Monthly Archives: January 1966

1966-1967: Canadian Consumer-Credit Legislation (Boston College Industrial and Commercial Law Review) (OCR)

Formatted PDF: 1966-1967- Leon Letwin – Canadian Consumer-Credit Legislation (Boston College Industrial and Commercial Law Review) – OCR

Citation: 8 B.C. Indus. & Com. L. Rev. 201 1966-1967




American and Canadian legislation regulating consumer-credit

transactions invites comparison. Each country presents the consumer

with similar credit arrangements and lending institutions; each has,

in recent years, experienced stress upon its credit-regulating apparatus

due to an explosive growth in consumer credit;1 and each must cope

with the resulting problems within the context of a similar economic

order and legal heritage. This article examines some of the principal

areas of Canadian consumer-credit legislation and draws comparisons

with analogous U.S. legislation 2

The scope of this study is restricted in several ways. First, it

does not attempt to evaluate the impact of the various aspects of the

law that have an important but only indirect bearing upon the consumer-

credit problem. The general law of sales and contracts, bankruptcy,

and remedies is of this type. Second, some of the legislation

considered has been the subject of judicial interpretation; however,

this case law has not been systematically canvassed, since the intent

here is to examine broad trends in Canadian consumer-credit legislation

rather than to answer the innumerable legal questions involved.

* Ph.B., University of Chicago, 1948; LL.B., University of Wisconsin, 1952; Member,

Wisconsin Bar; Acting Associate Professor, University of California Law School.

This article is based on a study made by the author in behalf of the Special Comnittee

on Retail Installment Sales, Consumer Credit, Small Loans and Usury of the

National Conference of Commissioners on Uniform State Laws. The views expressed

herein are those of the author and do not necessarily reflect the views of the Staff,

Advisors, or Commissioners. The author gratefully acknowledges the numerous valuable

criticisms of a draft of this paper made by his colleague, Professor Robert L. Jordan,

and by Professor Jacob S. Ziegel, University of Saskatchewan Law School.

1 See the chart in Proceedings of the Special Joint Committee on Consumer Credit

of the Senate and House of Commons, 26th ParI., 2d Sess. 118 (1964) [hereinafter cited

as Canadian Hearings]. The chart compares the two countries for the years 1948-1963

with respect to the total volume of consumer credit outstanding and the ratios of such

credit to disposable income and to gross national product. During the period 1953-1963,

these ratios corresponded quite closely. The rate of growth of consumer credit for

Canada (about 10%) compares with the figure for the United States (about 832o).

Each country also evidences similar rates of growth in personal disposable income and

gross national product.

2 Comparison between the two is facilitated by recent studies in each country

evaluating aspects of the consumer-credit problem. Heavy reliance is placed upon the

following sources: the extensive record of the Canadian Hearings; the broad survey of

the Canadian financial system found in the Report of the Royal Commission on Banking

and Finance (1964) [hereinafter cited as Royal Commission]; and the highly useful

analysis in Curran, Trends in Consumer Credit Legislation (1965) [hereinafter cited as


Legislation concerning consumer credit is undergoing continual change. Analysis,

however, is restricted to those Canadian statutes available by October 1, 1965.


— 8 B.C. Indus. & Com. L. Rev. 201 1966-1967


Third, there is no attempt to review all the laws dealing with the consumer-

credit problem, but only a limited number dealing with some

of the more important facets.

Credit can, of course, be extended either as a direct loan to the

borrower or as a credit sale of goods or services to the consumer. In

Canada, as in the United States, each type of credit has essentially

been regulated by a separate body of law. In Canada, federal legislation

deals with lender credit, while provincial legislation deals primarily

with vendor credit. This division of economic control results

in part from the constitutional distribution of power. Section 91 of

the Canadian Constitution expressly delegates to the Federal Parliament

exclusive control over interest and banking. Under these powers,

Parliament has enacted the Interest Act,3 the Small Loans Act,4 the

Pawnbrokers Act,’ and the Bank Act.6 Section 91 also confers on

Parliament authority to legislate with respect to bankruptcy, bills of

exchange and promissory notes, and the regulation of trade and commerce.

Section 92 of the Canadian Constitution, on the other hand, confers

on the provinces exclusive legislative authority regarding property,

civil rights, and “generally all matters of a merely local or private nature

in the province.” By virtue of these powers, the provinces have

enacted laws concerning credit unions and certain types of credit transactions,

such as installment sales, conditional sales, and “unconscionable”


Potential conflicts between such “exclusive” grants of provincial

and federal jurisdiction can be readily imagined. For example, since

the Constitution allocates to the Dominion control over “interest,”

does this include the regulation of other loan charges? Are such

charges “interest”? If not, are they nonetheless within the federal

power as necessary incidents to the effective regulation of interest?

If such charges are “interest,” is their regulation necessarily denied

to the provinces? Or, on the other hand, does such power fall within

one of the broad areas of “exclusive” provincial power mentioned


Even assuming that the regulation of such loan charges is within

the federal jurisdiction, what of finance charges imposed by a merchant

selling goods on credit? Are such charges within the ambit of the

federal interest power, or are they merely part of the price of the

merchandise, and therefore beyond the control of Parliament? In fact,

3 Can. Rev. Stat. c. 156 (1952).

4 Can. Rev. Stat. c. 251 (1952), as amended by Can. Stat. c. 46 (1956).

G Can. Rev. Stat. c. 204 (1952).

