Canada: Cross-Border Security Interests: Choice Of Law In Canada

Last Updated: April 4 2012

Article by Deborah S. Grieve*

1. Introduction

In this global economy, the laws of different jurisdictions come into play with respect to the priority and enforcement of interests against personal property when, for example, a debtor carries on business in different countries or provinces, or its personal property moves across borders.

This paper offers a primer on Canadian personal property security legislation choice of law provisions, and suggests a general approach from a Canadian perspective to address inter-jurisdictional disputes regarding personal property. The finance lawyer may find this analysis a useful in considering how to ensure that secured transactions are enforceable not only as against the debtor, but also against third parties claiming an interest in the collateral.

2. Canadian PPS Choice of Law Rules

In Canada, the "choice of law" (also referred to "conflict of laws") rules in personal property security ("PPS") legislation determine which jurisdiction's laws are to be applied to collateral issues with multi-jurisdictional aspects. As laws governing interests in personal property are under provincial, and not federal, legislative authority in Canada and provincial PPS choice of law rules are almost identical to each other, the focus of this paper is on Ontario personal property security legislation, specifically the Ontario Personal Property Security Act ("OPPSA").1

The original OPPSA was modelled after the Uniform Commercial Code ("UCC").2 The choice of law rules in the current OPPSA are substantially similar to those in Article 9 of the UCC as it was prior to amendments in 1999. (Note, however, that there are pending amendments to the rule regarding the location of the debtor, discussed below.)

Similar to Article 9 of the UCC, the OPPSA incorporates the concepts of validity, attachment and perfection of security interests. A "security interest" is defined as an interest in personal property that secures payment or performance of an obligation. Validity, though not defined in the OPPSA, covers the formal requisites for the creation of a security interest.3 Attachment refers to the point at which the secured party's interest materializes, while perfection relates to the publication of the interest, which will in turn affect its enforceability against third parties.4

3. How to Determine Applicable PPS Law in Ontario While there may be situations which require more sophisticated considerations, a simple general approach to determine the proper law is to consider whether: (a) there an issue relating to a security interest such that PPS legislation should apply; (b) if so, which PPS choice of law provisions should be used to determine the proper law to apply; and (c) do the choice of law provisions contain a rule applicable to the particular facts.5

(a) Is there a security interest?

Once the court is satisfied as to its jurisdiction over the matter (which will often be the location of the personal property within its jurisdiction), the next step is to consider whether there is an issue regarding a security interest—as to the validity or the effect of perfection or non-perfection in various types of personal property—such that a PPS law would apply.

If there is an agreement that in essence secures payment or performance of an obligation, that security agreement might provide that the law of a particular jurisdiction will apply. While debtor and creditor, as parties to a security agreement, are free to select the law to govern their rights inter se contractually,6 these choices will not necessarily be effective to address claims of third parties who are not privy to the agreement.7

According to the Ontario Court of Appeal, it is not necessary that there be a "security interest" strictly within the definition of the OPPSA for the OPPSA conflict rules of that jurisdiction to apply to direct the choice of law. In GMAC Commercial Credit Corp. v TCT Logistics Inc.,8 a secured party in Alberta sought to enforce its security interest in truck trailers located in Alberta against the Ontario lessor of the trailers. The Ontario lessor argued that because the leases were "true leases" and, at that time, the OPPSA did not create a security interest and require registration of "true leases" under the OPPSA, the choice of law provisions of the OPPSA did not apply. The Ontario Court of Appeal nevertheless applied the Ontario choice of law rule, which directed that the issue be determined under Alberta law, reasoning that an expansive application of the choice of law was warranted by the underlying purpose of the statute.9

(b) Which PPS choice of law will apply?

Once it is determined that there is an issue regarding a security interest in collateral, the forum court will tend to look first at whether its own jurisdiction has PPS legislation that might either resolve the problem, or provide a rule to designate a jurisdiction whose laws might do so.

For example, in Gimli Auto Ltd. v. BDO Dunwoody Ltd.10 ("Gimli"), the Alberta court started its analysis by reference to the Alberta PPS legislation conflict of law rule. As stated in paragraphs 8 and 9 of that case: One need not consider common-law choice-of-law rules, because Alberta's P.P.S.A. replaces them with new statutory choice-of-law rules. (So do all the other P.P.S.A.'s, and they are very similar, though that probably does not matter much here.) Nor need one consider a choice-of-law clause in a lease, for the statute sets which law applies. Nor is this a suit between two parties to a contract. The whole point of the P.P.S.A. is to overrule certain contractual or property rights: Re Giffen, The lessor and lessee could not, by contracting that the lease would be valid even if not registered, bind others. This is legislation on priorities: ibid.

(c) Do the choice of law provisions contain an applicable rule?

Although PPS choice of law rules are intended to replace confusing and inconsistent common law with a consistent set of statutory rules,11 there may be instances not adequately addressed by those rules. In such situations, a common law conflicts of law analysis will be required.12 As common law conflicts of laws constitute their own substantial topic, they will not be discussed here.

Once the appropriate law has been selected, in applying the substantive law it must then be confirmed that the secured party has taken all proper steps to create a valid, perfected and enforceable security interest, that there are no additional considerations under that law regarding enforcement or priority of the interest. Specific priority rules, such as purchase-money security interests, or laws regarding specific assets such as fixtures and accessions, will then come into play.

