors through an online participative financing portal that is either relying on the exemption from the dealer registration requirement or is operated by a registered dealer and by using the pre-established offering documents which are available on this portal. The highlights of this crowdfunding exemption are as follows: The issuer may raise up to $250,000 per offering, subject to a limit of two offerings per calendar year. Investors may invest up to $1,500 per offering; however, there is no limit as to the number of offerings to which an investor may participate. The shares acquired under this exemption cannot be resold except under another prospectus exemption or a prospectus. The crowdfunding exemption will also be implemented in British Columbia, Saskatchewan, Manitoba, New Brunswick and Nova Scotia. This new exemption is excellent news for startups as it will allow them to access a new source of capital to support their development. It also sets up the tone for the much expected Regulation 45-108 respecting Crowdfunding, which is still under discussion among the Canadian Securities Administrators. For more information respecting this equity crowdfunding exemption, please contact Étienne Brassard or Guillaume Synnott. Étienne Brassard: 514 877-2904 | [email protected] Guillaume Synnott: 514 877-2911 | [email protected]

The Superior Court considered two interesting issues in the case of Banque Laurentienne du Canada v. Yuan.1 First, it had to determine whether a term loan that was used to payout an existing term loan had resulted in the novation of the first debt. Second, it had to determine what the effect the contract titled (translation) “Credit Facility Secured by Hypothec”2 had on the survival of the disputed hypothec. FACTS The Court’s decision describes the circumstances of the dispute. On October 9, 2007, the Laurentian Bank of Canada (the “Bank”) granted a term loan in the amount of $600,000, and issued a corporate Visa credit card with a credit limit of $25,000 to 9154-1912 Québec Inc. (“9154-1912”). On October 18, 2007, the Bank and 9154-1912 entered into a Credit Facility Secured by Immovable Hypothec in the amount of $850,000. The hypothec charged an immovable owned by 9154-1912, and the deed of hypothec contained the following clause: The borrower undertakes to maintain this hypothec for the term of the loan, and in all cases in which the borrower contracts new obligations in favour of the lender, for any such obligations or commitments to the lender as well, until such time as this hypothec is discharged. (our emphasis) On July 14, 2008, the Bank granted a demand loan in the amount of $75,000 to 9154-1912. Finally, on March 5, 2009, it granted to 9154-1912 a $75,000 line of credit and a term loan of $675,000, which, among other things, was to be used to pay off the term loan of $600,000 granted on October 9, 2007. On June 16, 2011, 9154-1912 borrowed $150,000 from Mr. Zhou Yuan (“Mr. Yuan”), which was secured by a second hypothec on the same immovable. Mr. Yuan contended that he would not have agreed to make this loan if he had known that the Bank’s claim could have exceeded $575,000, and the evidence showed that there were contradictory e-mails in the file on this point. Mr. Yuan registered a prior notice of the exercise of a hypothecary right (May 8, 2012) and served a motion to institute proceedings for a forced surrender and taking in payment (May 24, 2012). On May 28, 2012, the parties to that action signed a “Consent to Judgment” “in accordance with the conclusions of the action as instituted” and, on June 21, 2012, the Court declared Mr. Yuan to be the owner of the immovable. In a new court action, the Bank presented a motion for an order enjoining Mr. Yuan to surrender the immovable on which the Bank held a first hypothec, and for a declaration that it was the owner thereof as a result of the taking in payment. Mr. Yuan contested the motion on the grounds that the Bank’s first hypothec ought to have been canceled because there had been a novation of the debt when the second term loan was granted and, therefore, the Bank could not claim the total amount it was owed from him, which then stood at $801,229.28. JUDGMENT Justice Godbout rejected Mr. Yuan’s arguments. He found that there had been no novation because the second loan granted to 9154-1912 had not replaced the first loan, which had simply been repaid.3 He stated as follows : [43] In this case, it is evident that the $675,000 term loan granted by the Bank on March 5, 2009 (credit facility E) (exhibit P-1) constitutes a new obligation. [44] However, this new obligation did not have the effect of extinguishing the first obligation, i.e. the $600,000 term loan granted on October 9, 2007 (credit facility A) (exhibit P-1). That loan was simply repaid. [45] The second term loan of $675,000 (credit facility E) did not therefore cause the extinction of the first term loan of $600,000 (credit facility A); that obligation was extinguished by the repayment thereof and not the creation of a new obligation. [46] The argument that there was a novation of the $600,000 term loan (credit facility A) cannot be upheld because there was not at the same time “an extinction of the original debt and […] the creation of a new debt substituted for the old one.” The judge also as adds the following: [47] Furthermore, the deed of immovable hypothec (exhibit P-2) explicitly states that: The borrower undertakes to maintain this hypothec for the term of the loan, and in all cases in which the borrower contracts new obligations in favour of the lender, for any such obligations or commitments to the lender as well, until such time as this hypothec is discharged (our emphasis). [48] This undertaking by the borrower, here 9154-1912, constitutes the reservation referred to in article 1662 C.C.Q., in respect of the creditor Bank. The Bank’s first hypothec against the immovable was therefore valid. Novation is not presumed (article 1661 C.C.Q.),4 and the discussions which the parties had had on the amount of the balance of the Bank’s loan do not allow for a different conclusion when there is a clear clause to the contrary effect. COMMENTS This decision confirms the validity of a hypothec granted in relation to future undetermined obligations, thus following the line of jurisprudence that started with the case of Banque HSBC Canada c. 9082-3659 Québec inc.,5 as well as the prevailing opinion in the doctrine which we endorsed in 2006.6 The judge relied on the wording of the clause in the deed of immovable hypothec to justify his conclusion. This highlights the importance of having a deed of hypothec that is drafted in sufficiently clear terms to determine the parties’ real intention and ensure that the grantor of the hypothec assumes the obligation with full knowledge of its effects. In this case, the judge confirmed the existence of the first hypothec on the basis of (1) the fact that there had been no novation of the first debt within the meaning of article 1660 C.C.Q., and (2) the reservation contemplated in article 1662 C.C.Q.,7 which the Bank took advantage of, as expressly provided in the terms of the deed of hypothec. We agree with the final conclusion reached by the judge, but nevertheless question whether his reasoning was properly founded on article 1662 C.C.Q. Indeed, this article applies in the context of a novation, i.e. when a new claim is substituted for the old one. However, the judge precisely rejected the existence of such novation. In finding that there was no novation, the judge could instead have based his reasoning on article 2797 C.C.Q.8 However, this decision does show the importance of getting proper advice before granting loans and incurring significant costs to institute hypothecary remedies that do not achieve the desired results. Finally, it will be interesting to follow the further developments in this case, which has been appealed. 2014 QCCS 3948, an appeal was filed on September 8, 2014. All the quotations cited herein from the Court decision in French are English translations. Article 1660, para. 1, of the Civil Code of Québec: “Novation is effected where the debtor contracts towards his creditor a new debt which is substituted for the former debt, which is extinguished, or where a new debtor is substituted for the former debtor, who is discharged by the creditor; in such a case, novation may be effected without the consent of the former debtor.” Article 1661 of the Civil Code of Québec: “Novation is not presumed; the intention to effect it must be evident.” [2005] R.D.I. 339 (Sup Ct). We outlined our position at the 6th Annual Conference on Secured Lending, held in Montreal on September 12, 2006, in the presentation entitled “Hypothec for present and future debts”. Article 1662 of the Civil Code of Québec: “Hypothecs attached to the former claim are not transferred to the claim substituted for it, unless they are expressly reserved by the creditor.” 8Article 2797 of the Civil Code of Québec: “A hypothec is extinguished by the extinction of the obligation whose performance it secures. In the case of a line of credit or in any other case where the debtor obligates himself again under a provision of the act constituting the hypothec, the hypothec, unless cancelled, subsists notwithstanding the extinction of the obligation.”

