Canada: Canada: Quebec Commercial Lending Law

I. Introduction1

The Province of Quebec is a civil law jurisdiction where most principles of law applicable to private legal relationships, including those applicable to loan agreements, security documents and to various other nominate contracts, are codified in the Civil Code of Quebec.2 Case law serves to interpret the intentions of lawmakers. Due to this distinctive feature of Quebec law, there exist some noticeable differences between the laws of commercial lending applicable in Quebec and those applicable in the rest of Canada and the United States that are common law jurisdictions. Like the other chapters in this book, this chapter assumes that the reader has a working knowledge of private financing transactions. Since what follows is meant to be a simple overview of Quebec law as it applies to commercial lending and taking security in the Province of Quebec, local Quebec counsel's advice should be sought in connection with your transaction.

II. Basic Legal Structure

A. Constitution and Statutory law

The Constitution Act, 1867,3 provides the matters that may be regulated and legislated in Canada at the provincial4 and the federal5 levels. Though matters such as banking and insolvency fall under federal jurisdiction, property and civil rights are provincial matters. As such, the Quebec legislature enacted the CCQ in accordance with the power given to it by the Constitution. 

B. Administrative Law

Statutes and regulations are enacted by the Quebec legislature, but only for matters that fall within its jurisdiction. Also, the Quebec legislature enacted an Act Respecting Administrative Justice,6 which created an administrative court—the Administrative Tribunal of Quebec—to deal with any decision made, in respect of a citizen, in the exercise of an administrative or adjudicative function.7

C. Courts

There are two courts of first instance in Quebec. The Court of Quebec deals with matters where the amount in dispute is less than $85,000,8 while the Superior Court has jurisdiction in matters where the amount is at least $85,000. For the Court of Quebec, there is also the Small Claims Division, which deals with claims up to $15,000 made by natural persons or legal persons that employ no more than five people. For cases before that division, parties may not be represented by counsel unless the complexity of the case demands it. It is important to note that the power to grant an injunction lies with the Superior Court. The Court of Appeal is the intermediate appellate court in Quebec, and sits in the cities of Quebec and Montréal. It may hear appeals from final judgments of the Superior Court and the Court of Quebec where the amount in dispute is $50,000 or more. Other final judgments of those courts may be appealed if granted leave to do so by a judge of the Court of Appeal. The Supreme Court of Canada is the highest court in the country and has final jurisdiction in criminal, civil, and constitutional matters. Its decisions are always final and without appeal and appeals made before it must be authorized.

D. Court Rules and Rules of Evidence

Quebec's court rules are provided in the Code of Civil Procedure9 and the various rules of practice for the courts,10 while the rules of evidence are provided in Book Seven of the CCQ. 

III. Authority to Do Business and Taxation

A. Required Qualification to Do Business; Trade Names

Foreign corporations that wish to carry on an activity in Quebec, which includes the operation of an enterprise, must file for extra-provincial registration at the Quebec Enterprise Register.11 Under Quebec law, the operation of an enterprise includes providing a service, or producing, administering, or alienating property.12 Legal persons that only possess a prior claim or a hypothec in Quebec are not required to be registered.13 Extra-provincial registration applies to natural persons, legal persons, and partnerships not constituted in Quebec. Registration requires that the registrant who is not domiciled in Quebec or does not have an establishment in Quebec designate an attorney in Quebec14 who will act as its representative for the purposes of the QLPE.15 Extra-provincial registration must be completed within 60 days of the start of the activities16. Registrants in Quebec may not declare a name that does not comply with the Charter of the French language.17 In addition, a registrant with a name in a language other than French must declare the French version of that name that will be used in Quebec in carrying on its business.18 For federal registration requirements, we refer the reader to the chapter on Ontario and other common law provinces in this book.

B. Licensing Requirements and Regulation of Financing

As the regulation of lending activities and its associated licensing requirements fall under federal jurisdiction and are handled by the Bank Act19 and its regulations, we refer the reader to the chapter on Ontario and other common law provinces in this book.

C. Taxation

We refer the reader to the Ontario and other common law provinces chapter regarding this topic. 

IV. Interest and Usury; Promissory Notes

A. Compound Interest

The power to legislate interest in Canada falls under federal jurisdiction.20 As such, we refer the reader to the Ontario and other common law provinces chapter regarding this topic.