The OPPSA contains a functional equivalent to perfection of a security interest for jurisdictions which do not contain this concept.13 Section 8(2) of the OPPSA provides that a security interest is deemed to be perfected under the law of a jurisdiction if the secured party has complied with the law of the jurisdiction with the creation and continuance of a security interest that is enforceable against the debtor and third parties.

4. Applying Ontario Choice of Law Rules

Under OPPSA choice of law rules, it is the type of collateral that determines the applicable law regarding the validity, perfection and effect of non-perfection of a security interest.14 Where the collateral is goods, or a possessory security interest in a security, instrument, document of title, money, or chattel paper (referred to herein as "Goods and Possessory Collateral"), the law of the jurisdiction15 of the location of the collateral governs.16 For all other types of collateral (other than investment property), namely intangibles; non-possessory interests in securities, instruments, documents of title, money, and chattel paper; and "mobile goods";17 the applicable law regarding the validity, perfection and effect of non-perfection will be the law of the location of the debtor.18 (These types of goods will be referred to collectively herein as "Debtor Location Collateral.")

*Deborah S. Grieve is a partner in the Financial Services Group of Cassels Brock & Blackwell LLP in Toronto, Ontario, Canada, specializing in financial restructuring, bankruptcy and insolvency (dgrieve@casselsbrock.com). This paper was prepared with the invaluable assistance of Eleonore Morris, an associate in the Financial Services Group of Cassels Brock & Blackwell LLP, and of Alec Milne, Student-at-Law. © 2011

Footnotes

1 While a reader must of course refer to the appropriate provincial legislation and obtain competent legal advice for specific queries, comments with respect to the OPPSA choice of law provisions will generally be applicable to the PPS laws across Canada.

2 U.C.C. § 9 (1999). In 1959, a committee of the Canadian Bar Association endorsed the Article 9 approach to secured transactions and prepared an "Ontario version" of Article 9, a revision of which was ultimately enacted by the Ontario legislature as the original OPPSA, Personal Property Security Act most of which came into force in 1976. See A. Duggan & J. Ziegel, Secured Transactions in Personal Property: Cases, Text, and Materials, 5 ed. (2009), at p.18.

3 R. MacLaren, The 2011 Annotated Personal Property Security Act (2010), at p.95.

4 Duggan & Ziegel, Supra note 2, at p. 113.

5 See also D. Tay and J. Stam, "Cross-Border Security Issues: Making Sense of the Con_ict of Laws Provisions in the PPSA" (Paper delivered at the OBA Continuing Legal Education conference: Priorities, Practices and Problems Under the PPSA, Toronto, 2004), at p.4.

6 Subject to certain liabilities—see, for example, Cardel Leasing Ltd. v. Maxmenko, 1991 WL 1128276 (Ont. Gen. Div. 1991), Additional reasons in, 1992 WL 1322561 (Ont. Gen. Div. 1992) ("Maxmenko"), where a contractual choice of law provision was not applied by the court7 See generally London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 WL 1325423, 3 S.C.R. 299, ¶ 200–253 (Can. 1992).

8 GMAC Commercial Credit Corp. — Canada v. TCT Logistics Inc., 2004 WL 595594 (Ont. C.A. 2004), leave to appeal refused by, 2004 WL 2131274 (Can. 2004).

9 The legal rationale in this case, though not the result, has been subject to academic criticism—See Ziegel, Ontario PPSA Choice of Law Rules and Ambulatory Definition of Security Interest: GMAC Commercial Credit Corp. v. TCT Logistics Inc. 40 Can. Bus. L.J. 412, 420 (2004).

10 Gimli Auto Ltd. v. Canada Campers Inc. (Trustee of), 1998 WL 1719402 (Alta. C.A. 1998). 11 Duggan & Ziegel, Supra note 2, at p. 21.

12 Section 72 of the OPPSA provides that the principles of law and equity continue to apply, except as they are inconsistent with the provisions of the OPPSA.

13 MacLaren, Supra note 3, at p.128. 14OPPSA, §§ 5(1) and 7(1).

15 For the purposes of the choice of law provisions in the OPPSA, any reference to the "law of a jurisdiction" is a reference to the internal law of the jurisdiction, excluding its choice of law rules (s.8.1). This has the practical effect of preventing a scenario where the OPPSA defers to another jurisdiction, and the other jurisdiction refers back to the OPPSA by operation of its choice of law rules.

16 OPPSA, § 5(1).

17 "Mobile goods" is the term often used for "goods of a type normally used in more than one jurisdiction, if the goods are equipment or are inventory leased or held for lease by the debtor to others," which is terminology used in § 7(1)(a)(ii) of the OPPSA. Canadian courts have sought to define the "mobile goods" category so it will mirror the analogous category found in Article 9 (§ 9-103(3)(a)): see Northwest Equipment Inc. v. Daewoo Heavy Industries America Corp., 2002 WL 36920, 3 P.P.S. A.C. (3d) 101, ¶ 30 (Alta. C.A. 2002). Also see Gimli, Supra note 10, at paras. 12–17.

18 OPPSA, § 7(1). E UCC Law Journal E Vol. 44 No. 1

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