SOMMAIRE GST/QST Election: Get Ready for 2015 “Laying Yourself Bare” to Get the Best Insurance Coverage! Clear Communication Between the Client and the Insurance Broker: The Key to Success   GST/QST Election: Get Ready for 2015Carolyne Corbeil and Emmanuel Sala Generally, certain corporations or partnerships within a same group who are engaged exclusively in commercial activities, may make intra-group supplies of taxable goods or services without having to collect or remit the GST/QST otherwise applicable to such supplies. This tax relief is possible thanks to the joint election made under subsection 156(2) of the Excise Tax Act (Canada)1 (“ETA”) and the first paragraph of section 334 of the Act Respecting the Québec Sales Tax (“QSTA”)2 (hereinafter the “section 156 election”). More specifically, by making this election, the consideration for most supplies of taxable services or goods between the qualifying corpora­tions of the same group is deemed to be nil (certain types of supplies are excluded from the section 156 election, particularly a supply by way of sale of real prop­erty). Recently, following the tabling of the 2014 federal budget, several major amendments were made to the section 156 election, including the fact that cor­porations benefitting or seeking to benefit from this election will henceforth be required to file it with the tax authorities on or after January 1, 2015, failing which the election will not be valid. Similarly, Quebec’s 2014-2015 budget announced that amendments would be made to the same election under the QSTA for purposes of harmonizing the QST with the GST. According to the current provisions of the section 156 election, “specified mem­bers” of a “qualifying group”, as defined by the ETA, may file the election jointly. Generally speaking, a specified member is a corporation resident in Canada or a “Canadian partnership” which is a GST/QST registrant, and which is engaged exclusively in commercial activities. A qualifying group is a group of corpora­tions each member of which is closely related for purposes of the ETA.3 Closely related members include, in particular, two corporations one of which, either directly or indirectly, holds not less than 90% of the value and number of shares of the other corporation (i.e. parent-subsidiary), or sister corporations of which not less than 90% of the value and number of shares are held by the same person. Currently, the section 156 election is made or revoked by the members of the qualifying group on a prescribed form (i.e. Form GST25), which need not be filed with the appropriate tax authorities, but simply kept in the records of the corporations concerned in the event of an audit. The section 156 election remains in effect until it is revoked by the parties, or when one of the corporations ceases to be a member of the qualifying group. Moreover, it is important to mention that, where a new specified member joins the qualifying group, the section 156 election must be amended in order to be valid in respect of any supplies made to or by this new member. Conversely, where supplies are made to or by a corporation that has left the group (for example, following a reorganization in which the percentage of share ownership in said corporation has changed) the section 156 election automatically ceases to be effective and the GST/QST becomes applicable to the taxable supplies. According to the proposed amendments to the relevant provisions of the ETA, in order to be effective for GST/QST re­porting periods subsequent to January 1, 2015, the section 156 election, or revoca­tion thereof, must henceforth be filed with the appropriate tax authorities before the first day on which any of the parties to the election must file its GST/QST return for the period. For example, if one mem­ber of the group has a monthly reporting period, the entire group must file their section 156 election with the tax author­ities by no later than February 28, 2015, if supplies are made on January 1, 2015. However, the amendments to the ETA give some relief to corporations already having a section 156 election in effect prior to 2015 by enabling them to file the election with the appropriate tax author­ities by no later than December 31, 2015 instead. It is important to note that having a valid section 156 election in your file for 2014 has no effect on your obligation to submit the section 156 election on the prescribed form to the tax authorities at some time between January 1, 2015 and December 31, 2015. Lastly, please note that the section 156 election cannot be filed prior to January 1, 2015, since it will not be recognized by the tax authorities. Consequently, where the group of corporations makes an unofficial section 156 election (i.e. where the parties act as if an election was made, without signing the prescribed form), it will henceforth only be valid if it is presented to the tax authorities in accordance with the pre­scribed requirements. In conclusion, the new requirements for filing the section 156 election present an excellent opportunity for reviewing the relevance, and especially the eligibility, of such election that one has made to date. Since it is impossible to file the section 156 election in advance, it is strongly recommended that one set a reminder to do so in the new year. ________________________________1 ETA (R.S.C.,1985), c. E-15.2 CQLR c T-0.1.3 We will not describe the concept of “closely related” under the ETA in detail herein, or its application to partnerships, since the complexity thereof would exceed the scope of our text. Please contact the authors should you require more information. “Laying Yourself Bare” to Get the Best Insurance Coverage! Clear Communication Between the Client and the Insurance Broker: The Key to SuccessJonathan Lacoste-Jobin with the collaboration of Léa Pelletier-Marcotte, student-at-law It is before the occurrence of a loss that businesses should ensure they have adequate insurance coverage which meets their needs and their specific characteristics, and which is adapted to the market in which they operate. This can save them a lot of trouble. However, it can be difficult to find your way in the world of insurance; hence the interest in doing business with a broker whose mandate is to assess the client's needs and offer insurance coverage which best fits those needs. Brokers have a two-tiered duty of advice toward their client.1 On the one hand, they must personally gather the information that will enable them to offer their clients a product meeting their specific needs. On the other hand, they must adequately inform and advise their clients so that they can make informed and considered decisions.2 The broker must therefore be able to describe the insurance product being offered as accurately as possible, while also clearly explaining its terms, ­conditions and exclusion.3 The broker [translation] "is not a mere vendor or conduit between the insured and the insurer, but an insurance pro­fessional."4 He must be proactive in the pre-contractual period, that is, before the insurance policy is issued, for example, by informing himself of the nature of the business and its insurance needs. He must also stay abreast of the needs of his clientele after the conclusion of the contract and make adjustments as those needs change. However, this duty to advise is largely dependent on the nature of the mandate given to him by the client, the client's general conduct, and the information provided5.It is therefore important for the client to act diligently in his interactions with the broker. Since the broker recommends an insurance product based on the informa­tion provided to him, the client should ac­curately describe the nature of the activ­ities and characteristics of his business. It is not up to the broker to guess the client's needs, but rather the client to communicate his expectations to the broker. While the broker's primary duty is to advise, the client's duty is to inform his broker accurately and unambiguously of what he needs6. One should also keep in mind that the broker does not necessarily have the requisite knowledge to handle all the as­pects of a file. For example, the appraisal of the value of the property being insured is not within the purview of the broker. The client is responsible for obtaining an accurate appraisal, preferably by a certified appraiser, so that the broker can obtain sufficient insurance coverage7. We also recommend that the client pay attention to the documents provided by the broker, including the coverage sum­maries as well as the insurance policies, and properly understand their terms and conditions before signing them. In case of uncertainty, many problems can be avoided by asking questions and requiring clarifications8. It is also import­ant to properly document your file and keep records of the various exchanges with your broker for future reference, particularly since losses often occur many months or even years after your discussions with the broker. In summary, the basis of proper insurance coverage is clear communi­cation to your insurance broker of the specific needs of your business and its activities. When in doubt, do not hesitate to ask questions and require any necessary clarifications. As the saying goes: too much is always better than not enough! ________________________________1 See the Act Respecting the Distribution of Financial Products and Services, chapter D-9.2; Code of ethics of the Chambre de la sécurité financière (D-9.2, r. 3); Regulation Respecting the Issuance and Renewal of Representatives’ Certificates (D-9.2, r. 7) and the Regulation respecting the pursuit of activities as a representative (D-9.2, r. 10).2 125057 Canada inc. (Tricots LG ltée) c. Rondeau, 2011 QCCS 94 (C.S.).3 Baril c. L’Industrielle Compagnie d’assurance sur la vie, [1991] R.R.A. 191 (C.A.).4 Ibid.5 2164-6930 Québec Inc. c. Agence J.L. Payer Compagnie Ltée, [1996] R.R.A. 549 (C.A.).6 Les marbres Waterloo Ltée c. Gérard Parizeau ltée, [1987] R.R.A. 938 (C.A.).7 See, for example, Renaud c. Promutuel Dorchester, société mutuelle d’assurances générales, [2006] R.R.A. 641 (C.S.).8 For example, 2751-9636 Québec Inc. c. Cie d’assurance Jevco, [2004] R.R.A. 954 (C.S.).

This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin). 3. WHAT PRECAUTIONS SHOULD A PROPOSED DIRECTOR TAKE PRIOR TO ACCEPTING TO ACT AS A CORPORATE DIRECTOR? A person who is invited or wishes to become a director should clearly make some prior verifications, including: his interest for the organization and its objectives; the requirements of the position as to time and efforts and his availability in that respect; the actual possibility to make a significant contribution, therefore resulting in added value for the legal person; the quality of incumbent directors, who will be his colleagues if he accepts to act as a director; the receptivity of management respecting sound governance and the help provided by management to directors to enable them to discharge their duties and play their full role; the quality of the existing corporate governance; the financial health of the legal person; the existence of actual or threatened significant proceedings against the legal person; the compliance by the organization with laws and contracts; the existence of adequate directors’ and officers’ liability insurance coverage; the availability of an indemnification undertaking by the legal person in favour of the director; the existence of recent director resignations and the reason thereof; the proportionality of compensation relative to the liability risks (mainly in the case of reporting issuers).Preliminary discussions with the chief executive officer, the chairman of the board and some current and former directors may be helpful in obtaining adequate confirmations in respect of many of these items. However, these discussions should be completed by reviewing documents such as the financial statements, court records, minutes...).A person who is an officer, director or employee of a corporation must also ensure that the new office as director is acceptable to the first corporation. The new office may in fact contravene a policy of the corporation, the contract between the individual and the corporation or the interest of the corporation.The risks to reputation related to accepting to act as director with some legal persons are not to be neglected either. We have recently seen that the reputation of high quality persons who had accepted on a pro bono basis to act as directors of not-for-profit organizations suffered as a result. The media, politicians and even auditors general sometimes draw quick, ill-founded conclusions as to the proper discharge of their duties by directors.4. WHAT ARE THE DUTIES OF A MEMBER OF A BOARD OF DIRECTORS?Incorporating statutes, particularly the Canada Business Corporations Act1 and the Business Corporations Act2 (Quebec), as well as the Civil Code of Québec3 all stipulate two general duties which directors are subject to, that is, the duty of care and the duty of loyalty. The Canada Business Corporations Act stipulates these duties as follows:“122. (1) [Duty of care of directors and officers] Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”In addition to these general duties, a director is also subject to many statutory obligations or presumptions of liability or guilt under various statutes, particularly for unpaid salaries and remittance of deductions at source and GST/QST. It is important for directors to be aware of all the statutory obligations and presumptions and know how to recognize them, ensure that the legal person takes appropriate measures in this respect and that the board supervises such measures. _________________________________________1 Canada Business Corporations Act, R.S.C. 1985, c. C-44.2 Business Corporations Act, C.Q.L.R., c. S-31.1 art. 119.3 Civil Code of Québec, L.R.Q., c. C-1991, articles 321 and following.