B. Usury

Under Quebec law, a court may pronounce the nullity of a contract for the loan of a sum of money, order the reduction of the obligations (including the obligation to pay interest) arising from such contract or revise the terms and conditions of the performance of the obligations to the extent that it finds that, having regard to the risk and to all the circumstances, one of the parties has suffered "lesion."21 Lesion results from the exploitation of one of the parties by the other, which creates a serious disproportion between the obligations of the parties.22 To eliminate the risk of lesion, most lenders may require that the borrower seek independent legal advice before agreeing to the terms of the loan. It is an offense under s. 347 of the Criminal Code23 (Canada) to receive, or to agree to receive, a criminal rate of interest. A "criminal rate" is defined as an effective annual rate interest calculated in accordance with generally accepted actuarial principles that exceeds 60 percent per annum on the "credit advanced." The definition24 of "interest" is broad enough to encompass "fees," including legal fees and commitment fees that are common in commercial agreements. This offense is punishable by indictment or summary conviction and carries a penalty of a jail term of a maximum of five years for an indictment, or a fine of up to $25,000 or imprisonment for up to six months or both for a summary conviction. It is not possible to plead, as a defense, that the borrower was willing to participate in the agreement.25

C. Acceleration

As a general rule, a term is for the benefit of the debtor, unless it is apparent that it has been stipulated for the benefit of the creditor or of both parties.26 Only the party that has the benefit of the term may renounce it.27 In Quebec, for a loan bearing interest, the term is presumed to be for the benefit of both parties28 and as such parties are free to provide for an acceleration clause in their agreement. This acceleration may take place automatically upon the occurrence of an event of a default under the agreement,29 or may require the creditor to actively demand acceleration,30 depending on the wording of the clause itself. Also, a debtor loses the benefit of the term in the event that he becomes insolvent or declared bankrupt, or if he reduces the security given to the creditor without his consent.31

D. Demand Notes

Any contractual obligation that is payable on demand is valid and enforceable under Quebec law. Though the contract itself will be regulated by the CCQ, the fact that it is payable on demand makes it subject to the provisions of the Bills of Exchange Act.32 The only obligation of the creditor is to present the note for payment within a reasonable time of the endorsement.33

E. Place of Payment

All payments have to be made to the creditor or to the person authorized to receive them.34 If such payment is made to a third party, it is valid if the creditor ratifies it—and should the creditor not ratify it, it is only valid to the extent that it benefits the creditor.35 All payments must be made at the place expressly or impliedly indicated by the parties, but should no place be indicated, then payment is made at the domicile of the debtor.36 If a contract governed by Quebec law is silent as to where the payments have to be made, the courts may infer from the past conduct or intention of the parties that payments may be made in the province of Quebec.37

F. Application of Payments

Under Quebec law, when the debtor owes several debts to a creditor, the debtor has the right to impute the payment to a specific debt.38 This is tempered by the fact that the debtor may not impute payment on a debt that is not yet due without the consent of the creditor, unless the parties agreed that the payment made by the debtor was made by anticipation. The right to decide on which debt to impute the payment belongs to the debtor and the creditor may only be granted this right if the debtor fails to indicate on which debt to impute the payment.39 Pursuant to Article 1570 CCQ, in the case where a debtor owing debt that bears interest, the consent of the creditor is required if the debtor wishes to impute his payment to the capital in preference to the interest owed. In addition, any partial payment made by the debtor on the principal and interest is imputed first to the interest.40 In this respect, the courts of Quebec have held that the parties to a contract of lending may decide on a different application of the debtor's payments, given that Article 1570 CCQ is not of public order.41 Though the debtor normally has the benefit of the term of the contract,42 a debtor party to a lending contract that bears interest may not make payments by anticipation without the consent of the creditor, as the benefit of the term for such a contract is to the benefit of both parties.43 

G. Prepayment 

Debtors in Quebec may not, without first obtaining the consent of the lender, impute payment to a debt not yet due in preference to a debt that has become due, unless the parties have agreed in advance that payment may be made in anticipation.44 As mentioned in Section C above, a term is for the benefit of the debtor unless it is apparent that it has been stipulated for the benefit of the creditor or both parties.45 Given that for an interest-bearing loan the term is presumed to be for the benefit of both parties, the debtor may not reimburse in advance without the consent of the creditor.46 As such, for lending agreements made in Quebec, it is good practice to provide whether prepayment is accepted or the conditions to be applied to such payment. The Interest Act47 (Canada) (discussed further in the Ontario and other common law provinces chapter) provides for an automatic right of prepayment48 where principal or interest under a loan secured by hypothec on immovables49 are payable for a period exceeding five years after the date of the loan. 