This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin).1. IS A DIRECTOR REQUIRED TO BE A SHAREHOLDER OR MEMBER OF THE LEGAL PERSON?Subject to the following, the answer to this question is no.However, the governing statute, articles of incorporation, internal or administrative by-law or unanimous shareholder agreement may stipulate specific eligibility conditions.For example, as a non-exhaustive list of examples: the incorporating statute or the by-law of a not-for-profit organization (NFPO), professional corporation or some other legal persons may stipulate requirements as to membership, residence, citizenship, etc.; the articles of incorporation of a corporation or a unanimous shareholder agreement may confer on a shareholder the authority to appoint one or several directors or provide that a director must also be a shareholder.2. WHO IS ELIGIBLE TO BECOME A DIRECTOR?The eligibility conditions are mainly found either in the Civil Code of Québec1 for legal persons governed by it or in the incorporating statute of the legal person, as completed in both cases by the internal or administrative by-law duly adopted by the legal person or a unanimous shareholder agreement.Under all relevant statutes, a director must be a natural person. A legal person cannot be a member of the board of directors of another legal person.Article 327 of the Civil Code of Québec2 stipulates that “Minors, persons of full age under tutorship or curatorship, bankrupts and persons prohibited by the court from holding such office” are disqualified for office as directors. Exclusions which are similar in whole or in part are to be found in most incorporating statutes of legal persons.Most incorporating statutes do not require directors to be shareholders or, in the case of a NFPO, a member of the legal person.Moreover, some incorporating statutes prescribe eligibility conditions, such as citizenship or residence.Some statutes other than the incorporating statutes or some regulations or decisions of regulatory authorities establish prohibitions from acting as a director generally or, in other circumstances, from acting as a director of specific legal persons.In another publication entitled “May a director be removed by the board of directors during his term of office?”3 we discussed some additional eligibility conditions which may be prescribed by the internal or administrative by-law. Some legal person may, for example, wish to impose as an eligibility condition the absence of criminal record to avoid having to file an application with the court under article 329 of the Civil Code of Québec4 to obtain the removal of a director who has been found guilty of an offence pursuant to the Criminal Code.Failure to meet the conditions of eligibility and the loss of eligibility should, in our opinion, result in most cases and for most purposes, in the automatic disqualification of a natural person as a director.Any person who is invited to become a director of a legal person and the legal person itself must therefore verify that the applicable eligibility conditions are met. _________________________________________1 Civil Code of Québec, CQLR, c. C-1991.2 Civil Code of Québec, CQLR, c. C-1991.3 Lavery website - Publications - André Laurin - “The Corporate Director’s Q & A”, “20. May a director be removed by the board during his term of office?”.4 Civil Code of Québec, CQLR, c. C-1991.

Although non-compliance with the Consumer Protection Act (the “CPA”) is generally sanctioned by the nullity of the CPA non-compliant clauses, or of the contract in its entirety, in cases involving written notices of forfeiture of the benefit of the term, the courts have sometimes decided to maintain the validity of the non-compliant notices if they were not prejudicial to the consumer’s rights. The following two judgment support this view.CAISSE POPULAIRE DESJARDINS DU PORTAGE JUDGMENTIn a recent Court of Québec judgment, Caisse Populaire Desjardins du Portage v. Létourneau1, the Court dismissed the defendant’s plea which sought to annul the notice of forfeiture of the benefit of the term because the statements of account attached to the said notice did not detail all of the information prescribed by the Regulation respecting the application of the CPA (the “Regulation”). Contrary to the requirements of subsections 67(e) and 67(f) of the Regulation, the statements of account in question did not clearly indicate the balance of net capital remaining after each sum of money paid into the defendant’s account, nor the portion thereof used to pay the net capital and the portion used to pay credit charges.Having sent two notices of forfeiture of the benefit of the term and waited the requisite thirty (30) days for the forfeiture to occur, the Caisse sued the defendant for the reimbursement of two personal loans on which the defendant failed to make monthly instalments.At trial, the defendant admitted owing payments on the loans, however she submitted that the notices were invalid because the statements of account did not include all of the information required by the Regulation. Therefore, she argued that the forfeiture of the benefit of the term had not occurred and she was only liable to pay the plaintiff the lapsed instalments, rather than the balance of the loans.The Caisse admitted that the statements of account did not respect the form prescribed by the Regulation, but argued that the information omitted was not material and should not invalidate the notices.The Court noted that the purpose of the statement of account attached to the notice of forfeiture of the benefit of the term is to inform the consumer of the amount owing so that he may, within thirty (30) days of the receipt of such notice, remedy the default by paying the stated amount to the merchant. In this case, the Court sided with the Caisse, agreeing that the notices and the attached statements of account contained the information required for the defendant to ascertain and remedy its default. Citing another Court of Québec judgment in the case of Banque de Montréal v. Bujold2, rendered in 2009, the Court reminded us that the CPA was adopted in order to protect consumers from illegal practices of merchants, but it should not enable consumers to plead trivial and immaterial non-compliance with the law in order to avoid their obligations.BUJOLD JUDGMENTIn the Bujold case, the plaintiff bank sued the defendant for the balance due under the instalment sales contract signed for the purchase of a used vehicle. Similarly to the judgment summarized above, the defendant submitted to the court that the notice of forfeiture of the benefit of the term did not respect subsections 67(e) and 67(f) of the Regulation and should therefore be annulled. The defendant, however, also submitted that the credit contract itself should be annulled due to the bank’s failure to adequately investigate his financial situation, and the fact that it was obvious that the defendant had no use for the purchased vehicle. In its judgment, the Court noted that the CPA is meant to protect vulnerable consumers, but should not be abused by them to obtain the nullity of clauses or contracts that are otherwise valid. The Court admitted that it could annul the notice of forfeiture of the benefit of the term based on the defendant’s submissions, but such a decision would be contrary to the best interests of justice because it would inevitably result in a new notice being issued by the plaintiff, causing additional delays and possibly further contestation by the defendant.On the issue of the nullity of the consumer contract itself, the Court questioned the good faith of the defendant, Bujold, because he made multiple flagrantly incorrect statements on the bank’s credit application form, including a false declaration of employment and revenue and false details regarding hypothecary loan payments, and blatantly neglected to declare several outstanding personal loans. Yet, the defendant did not hesitate to sign at the bottom of the credit application form, certifying that all the information provided to the bank was true and correct.In light of these circumstances, the Court found that the bank was not negligent in its duty to investigate the plaintiff’s financial background prior to granting the credit. According to the Court, the real reasons which explained why the defendant obtained a loan to purchase a vehicle he did not need were the defendant’s own misrepresentations and his general lack of business acumen. Moreover, the Court criticized the defendant’s reprehensible conduct, holding that this conduct estopped the defendant from arguing the deficiencies in the notices before the Court. For these reasons, the Court upheld the validity of both the credit contract as well as the notice of forfeiture of the benefit of the term and ordered the defendant to pay the outstanding debt to the plaintiff.COMMENTSMerchants should not view the courts in these cases as being generally lenient toward non-compliance with consumer protection legislation. However, these cases are a reminder that a merchant’s rights should not be undermined on the basis of technicalities or trivial and immaterial non-compliance that does not prejudice the consumer.While it is difficult to generalize from these cases, the courts have at least given some flexibility to merchants in cases in which their notices of forfeiture of the benefit of the term are deficient where the accompanying statements of account fail to clearly indicate the balance of net capital remaining and the portion thereof used to pay the credit charges. The real criterion seems to be whether the defendant was able to ascertain and remedy its default.The Bujold judgment also provides some guidance on the extent of the merchants’ duty to investigate the degree of the consumer’s consent in accordance with the criteria under section 9 of the CPA (namely, the condition of the parties, the circumstances in which the contract was entered into and the benefits arising from the contract for the consumer). According to case law, the consumer’s personal circumstances should be considered and verified by the merchant prior to entering into a binding contract with the consumer. In carrying out such verifications, a merchant may rely on the (apparently true) representations made by the consumer._________________________________________ 1. Caisse Populaire Desjardins du Portage v. Létourneau, 250-22-002775-125 (C.Q.). 2. Banque de Montréal v. Bujold, 2009 QCCQ 5530.

Recently, the Court of Québec reminded merchants of their responsibility to ensure that consumers are cognizant of important contractual clauses at the time a contract is entered into. In the case of 159191 Canada inc. (Discount Location d’autos et camions) c. Waddell1, the Court had to decide whether a clause in a two-page vehicle rental contract which excluded insurance coverage in a specific situation was valid under Québec law. FACTSThe facts of the case are as follows. The Defendant, Mr. Patrick Waddell, rented a van from the Plaintiff, Discount Location d’autos et camions (“Discount”) and opted to pay for additional damage insurance. That same day, while attempting to park the van, Waddell collided with a balcony and damaged the van significantly. The parking space was large enough for a standard car but too small for the van. Upon returning the van to Discount, Waddell was told that the rental contract expressly excluded insurance coverage for damage resulting from insufficient height or width clearances. Waddell contested the application of the exclusionary clause and refused to pay for the damages. Consequently, Discount instituted proceedings against him to recover the amount of $14,906, representing the difference in the value of the van before and after the accident.At trial, Discount argued that, in accordance with relevant case law, it had intentionally printed the clause on the reverse-side of the contract, in the same section as the client’s acceptance and signature. Therefore, Waddell should have been aware of it. In response, Waddell argued that Discount’s representative failed to bring the clause to his attention, and that, on its own, the font, size and quality of print rendered it illegible.FINDINGRelying on several legislative provisions, the Court found in favour of Waddell and dismissed Discount’s claim.ANALYSISFirst, the Court explained that based on Article 1436 of the Civil Code of Quebec2 (“CCQ”), any clause in a consumer contract which is illegible or incomprehensible to a reasonable person is null if a consumer suffers injury therefrom. The Court found that two of the conditions for the application of this provision were satisfied. The Court determined that the contract in question was a consumer contract within the meanings of Article 1379 CCQ and Section 2 of Quebec’s Consumer Protection Act3 (“CPA”). It was also clear that Waddell would suffer injury from the application of the clause, since he alone would be responsible for paying to repair the vehicle. The principle issue, therefore, was whether the clause was illegible.Second, before addressing the issue of legibility, the Court explained that because a merchant has more knowledge and power than a consumer, it has the obligation to inform the latter of important terms stipulated in consumer contracts. This obligation stems from the duty to act in good faith imposed by Articles 6, 7, and 1375 CCQ.Third, the Court examined whether Waddell had truly consented to the application of the clause. In accordance with Section 9 CPA, the Court analyzed the circumstances in which the contract was entered into and explained that the fact that Waddell had signed the contract was not sufficient proof of his consent. The Court explained that Discount had to prove that Mr. Waddell had in fact read and understood its terms. In referring to the Supreme Court of Canada decision Dell Computer, the Court explained that “a clause that is buried among a large number of other clauses because of its location in the contract is characterized as illegible”.4Fourth, the Court explained that the size, font, spacing, and colour contrast of the text may also render it illegible. The Court further noted that the merchant must use reasonable efforts to make the text accessible, especially when a clause affects the rights of a consumer. In fact, the clause at issue failed to meet the requirements of Section 28 of the Regulation respecting the application of the Consumer Protection Act5, namely, that it be “set in typeface equivalent to HELVETICA LIGHT of at least 8 points with 10-point leading”. It was typed in a 7 point font without sufficient spacing, and did not require initialing, in contrast with other less important clauses for the consumer (such as clauses notifying the consumer that he had to return the vehicle with a full tank of gas, or asking the consumer to confirm he is insured) in the contract. Other cases cited in this decision deem to be illegible light grey letters printed on poor quality white paper.Lastly, the Court referred to Section 17 CPA which stipulates that, “in case of doubt or ambiguity, the contract must be interpreted in favour of the consumer”.Based on the foregoing, the Court held that Waddell’s consent had been vitiated and found the clause to be null. It explained that any reasonable person presented with the contract would not have understood the extent of its application nor been aware of the existence of the clause. The fact that Discount printed the clause on the back-side of the contract, near the consumer’s signature, did not render it legible. It was also of no consequence that Waddell’s own personal car insurance included a similar clause.CONCLUSIONThis case reminds merchants of their burden to inform consumers, at the time a contract is entered into, of any material clauses which they may seek to enforce later on. In addition, merchants have the obligation to draft contracts that respect the requirements of the CPA and related regulations, most notably, with respect to font, size and spacing. Lastly, merchants can only benefit from the Court’s requirement that consumers be asked to initial clauses that render their obligations more onerous. By doing so, merchants can better protect their interests and ensure that their contracts will be enforceable against consumers in the context of a legal dispute._________________________________________  1 2013 QCCQ 3560. 2 c. C-1991. 3 c. P-40.1. 4 Dell Computer Corp. v. Union des consommateurs, [2007] 2 S.C.R. 801, 2007 SCC 34, para.90. 5 c. 5 c. P-40.1, r. 3.

Recently, the Superior Court rendered a decision1 which clarifies the extent of the discretion a court has when asked to ratify a hypothecary creditor's recommendation to appoint an employee of its legal counsel to act as the officer of the court entrusted with the sale by judicial authority of the collateral secured in its favour.CONTEXTThe Superior Court had to render judgment in five cases involving very similar facts. In each case, the loan granted to the debtor (the “Debtor”) was secured by a hypothec in favour of the lender (the “Creditor”).Following the Debtor’s failure to make its monthly loan repayments, the Creditor applied to the Court for ratification of the process it proposed for the sale by judicial authority (by agreement) of the collateral secured in its favour. As part of the process, the Creditor proposed that an employee of its legal counsel be appointed to conduct the sale by judicial authority.Justice Carole Julien first noted the extent of the court’s power in connection with a sale by judicial authority process and referred to the following legal provision:2791 C.C.Q. A sale takes place by judicial authority where the court designates the person who will proceed with it, fixes the conditions and charges of the sale, indicates whether it may be made by agreement, a call for tenders or public auction and, if it considers it expedient, after enquiring as to the value of the property, fixes the upset price.Pursuant to this article, the hypothec vests the Creditor with the power to exercise its right to proceed with a sale by judicial authority and a court cannot deny it that right. However, the Court must ensure that the Creditor complies with the legal conditions attached to that right and must rule on the conditions of the sale. For example, the Court will determine who will proceed with the sale, the extent of that person’s responsibilities, his or her remuneration, the date of the sale, the extent to which the sale must be publicized and the date at which the balance of sale price and the transfer duties must be paid, if any.2THE QUESTION IN DISPUTEThe Court framed the issue in each case in the following terms:“Is there a conflict of interest if the person designated by the Court to conduct the sale by judicial authority is the legal counsel (or one of its employees) of the hypothecary creditor?”3 [Translation]ANALYSISAt the outset, the Court explained that the Creditor’s recommendation to entrust a particular individual with the sale by judicial authority of the hypothecated property is not binding on the Court. The Court has the power to designate any other person that it deems more impartial, independent and competent to do so.4As such, the person entrusted with the sale by judicial authority becomes an appointed officer of the court. To meet the requirements of that role, the appointed person must be both objectively and subjectively competent. While “objective competence” refers to the ability and competence needed to successfully conduct the sale by judicial authority, “subjective competence” refers to the ability to place the interests of each party, including those of the holder of the hypothec and those of its grantor, on equal footing in order to prevent a situation of conflict of interest.5In that respect, the Code of Ethics of Advocates6 (the “C.E.”) stipulates at the first paragraph of section 3.06.07, that a lawyer is in a situation of conflict of interest where he represents conflicting interests. The Superior Court clarified the scope of that provision by explaining that the existence of a conflict of interest must be appreciated in light of a lawyer’s duty of loyalty and confidentiality towards his or her clients. Therefore, every situation must be analyzed according to whether there appears to be a potential or apparent conflict, and not whether an actual conflict exists.7The Civil Code of Québec stipulates that the person entrusted with the sale by judicial authority acts as the legal mandatary of the owner of the property sold:2793 C.C.Q. The person entrusted with the sale of the property is bound to observe the rules prescribed in the Code of Civil Procedure (chapter C-25) for the sale of the property of another and, in addition to inform the interested parties of the steps he is taking if they require him to do so.The person acts in the name of the owner and is bound to declare his quality to the purchaser.The Court explained that in order to properly fulfill this mandate, the person must act prudently and must respect the competing interests at stake, in accordance with the rules governing the administration of the property of another (articles 1299 to 1370 C.C.Q.). In his or her role as an administrator, the person has an obligation of loyalty, prudence and impartiality.8Justice Julien referred to several decisions in which courts agreed to allow a representative of the creditor to conduct a sale by judicial authority.9 However, those cases did not consider the issue from the standpoint of the notion of conflict of interest.According to Justice Julien, the issue is whether there exists a real or potential risk in allowing an employee of the Creditor’s legal counsel to proceed with the sale by judicial authority, and whether that person would favour the legal counsel’s economic interests over those of the Debtor, even though the employee would also be the Debtor’s legal mandatary.The parties involved in a sale by judicial authority usually have several convergent interests. However, even if the creditor and the debtor have a mutual interest in ensuring that the hypothecated property is sold at the highest possible price, it is important to remember that regardless of the sale price, the creditor retains the right to sue its debtor if there is a shortfall between the proceeds of sale and the amount stipulated in the hypothec.In the case at hand, the Court held that the Creditor’s proposed appointee could not act as an officer of the court in the sale by judicial authority. In support of its position, the Court referred to the principle established in ADR Capital Inc. v. Weinberg10 and explained the following:“[55] As discussed above, the person designated by the Court is granted “a portion of the court’s authority” and becomes “an extension of the Court and of its authority”. Where that person is a lawyer, or the lawyer’s employee, and acts as the creditor’s representative, his or her duty of impartiality and neutrality could be called into question. Lawyers must not only avoid any situation of conflict of interest (section 3.06.06 C.E.) but also [those] that give the appearance of such a conflict.[56] By acting for both the creditor and the debtor in a sale by judicial authority, the lawyer represents conflicting interests, which is in breach of the first paragraph of section 3.06.07 C.E. Moreover, the lawyer cannot concomitantly represent a trustee in bankruptcy or a liquidator as well as the debtor or creditor in question (third paragraph of section 3.06.07 C.E.). That prohibition would also apply to the conflicting role played by a lawyer acting as the person designated to proceed with sale by judicial authority while representing the creditor or the debtor in the matter. The C.E. further prohibits a lawyer from acting as a bailiff or exercising judicial or quasi-judicial functions while acting as a lawyer in the same matter (sections 3.05.05 (a) and 4.01.01 C.E.).[57] Furthermore, the lawyer must avoid “all methods and attitudes likely to give to his profession a profit-seeking or commercial character” (section 3.08.03 C.E.). Although the lawyer may wish to provide full services to his or her client, he or she must assess the impact of doing so in relation to the need to maintain an appearance of justice at all times. By recommending a paralegal from his firm to act as the designated person in proceedings instituted for the benefit of his client, the creditor, the lawyer may give the appearance of unethically profiting monetarily in this case.”11 [Translation]COMMENTIn Soulières, the Court clarifies the role of the person designated as the officer of the court entrusted with a sale by judicial authority. It asserts that even though a hypothecary creditor remains free to decide the nature of its hypothecary recourse, a court should not ratify a creditor’s proposal regarding the conditions of sale without ensuring that the person appointed to conduct the sale is in a position to respect his or her duty of impartiality and independence._________________________________________  1 Compagnie de fiducie AGF v. Soulières, 2013 QCCS 83 (single judgment applicable to five cases) [Soulières]. 2 Louis Payette, Les sûretés réelles dans le Code civil du Québec, 4th ed., Cowansville, Éditions Yvon Blais, 2010, para 3541; also see Montréal Trust Co. of Canada v. Regletex Inc., J.E. 98-883 (S.C.) (appeal dismissed, J.E. 98-1874 (C.A.)). 3 Supra, note 1, para 38. 4 Id., para 30; see also Louis Payette, supra, note 2, at paragraph 1851. 5 Id., para 33. 6 R.R.Q., c. B-1, r. 3. 7 Supra, note 1, para 35; see also Castor Holdings Ltd. (Syndic de), [1995] R.J.Q. 1665 (C.A.) (application for leave to appeal dismissed, S.C.C., 25-04-1996, No. 24910). 8 Articles 1309, 1310 and 1317 C.C.Q.; article 1310 C.C.Q. expressly state that, “No administrator may exercise his powers in his own interest or that of a third person or place himself in a position where his personal interest is in conflict with his obligations as administrator. If the administrator himself is a beneficiary, he shall exercise his powers in the common interest, giving the same consideration to his own interest as to that of the other beneficiaries”. 9 Supra, note 1, paras 47 and 48. 10 2008 QCCS 4788, para 30. 11 Supra, note 1, para 55 to 57.