Footnotes

1 The authors would like to thank their colleagues Marco P. Rodrigues, Jean Bernard Ricard, and Eve Tessier for their invaluable contribution regarding the research and drafting of this chapter.

2 CQLR c C-1991, hereinafter CCQ.

3 30 & 31 Vict., c. 3, hereinafter Constitution.

4 Article 92 Constitution.

5 Article 91 Constitution.

6 CQLR c. J-3.

7 Article 1 An Act Respecting Administrative Justice.

8 Article 35 CQLR c. C-25.

9 CQLR c. C-25, hereinafter CCP.

10 Namely the Rules of the Court of Appeal in Civil Matters, CQLR c. C-25, r. 14, the rules of practice of the Superior Court of Quebec in Civil Matters, CQLR c. C-25, r. 11, and the Regulation of the Court of Quebec, CQLR c. C-25, r. 4. It may also be noted that specific rules apply in the legal districts of Montréal and Quebec, codified in the rules of Practice of the Superior Court of the District of Montréal in Civil Matters and Family Matters, CQLR c. C-25, r. 15 and the rules of Practice in Civil Matters of the Superior Court (District of Quebec), CQLR c. C-25, r. 12.

11 Article 21(5) of An Act Respecting the Legal Publicity of Enterprises, CQLR c. P-44.1, hereinafter QLPE.

12 Article 1525 CCQ.

13 Article 21(5) QLPE.

14 Article 26 QLPE.

15 Article 28 QLPE.

16 Article 32 QLPE.

17 Article 17(1) QLPE.

18 Article 17 QLPE.

19 S.C. 1991, c. 46.

20 Article 91 (19) Constitution.

21 Article 2332 CCQ.

22 Article 1406 CCQ.

23 R.S.C., 1985, c. C-46.

24 Criminal Code, R.S.C., 1985, c. C-46, s. 347 (2).

25 R. v. McRobb (1984), 20 C.C.C. (3d) 493 (Ont. Co. Ct.).

26 Article 1511 CCQ.

27 Ibid.

28 Option Consommateurs c. Banque de Montréal, 2012 QCCS 4106.

29 Gauthier c. Gauthier, 2006 QCCQ 9942.

30 Jelinek-Harl c. Goulet, 2003 CanLII 45160 (QC CQ).

31 Article 1514 CCQ.

32 R.S.C. 1985, c. B-4, article 22; [discussed in the Canada chapter]

33 Article 180 Bills of Exchange Act, R.S.C., 1982, c. B-4. See also Fleury (Succession de) c. St-Pierre, 2002 CanLII 4459 (QC CS).

34 Article 1557 CCQ.

35 Ibid.

36 Article 1566 CCQ. See also Fortier c. Roy, [1957] B.R. 664.

37 Almiria Caital Corp. c. Hygieia Holdings (Canada) Inc., J.E. 95-2049. See also Surplec inc. c. Ainsworth inc., AZ-50081408.

38 Article 1569 CCQ.

39 Dupuis c. Magog (Cité de), (C.S., 1980-01-22), J.E. 80-203.

40 Article 1570(2) CCQ.

41 Banque Nationale du Canada c. Olivier, (C.S., 2002-01-25), J.E. 2002-549, REJB 2002-29995; Constantineau c. Saulnier Millette, (C.S., 2001-04-17), SOQUIJ AZ-50187824.

42 Article 1511 CCQ.

43 Locations Lutex Ltée c. Banque Royale du Canada, (c.S. 1984-05-31). J.E. 84-733 and Turmal c. Compagnie Trust Nord-américain, (C.S. 1994-06-15), J.E. 94-1140.

44 Article 1569 CCQ.

45 Article 1511 CCQ.

46 Locations Lutex Ltée c. Banque royale du Canada, J.E 84-733, appeal denied [1986] R.L. 42.

47 R.S.C., 1985, c. I-15, s. 10.

48 Corporations, joint-stock companies, partnerships, trusts settled for business or commercial purposes and unlimited liability corporations are excluded from such automatic prepayment rights.

49 i.e., a mortgage loan.

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