This bulletin includes an analysis of certain provisions of the Cape Town Convention and the Aircraft Protocol that will take effect in Canada on April 1, 2013.  AN OVERVIEWBy: Pierre Denis1 and Étienne Brassard2Lavery, de Billy LLP INTRODUCTIONThis Bulletin is intended as a brief overview of the above-mentioned Convention and its Protocol and is not an in depth analysis of each of their provisions. We selected the provisions which we believe are required or useful to gain a working understanding of the CTC in the context of an overview. While drafted in layman’s terms, this overview does raise a few transactional/financing legal points. Hopefully they will not overburden the reader’s review.Since they were concluded on November 16, 2001 at a Diplomatic Conference in Cape Town, South Africa, the Convention and Protocol have become known and referred to collectively as the “CTC” and this term will be used herein when referring to both. However, since certain terms are defined in the Convention and others in the Protocol, and given the need to read both the Convention and the Protocol in conjunction, when quoting or referring to definitions or Articles, a specific reference to the Convention or the Protocol, as the case may be, will be added. For ease of reference, the non-consolidated Convention and Protocol are readily available without cost at the web site of Unidroit3 and all quotes and references herein are to the non-consolidated version of each of them. The International Interests in Mobile Equipment (Aircraft Equipment) Act4, as amended, adopted by Canada provides that the non-consolidated texts have force of law.We will briefly discuss the meaning of aircraft objects, the rules of form to create an international interest, the choice of forum and certain jurisdictional rules adopted under the CTC, the rules applicable to the location of the debtor (or “where the debtor is situated” to use the CTC terminology), the defaults, remedies, as well as preliminary reliefs and “self-help remedies” rules. The main priority and registration rules of the International Register (the “IR”) will also be overviewed, as well as searches thereunder and will be followed by a few comments in respect of States and common law liens, “super priorities” and “prior claims” in the province of Québec, as well as “arrest” or “detain” rights, all of which will continue to be recognized. Priorities, assignments, accessory rights, subrogations and related defaults and priority rules will only be alluded to but not reviewed. We will finally discuss the coming into effect of the CTC in Canada, the grandfathered transactions and amendments thereto.1. PURPOSES OF THE INTERNATIONAL REGISTRY OF MOBILE ASSETSOther than commerce and trade benefits intended to be achieved by the adoption of the CTC, one of the main purposes of the IR, which is supervised by the International Civil Aviation Organization, is to centralize the recording of transactions related to aircraft objects (as hereinafter defined) occurring world-wide and is intended to eventually become the sole register for all transactions related to aircraft objects creating international interests, other than purely State internal transactions when a “national registry” exists in a Contracting State and has been declared to apply as “national interests” by such Contracting State and are registered at the IR5. Canada did not make such a declaration and does not currently have such a national registry to record “national interests” in aircraft objects. The Canadian Civil Aircraft Register merely records as “owner”6 the person(s) or entities which have “custody and control” of aircraft registered thereunder; it does not allow for the recording of either national or international interests (as hereafter discussed). Thus, we will not elaborate further in respect of such national interests.Some of the countries participating in the CTC negotiations had been asked by several industries to modernize and harmonize the various national registration systems applicable to security/title retention financing devices (if any even existed in certain States) related to aircraft objects. Their goal was to reduce the economic and insolvency risks created by the uncertainties related to the validity and effectiveness as against third parties of security agreements, title retention agreements (conditional sales), leases and title transfers related to aircraft objects and optimize the international uniformization and recognition by Contracting States of the remedies adopted under the CTC, the enforcement thereof by their courts, as well as the enforcement by the courts of Contracting States of foreign judgments in respect thereof rendered by the courts of other Contracting States.2. AIRCRAFT OBJECTS2.1 Types of aircraft object requiring registration.The CTC is intended to apply in relation to “aircraft objects”7, other than those used in military, customs or police services, which are defined in the Protocol to include the following:(i) “airframes”8 that are type certified to transport at least eight (8) persons including crew or goods in excess of 2,750 kilograms;(ii) “aircraft engines”9 having in the case of jet propulsion aircraft engines at least 1750 lb of thrust or its equivalent or in the case of turbine-powered or pistonpowered aircraft engines at least 550 rated take-off shaft horsepower or its equivalent; and(iii) “helicopters”10 that are type certified to transport at least five (5) persons including crew or goods in excess of 450 kilograms.Each of the foregoing includes all installed, incorporated or attached accessories, parts and equipment (in the case of airframes, other than aircraft engines) and all data, manuals and records relating thereto.Note that the Protocol specifically provides that ownership of or another right or interest in an aircraft engine shall not be affected by its installation on or removal from an airframe11.There is no defined term “helicopter engines”, but in the Official Commentary of the CTC12 (hereafter “CTC Official Commentary”), Professor Goode states:“(i) a helicopter engine is an “aircraft engine” when it is not attached to a helicopter; and(ii) when a helicopter engine is installed on a helicopter, the helicopter engine becomes a component or an accessory of the helicopter, and subsequently, loses the characterization as an “aircraft object.”Instead of registering a new international interest every time a helicopter engine is removed from a helicopter or registering an international interest against a helicopter engine while it is installed on a helicopter, the CTC Official Commentary suggests to adapt the security agreement in order to contemplate the existence and registration at closing of both current and prospective interests against the engine (i.e. when the engine will be removed from the helicopter, the prospective registration against the engine will become effective)13.3. WHAT IS AN INTERNATIONAL INTEREST3.1 Agreements covered by the CTC.The CTC is intended to apply to a broad range of agreements, both current and prospective, creating or evidencing a security agreement, a title reservation agreement or a leasing agreement of an aircraft object, as these terms are hereafter defined.None of the following agreements recognized by the CTC require a minimum term or duration to meet the definition requirements and to thus become subject to registration at the IR.3.1.1 Security agreement;Under the Convention:“security agreement” means an agreement by which a chargor grants or agrees to grant to a chargee an interest (including an ownership interest) in or over an object to secure the performance of any existing or future obligation of the chargor or a third person;14This definition is sufficiently broad to cover most forms of security interest and would include a security trust (fiducie-sûreté), a sale with a resolutory condition and a sale with a right of redemption securing a loan (as understood in the province of Québec under Article 1755 of the Civil Code of Québec (“C.c.Q.”), given that transfers of ownership interests as security are included. Of course, it also includes a Personal Property Security Act (“PPSA”) type security agreement and hypothec under the C.c.Q.Applicable law will determine if the agreement in question is a security agreement, a title reservation agreement or a leasing agreement (see Articles 2(4) and 5(2), (3) and (4) of the Convention).3.1.2 Title reservation agreement;Under the Convention:“title reservation agreement” means an agreement for the sale of an object on terms that ownership does not pass until fulfilment of the condition or conditions stated in the agreement;15Under Article 2(2) of the Convention, an agreement cannot be both a security agreement and a “title reservation agreement”. This last definition is arguably broad enough to include a consignment agreement where title will typically pass, subject to the other conditions of the agreement, upon consumption, use or resale of the property. While in the CTC Official Commentary16 Professor Goode states that a consignment agreement “without a rental charge” cannot be a leasing agreement, he also states earlier on that a consignment “does not cross the threshold of falling within a Convention category…”17. In our view, a consignment may arguably qualify if all other requirements of the CTC are met. The conceptual differences as to when titles passes between a conditional sale and a consignment are full payment of the purchase price in a conditional sale, as opposed to the payment thereof upon use, consumption or sale in the case of a consignment. They are all “conditions” contemplated by the definition, which when fulfilled, trigger the transfer of title to the property involved.3.1.3 Leasing agreement;This Convention provides:“leasing agreement” means an agreement by which one person (the lessor) grants a right to possession or control of an object (with or without an option to purchase) to another person (the lessee) in return for a rental or other payment;18This definition is broad. Certain transactions which would not be subject to a registration at a personal property register or at the Québec register of personal and movable real rights, are leasing agreements under this definition and qualify for registration at the IR if the aircraft object is involved in a transaction where an international interest is created. This would include sale and leaseback transactions in PPSA jurisdictions (which include all Provinces in Canada, save Québec).The definition undoubtedly includes the more common “financial leases” as well as “rental agreements”, as these terms are understood at common law and as codified in the C.c.Q. In the case of the C.c.Q. this is the case irrespective of the codified meaning given to “lease” (louage) and “leasing” (credit-bail) thereunder19.However, we again note that applicable law will determine if a lease or leasing is a “leasing agreement” under the CTC or a security agreement (see Article 2(4) of the Convention).3.2 Formal requirements.The Convention defines “international interest” as follows:“international interest” means an interest held by a creditor to which Article 2 applies;Article 2 of the Convention reads as follows:Article 2 — The international interest1. This Convention provides for the constitution and effects of an international interest in certain categories of mobile equipment and associated rights.2. For the purposes of this Convention, an international interest in mobile equipment is an interest, constituted under Article 7, in a uniquely identifiable object of a category of such objects listed in paragraph 3 and designated in the Protocol:(a) granted by the chargor under a security agreement;(b) vested in a person who is the conditional seller under a title reservation agreement; or(c) vested in a person who is the lessor under a leasing agreement.An interest falling within sub-paragraph (a) does not also fall within sub-paragraph (b) or (c).3. The categories referred to in the preceding paragraphs are:(a) airframes, aircraft engines and helicopters;(b) railway rolling stock; and(c) space assets.4. The applicable law determines whether an interest to which paragraph 2 applies falls within subparagraph (a), (b) or (c) of that paragraph.5. An international interest in an object extends to proceeds of that object.A few observations are required. An outright sale, while not an international interest, nevertheless benefits from the registration provisions of the CTC pursuant to Articles III and XIV of the Protocol and can thus benefit from the priority or ranking rules provided by the CTC. The IR is not, per se, a title registry, but the registration of contracts of sale will, over time, provide a searchable list of title transfers with regards to a specific aircraft object (assuming that the CTC applies to each transfer).“Non-consensual rights or interests” as defined in the Convention are not international interests although they are subject to registration at the IR if a Contracting State has made a declaration in respect thereof under Article 39 of the Convention. Canada has made such a declaration as we will see later on. We further note that a “prospective international interest” (discussed later) is an international interest for the purposes of the CTC.Article 7 of the Convention requires the existence of four (4) formal conditions for an international interest to exist.3.2.1 a writing;The requirement of a writing may seem innocuous. However, readers from civil law jurisdictions should note that certain formal domestic law rules do not apply. For instance, this is the case for the rule prescribed by Article 2692 of the C.c.Q. for hypothecs in favour of a person holding the power of attorney (fondé de pouvoir) of the creditors, which rule requires that the document be signed “…on pain of absolute nullity be granted by notarial act en minute…”. An agreement failing to comply with this rule, when it applies, would nevertheless create an effective international interest even if invalid as a matter of domestic law.Also note that a “writing” includes electronic records of information20.3.2.2 having the power to dispose of the aircraft object;This requirement is very broad and it was drafted as such so that entities which may not legally own, but have the “power” (as opposed to “right”) to create an interest in or dispose of an aircraft object could do so21 (for instance a conditional buyer reselling or leasing, a lessee sub-leasing or a trustee acting under a trust agreement). This includes every type of transfer whether by sale, lease, conditional sale or a transfer by way of security.3.2.3 identification of the aircraft object conforms to the Protocol requirements;This requirement is important and is completed by Article V of the Protocol in respect of contracts of sale and by Article VII of the Protocol which states:Article VII — Description of aircraft objectsA description of an aircraft object that contains its manufacturer’s serial number, the name of the manufacturer and its model designation is necessary and sufficient to identify the object for the purposes of Article 7(c) of the Convention and Article V(1)(c) of this Protocol.(emphasis added)This rule in effect prohibits the recognition of an international interest, current or prospective, in future aircraft objects and it follows that neither a general security agreement on all present and future personal property, nor a universal movable hypothec on all present and future movable property would charge future aircraft objects. See also the reference to “uniquely identifiable objects” in Article 2 of the Convention.In Canadian PPSA provinces, except Ontario, the Personal Property Security Regulation22 requires that reference be made to the Canadian registration marks of the aircraft (issued by Transport Canada), in any filing instead of the manufacturer serial number. This will no longer be required for IR purposes. However, it will still be possible to include such registration marks, as we will see later.3.2.4 a security agreement must permit the determination of the obligations secured but not an amount or maximum amount secured;Domestic law in several States or territories of States (in respect of a Federated State see Article 5 (4) of the Convention) such as the province of Québec in the case of hypothecs, requires that the maximum amount for which any property is being charged be specifically mentioned. Again, domestic law rules of form are ousted for international interests (such as the requirement to have a hypothec amount), provided that the secured obligations are determinable.As the IR is not a document filing system, should someone wish to ensure compliance with the above formal rules for an international interest to be created, such person would need to obtain copy of the underlying agreement. No rule is provided obligating a creditor to provide copy of the agreement to someone requesting it, as is the case for instance in various PPSA jurisdictions23. Domestic law could apply to this question24.3.3 Choice of law/applicable law.3.3.1 Choice of governing law recognition;Article VIII (2) of the Protocol provides:The parties to an agreement, or a contract of sale, or a related guarantee contract or subordination agreement may agree on the law which is to govern their contractual rights and obligations, wholly or in part.This rule applies in Canada which has made a Declaration adopting it as is permitted under the first paragraph of this Article. The governing law of an agreement should be contrasted with the applicable law. The applicable law of where the debtor is situated will apply irrespective of the chosen governing law of an agreement. For instance, the rules governing registration and perfection of agreements under applicable law of a non-Contracting State would apply even if a debtor situated in a non-Contracting State agrees to a choice of law clause which selects the laws of a Contracting State as the governing law of the contract. Conversely, a debtor situated in a Contracting State who agrees to a choice of the laws of a non- Contracting State would not, by doing so, avoid the application of the CTC to its agreement.3.3.2 Domestic law suppletive;Article 5 (2) of the Convention provides:2. Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the applicable law.This rule is self-explanatory. It should be noted that both Article 5 (3) of the Convention and Article VIII, paragraph 3 of the Protocol provide that it is the domestic rules of law which are applicable, as opposed to conflict of laws rules of that State. This would exclude a possible transfer (renvoi) to the laws of another State.3.4 Paramountcy of Protocol over the Convention.Article 6 of the Convention is self-explanatory and reads as follows:Article 6 — Relationship between the Convention and the Protocol1. This Convention and the Protocol shall be read and interpreted together as a single instrument.2. UN the extent of any inconsistency between this Convention and the Protocol, the Protocol shall prevail.4. CONNECTING FACTORS4.1 Location of debtor.The term debtor is defined as follows in the Convention:“debtor” means a chargor under a security agreement, a conditional buyer under a title reservation agreement, a lessee under a leasing agreement or a person whose interest in an object is burdened by a registrable non-consensual right or interest;25Article 3 of the Convention provides:Article 3 — Sphere of application1. This Convention applies when, at the time of the conclusion of the agreement creating or providing for the international interest, the debtor is situated in a Contracting State.2. The fact that the creditor is situated in a non-Contracting State does not affect the applicability of this Convention.Article III (1) of the Protocol further provides:1. Without prejudice to Article 3(1) of the Convention, the Convention shall also apply in relation to a helicopter, or to an airframe pertaining to an aircraft, registered in an aircraft register of a Contracting State which is the State of registry, and where such registration is made pursuant to an agreement for registration of the aircraft it is deemed to have been effected at the time of the agreement.These definitions make clear that the location of the debtor in a Contracting State is the main element required (connecting factor) for the CTC to apply in respect of aircraft objects, except aircraft engines. However, a debtor may be located in a non-Contracting State if the helicopter or airframe is registered as a civil aircraft in a national registry of a State which is a Contracting State.In respect of a contract of sale, Article III of the Protocol adds “purchaser” as a “debtor” for the purposes of certain Articles.Article 4 of the Convention provides the following rules to determine the location or “situs” of a debtor:Article 4 — Where debtor is situated1. For the purposes of Article 3(1), the debtor is situated in any Contracting State:(a) under the law of which it is incorporated or formed;(b) where it has its registered office or statutory seat;(c) where it has its centre of administration; or(d) where it has its place of business.2. A reference in sub-paragraph (d) of the preceding paragraph to the debtor’s place of business shall, if it has more than one place of business, mean its principal place of business or, if it has no place of business, its habitual residence.As these rules are relatively clear and have been inspired by Uniform Commercial Code (“UCC”) UCC/PPSA-type statutes rules such as “centre of administration” or the better known “chief executive office”, they will be familiar to most. In the province of Québec, the private international law “domicile” rule is now replaced by these rules in respect of a “…corporeal movable ordinarily used in more than one country…”26, when it qualifies as an aircraft object under the CTC.4.2 The location of the debtor rule is not applicable to aircraft engines.While mounted on an airframe, an aircraft engine will follow the same rule as other aircraft objects but are separately registered at the IR, as we shall see below. An engine which is not mounted on an airframe is subject to the rules of the place where it is physically situated. It is to be noted that the engines situated in a non-Contracting State may be registered at the IR. Whether the courts of a non-contracting State would recognize and enforce such an international interest is another matter.5. MEANING OF DEFAULTArticle 11 of the Convention provides:Article 11 — Meaning of default1. The debtor and the creditor may at any time agree in writing as to the events that constitute a default or otherwise give rise to the rights and remedies specified in Articles 8 to 10 and 132. Where the debtor and the creditor have not so agreed, “default” for the purposes of Articles 8 to 10 and 13 means a default which substantially deprives the creditor of what it is entitled to expect under the agreement.It follows from Article 11 that the parties may still determine which events may constitute defaults. However, secured creditors, conditional vendors and lessors will no doubt wish to continue providing what the events of default will be under their agreements to avoid any debate as to whether a default “substantially deprives the creditor of what it is entitled to expect under the agreement”, more particularly in connection with any attempted challenge from a debtor. This is particularly true in light of the “self-help” remedies hereafter discussed.It is also possible to argue that the default by law provisions of the C.c.Q. could continue to apply. See for instance Articles 1597 (la demeure), 1598, 1599 and 1600 C.c.Q. We further refer to Article 2740, paragraph 2 of the C.c.Q. which requires that the claims of creditors be “liquid and exigible” for the hypothecary recourses of the C.c.Q. to be available and which seems overridden.6. REMEDIES AGAINST AIRCRAFT OBJECTS6.1 Under a security agreement.Article 8 of the Convention sets out the three remedies available under a security agreement. The debtor must have agreed either in the agreement or thereafter to each of these remedies.6.1.1 taking possession or control of aircraft objects;This remedy is similar to one of the remedies available to secured creditors under existing Canadian law. It does not however refer to the concepts of “simple” or “full administration” as understood under the C.c.Q. Thus, these concepts will not apply to remedies against aircraft objects.6.1.2 selling or leasing of aircraft objects;These remedies are again not dissimilar to existing Canadian law. However, the concepts of sale by the creditor and of sale by judicial authority of the C.c.Q. will no longer apply.6.1.3 collect or receiving income or profit from the management or use of the aircraft objects;This remedy is interesting. While it is difficult to contemplate a “chargee” or secured creditor managing or using the aircraft object to earn “income or profit” when the aircraft or helicopter is still nationally registered in the name of the chargor or debtor who may have the sole right to the custody and control of the aircraft under the Canadian Aeronautics Act and the Canadian Aviation Regulations (“CARs”), it would be possible to de-register the aircraft and re-register it in the name of the secured creditor (or another third party) to collect such income or profit.If a creditor’s international interest is prior registered at the IR and the debtor leases the object to a third party, the creditor could collect the rental payments from the lessee instead of terminating the lessee’s rights.We further note that “income or profit” from an aircraft object is not itself an aircraft object and it is debatable whether security in such “income or profit” (which are normally considered as “accounts” or “claims” in the province of Québec) is subject to registration of a security interest or hypothec therein at the relevant register in the chargor’s or grantor’s State or territory of such State.We also refer to the definition of “proceeds” in the Convention:“proceeds” means money or non-money proceeds of an object arising from the total or partial loss or physical destruction of the object or its total or partial confiscation, condemnation or requisition;27This definition does not include receivables arising from the “use or management” of an aircraft object and we are left with the reference to “income or profit” in Article 8 of the Convention as the sole basis for this “secured” remedy under the CTC. What of “comingled” proceeds in a bank account of a secured lender? “Traceability” or whether an object’s proceeds (as normally understood) remains identifiable are matters for applicable law to determine.286.2 Under a title retention agreement or lease.Article IX of the Protocol sets out the two remedies available under a title retention agreement or lease. Unlike under a security agreement, these remedies are available without any specific agreement by the debtor permitting them.6.2.1 terminate the agreement and take possession or control of the aircraft object;It is to be noted that Professor Goode states in the CTC Official Commentary that in jurisdictions where a title retention agreement or a particular type of lease is treated as a security agreement, the provisions of the Convention related to a title reservation agreement or a lease may not apply29. All Canadian PPSAs consider that title retention agreements create security interests, as well as leases of more than one year30. We also note that a title retention agreements, for the purposes of the Canadian insolvency statutes, a security agreement (as defined in such statutes) which statutes apply in all Canadian provinces and territories. One may thus question which remedies apply to them outside insolvency proceedings and we will need to await court decisions to clarify this.In the province of Québec, in respect of leases and leasing agreements as defined in the C.c.Q., it is clear that the termination of the “leasing agreement” and possession of the aircraft object in accordance with this CTC remedy ends the matter and the lessor may thereafter freely dispose of the repossessed aircraft object without having to account to the debtor thereafter. This is a significant advantage as the remedies will vary depending on the governing law of the “leasing agreement”. Similarly, conditional sale remedies could be available in respect of an instalment sale agreement under Article 1745 of the C.c.Q. governed by Quebec law (outside insolvency proceedings), instead of the remedies available under a security agreement.Since the Canadian Declarations include this Article, no application or leave from a court is required to exercise this remedy. This is part of the so-called “self-help remedies” hereafter discussed.6.3 Realization to be commercially reasonable.Article IX (3) of the Protocol reads as follows:Article 8(3) of the Convention shall not apply to aircraft objects. Any remedy given by the Convention in relation to an aircraft object shall be exercised in a commercially reasonable manner. A remedy shall be deemed to be exercised in a commercially reasonable manner where it is exercised in conformity with a provision of the agreement except where such a provision is manifestly unreasonableExisting case law in Canada may provide guidance as to what may or may not be “manifestly unreasonable”. Creditors are likely to require acknowledgements from debtors in their agreements that the remedies set out in the agreement are commercially reasonable and not manifestly unreasonable.6.4 Self-help “remedies”.Article 54(2) of the Convention reads as follows:2. A Contracting State shall, at the time of ratification, acceptance, approval of, or accession to the Protocol, declare whether or not any remedy available to the creditor under any provision of this Convention which is not there expressed to require application to the court may be exercised only with leave of the court.As part of its Declarations deposited with its instrument of ratification, the Government of Canada has specifically accepted this Article of the Convention. This Declaration reads as follows:“The Government of Canada also declares, in accordance with Article 54 of the Convention, that any remedy available to a creditor under any provision of the Convention, the exercise of which does not thereby require application to the court, may be exercised without leave of the court.”Professor Goode makes several comments in respect of this “remedy”. He states the following31:“Conversely, where a State makes a declaration under Article 54(2) that remedies are to be available without leave of the court, then the creditor cannot be required to institute court proceedings to enforce a remedy”.He also states:32“Article 54(2) requires a Contracting State to declare whether or not any remedy which under the Convention does not require application to the court is to be exercisable only with leave of the court. Moreover, the Convention does not affect rules of criminal law or tort law in national legal system. ”He also states the following in respect of certain remedies available to a conditional seller or lessor, (which we believe equally apply to self-help “remedies”):33“The Convention does not, of course, entitle the creditor to use violence or other unlawful means or affect the criminal liability of a creditor who uses such means.”Self-help will thus be subject to existing national legal system rules and its public order laws. In Canadian common-law jurisdictions, self-help is allowed34.In the province of Québec this is new law and it is to be anticipated that guidance from the common-law provinces case law, among others, will be sought by Québec courts in determining what a creditor may or may not do without leave of a court. We would anticipate that wherever an attempt to realize is being objected to, a creditor would not forcibly remove an aircraft object without leave from a court but we will need to await Québec court decisions for guidance as to the limits of this new “remedy”.6.5 Registration and export request authorization.This additional remedy is provided at Article XIII of the Protocol and is available in Contracting States that have made a Declaration in that respect as part of their ratification of the CTC. Canada has made such a Declaration (Alternative A). A creditor which has obtained from a debtor such a form of irrevocable de-registration and export request authorisation substantially in the form attached to the Protocol would be entitled to request from the Contracting State’s national registry authority, the deregistration of the aircraft further to a default. See Article X (6) of the Protocol and the Declarations made by Canada. The national registry authority and administrative authorities are obliged to expeditiously cooperate for such purposes. Article X (6) refers to “within 5 working days”. This remedy is not dissimilar to certain powers of attorney provided in Canadian security agreements and hypothecs and while there are issues relating to their effectiveness and whether they can be irrevocable. The Protocol makes its effectiveness very clear and this will expedite realization and export of the aircraft object when required.6.6 Additional Remedies.Article 12 of the Convention provides:Any additional remedies permitted by the applicable law, including any remedies agreed upon by the parties, may be exercised to the extent that they are not inconsistent with the mandatory provisions of this Chapter as set out in Article 15.Penalties, interest, liquidated damages and non-monetary awards would be examples of these additional remedies35.6.7 Prior notices.Article 8(4) of the Convention reads as follows:4. A chargee proposing to sell or grant a lease of an object under paragraph 1 shall give reasonable prior notice in writing of the proposed sale or lease to:(a) interested persons specified in Article 1(m)(i) and (ii); and(b) interested persons specified in Article 1(m)(iii) who have given notice of their rights to the chargee within a reasonable time prior to the sale or lease.This article is completed by Article IX (4) of the Protocol which adds:4. A chargee giving ten or more working days’ prior written notice of a proposed sale or lease to interested persons shall be deemed to satisfy the requirement of providing “reasonable prior notice” specified in Article 8(4) of the Convention. The foregoing shall not prevent a chargee and a chargor or a guarantor from agreeing to a longer period of prior notice.This 10 day prior notice replaces any prior notice required by domestic law in respect of any security agreement. It does not apply where a leasing agreement or a title retention agreement is involved.We note the definition of “debtor” quoted above and that of “interested persons” as follows:“interested persons” means:(i) the debtor;(ii) any person who, for the purpose of assuring performance of any of the obligations in favour of the creditor, gives or issues a suretyship or demand guarantee or a standby letter of credit or any other form of credit insurance;(iii) any other person having rights in or over the object;36A chargee or secured creditor would therefore be required to provide such a prior notice to a guarantor, a provider of a standby letter of credit or of any other form of credit insurance.6.8 Effects of realization.The CTC contains provisions relating to the allocation of proceeds also called “collocation” among “interested parties”, the effects of realization, the vesting of ownership of an aircraft object in satisfaction of the underlying obligations and in respect of the effect of such ownership and satisfaction. We invite the reader to review Articles 9 and 10 of the Convention and the CTC Official Commentary37.As a final note, Article 15 of the Convention reads as follows:In their relations with each other, any two or more of the parties referred to in this Chapter may at any time, by agreement in writing, derogate from or vary the effect of any of the preceding provisions of this Chapter except Articles 8(3) to (6), 9(3) and (4), 13(2) and 14.The provisions which cannot be waived essentially relate to the reasonableness of the recourses, the collection and application of proceeds of realization (8(3) to 8(6)), consideration already paid by the debtor (9(3)), the possibility of curing defaults afforded to interested parties (9(4)), certain reliefs pending final determination (13(2)) and procedural matters.Except for the above, the parties to any agreement may vary the remedies as may be agreed among them.7. PRELIMINARY RELIEF (CONSERVATORY MEASURES)Both Article 13 of the Convention and Article X of the Protocol address the interim measures or relief available through the courts (to ground, protect, preserve, immobilize, etc. the aircraft object) pending a final determination of certain issues.Article 14 of the Convention reconfirms that: “…procedure will be as prescribed by the law of the place where the remedy is to be exercised”.8. REMEDIES ON INSOLVENCYOne of the important changes brought about by the CTC in certain Contracting States that ratified the CTC is the changes to the bankruptcy and insolvency provisions of statutes of such Contracting States.The CTC and the Protocol in particular recognize that speedy recovery is crucial to creditors given the intrinsic high value of aircraft objects and the need for their continued maintenance. We will only briefly discuss these changes to bankruptcy legislations of Contracting States given that Canada had enacted essentially the same provisions in its Canadian insolvency statutes some years ago. In a nutshell, at the end of the “waiting period” as defined in Article XI of the Protocol (and which Canada declared to be 60 days in its Declarations deposited with its Instrument of Ratification) the debtor or “insolvency administrator” must give possession of the aircraft object to the creditor, unless the insolvency administrator or the debtor, as the case may be, has cured all defaults other than bankruptcy and insolvency events and has agreed to perform all future obligations provided under the agreement between the debtor with the creditor. These remedies on insolvency provisions apply in respect of all security agreements, title reservation agreements and leasing agreements subject to the CTC.In addition, these remedies on insolvency provisions recognize the continued priority of registered interests in such proceedings except of course for the priority afforded to nonconsensual rights or interests declared by a State to continue to apply pursuant to Article 39(1) of the Convention, as Canada did.Article 30(2) provides:2. Nothing in this Article impairs the effectiveness of an international interest in the insolvency proceedings where that interest is effective under the applicable law.This provision means that the applicable law will continue to determine if an unregistered international interest is effective in insolvency proceedings.38 Courts in common law PPSA jurisdictions in Canada have given priority to a trustee in bankruptcy over unregistered security interest, whereas Québec courts have given priority to the unregistered right in the same context.39Article 30(3) of the Convention also maintains the insolvency rules of the applicable law relating to “…avoidance of a transaction as a preference or a transfer in fraud of creditors, as well as rules to enforce rights to property available to an insolvency administrator”.9. THE INTERNATIONAL REGISTRY9.1 Types of registrations.The CTC permits many types or registration at Section 16 of the Convention as follows:Article 16 — The International Registry1. An International Registry shall be established for registrations of(a) international interests, prospective international interests and registrable non-consensual rights and interests;(b) assignments and prospective assignments of international interests;(c) acquisitions of international interests by legal or contractual subrogations under the applicable law;(d) notices of national interests; and(e) subordinations of interests referred to in any of the preceding subparagraphs.2. Different international registries may be established for different categories of object and associated rights.3. For the purposes of this Chapter and Chapter V, the term “registration” includes, where appropriate, an amendment, extension or discharge of a registration.The IR is a web site operated by Aviareto Limited and located in Dublin, Ireland.We will discuss only two types of registrations, in addition to the absence of “national interests” in Canada discussed earlier. They are “prospective international interests” and “international interests”.9.1.1 prospective international interest;The definition thereof in the Convention provides:“prospective international interest” means an interest that is intended to be created or provided for in an object as an international interest in the future, upon the occurrence of a stated event (which may include the debtor’s acquisition of an interest in the object), whether or not the occurrence of the event is certain;40This definition is completed by the definition of “prospective sale” as follows:“prospective sale” means a sale which is intended to be made in the future, upon the occurrence of a stated event, whether or not the occurrence of the event is certain;41These definitions do not mean that the aircraft object may not be determined at the time of the registration of a prospective international interest. On the contrary, the definitions of “object” and “aircraft objects” make it clear that the description must comply with the requirements of the CTC in respect of the description of aircraft objects highlighted above. Parties contemplating the grant of an international interest in the future is not enough. There must be real negotiations relating to a uniquely identified object with an intent to create an international interest in such object upon the occurrence of such event42.While registrations in advance of the execution of an agreement are common under UCC/PPSA type registrations in commercial transactions, this is new law in the province of Québec. If the prospective international interests becomes an international interest, no second registration is required and the priority of registration rule of the IR will apply.9.1.2 international interest;We already discussed international interest earlier and would simply add here that again the following priority of registration rule will apply.9.2 Priority of registration rule.Section 29 of the Convention adopts the rule that the first to register a registered interest has priority. However, given certain exceptions, it is best to quote Article 29 at length:Article 29 — Priority of competing interests1. A registered interest has priority over any other interest subsequently registered and over an unregistered interest.2. The priority of the first-mentioned interest under the preceding paragraph applies:(a) even if the first-mentioned interest was acquired or registered with actual knowledge of the other interest; and(b) even as regards value given by the holder of the first-mentioned interest with such knowledge.3. The buyer of an object acquires its interest in it:(a) subject to an interest registered at the time of its acquisition of that interest; and(b) free from an unregistered interest even if it has actual knowledge of such an interest.4. The conditional buyer or lessee acquires its interest in or right over that object:(a) subject to an interest registered prior to the registration of the international interest held by its conditional seller or lessor; and(b) free from an interest not so registered at that time even if it has actual knowledge of that interest.5. The priority of competing interests or rights under this Article may be varied by agreement between the holders of those interests, but an assignee of a subordinated interest is not bound by an agreement to subordinate that interest unless at the time of the assignment a subordination had been registered relating to that agreement.The CTC provides a number of rules relating to the priority of competing rights and the reader should review Article 29 and following of the Convention as completed by the Protocol in respect of sale agreements. The Official Commentary reviews the priority rules and has done a thorough analysis of these rules and absent court precedents at this time, we defer to its analysis43. We note however that these rules apply in respect of the various possible registrations described in Article 16 of the Convention quoted above.9.3 Registration requirements.We have already discussed how aircraft objects need to be described. The IR rules and regulations make clear that no other information in respect of the aircraft objects involved may or can be added. For instance, landing gears, propellers, avionics and auxiliary power units cannot be included in the description in the forms to be used for IR registration purposes.9.4 User Entity, its Administrator and the named Professional User Entity. The regulation, procedural requirements and guide to effect registrations at the IR require the user to become a “user entity”. The user entity names an “administrator” and the user entity may also name a “professional user entity”. It is also to be noted that the other party must also become a user and to consent to the registration. For a full analysis of the inner workings of the IR the reader should consult the International Registry User Manual (“User Manual”)44 and the Regulations and Procedures for the International Registry (“ICAO Regulation”)45.Note that pursuant to Article 18(5) of the Convention a State may designate an entity or entities in its territory as the entry point

This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The title of this newsletter gives a good summary of the explanatory notes that serve as an introduction to Bill 14, entitled An Act to amend the Charter of the French language, the Charter of human rights and freedoms and other legislative provisions (the “Bill”). The legislator is concerned that English is being used systematically in certain workplaces. The Bill was tabled on December 5, 2012 and the proposed amendments are designed to reaffirm the primacy of French as the official and common language of Quebec.

In a recent decision, the Superior Court ruled in favour of GE, Commercial Distribution Finance Canada ('GE') in a dispute against the National Bank of Canada ('NBC'). Both institutions had a common client, New World Zanotti Transblock Inc. ('Zanotti'), which had granted to each of them a hypothec specifically charging its receivables. NBC had agreed to grant GE’s hypothec a prior rank to its own. In order to reduce Zanotti's indebtedness to it, NBC nevertheless collected the proceeds resulting from the sale of Zanotti’s receivables, which were themselves encumbered by GE's hypothec, and deposited those proceeds into Zanotti's operating bank account. The proceeds were paid by NatExport, a subsidiary of NBC, that had purchased the receivables pursuant to a factoring agreement entered into between it and Zanotti. GE claimed damages for an amount equal to the proceeds usurped by NBC on the grounds that NBC had contractually acknowledged GE's priority over those assets.