6 Can. Stat. c. 48 (1953-1954).

— 8 B.C. Indus. & Com. L. Rev. 202 1966-1967


federal interest legislation has not been construed to apply to a

merchant’s charges for the buyer’s privilege of buying on time.7 It

by no means automatically follows, however, that “interest” in the

constitutional sense must receive an equally restrictive interpretation.

The matter has yet to be definitely resolved.s

The language of the Canadian Constitution might lead one to

conclude that a broader federal power over consumer-credit transactions

exists in Canada than in the United States. Examination of

the relevant legislative application, however, indicates that parliamentary

control may be less “exclusive” than a casual reading of section

91 suggests. On the other hand, the commerce clause probably grants

the U.S. Congress ample power to regulate the vital aspects of the

consumer-credit field. This, at any rate, is the premise of the Douglas

bill which seeks to compel the disclosure of finance charges in credit

transactions; 9 and the premise is not likely to prove unsound.”°

  2. A Contrast in the Scheme of Legislation

Broad usury statutes are in effect throughout most of the United

States.” The rate limits found in these statutes, however, have proven

unrealistic for the demands of the developing U.S. credit market. The

history of U.S. loan regulation is, therefore, largely the story of successive

exceptions to the usury laws. These exceptions developed in

response to the expanding needs and pressures of the credit market.

The affected category might be a class of lending institution or a type

of lending arrangement, but in either case the category is withdrawn

from the scope of the usury law and is governed by a different schedule

of maximum rates.

In Canada, however, no such general usury law exists today. A

lender may charge what he wishes unless specific legislation limits his

power to do so. Actually, such limiting legislation does exist in abundance,

and it applies to the principal participants in the consumer loan

market-banks, small loans companies, and credit unions. It therefore

seems that the distinctions in the scheme of legislation between

the two countries are of no more than formal significance.

7 In the Matter of Pyke, 9 N.S. 342 (1873).

8 See Canadian Hearings 480-81 (brief of Professor Ziegel).

D Truth in Lending Bill, S. 2275, 89th Cong., 1st Sess. (1965).

10 Compare, e.g., Katzenbach v. McClung, 379 U.S. 294 (1964); Heart of Atlanta

Motel, Inc. v. United States, 379 U.S. 241 (1964).

11 Exceptions are Maine, New Hampshire, and Massachusetts. Curran 15. For a

discussion of interest and usury statutes in the United States, see generally id. at 15-16.


— 8 B.C. Indus. & Com. L. Rev. 203 1966-1967


  1. The Interest Act

The Interest Act’2 establishes a legal rate of interest 8 of five per

cent per annum, but section 2 permits the parties to contract for “any

rate of interest or discount” they please, with one narrow limitation:

Whenever the interest rate is expressed in terms of any period less

than a year, the interest must also be stated in terms of the annual

rate; if it is not, the maximum rate allowed is five per cent.’ 4

Since very little consumer credit today can be profitably extended

at five per cent per annum, this provision might be thought

more effective as a disclosure requirement than as a rate limitation.

Yet this is probably not the case. First, the provision applies to written

contracts only. Second, it applies only to interest rates for periods

less than a year, and therefore appears to be inapplicable to loans in

which the charge is expressed as a lump sum rather than as a rate

over time. 5 Third, “interest” is undefined in the act, thus inviting the

usual abuses accorded an interest rate regulation that does not unequivocally

specify what charges must be included within the limit.

Finally, the only remedies provided in case of overcharge are restitution

or an equal deduction from any principal or interest outstanding

under the contract;’ 6 these are hardly remedies calculated to secure’

maximum compliance.

  1. The Small Loans Act

The Small Loans Act,”r passed in 1939, has proven highly effective,

both in regulating legitimate moneylenders and in curbing loan

sharks.'” Originally covering only loans up to $500, the act has, since

1956, regulated loans up to $1,500 made by those in the business

of lending money.’9 Its restrictions are enforced by rigid licensing

requirements and effective administrative supervision. A detailed consideration

of its provisions follows.

Coverage in General. The Small Loans Act defines two categories

of regulated lenders: “moneylenders” and “small loans companies.”

The principal distinction is that the latter are federally

incorporated, whereas moneylenders are companies provincially incorporated,

partnerships, or individuals. 0 Except for chartered banks

12 Can. Rev. Stat. c. 156 (1952).

13 The “legal rate” of interest is the rate which governs if the parties agree on no


14 Can. Rev. Stat. c. 156, § 4 (1952). This provision applies to all written or printed

contracts except real estate mortgages.

15 Canadian Hearings 27 (testimony of the Superintendent of Insurance).

16 Can. Rev. Stat. c. 156, § 5 (1952).

17 Can. Rev. Stat. c. 251 (1952), as amended by Can. Stat. c. 46 (1956).

Is Canadian Hearings 25-26 (testimony of the Superintendent of Insurance).

19 Can. Rev. Stat. c. 251, § 2(c) (1952), as amended by Can. Stat. c. 46, § 1 (1956).

20 A few partnerships and individuals were in business before the act came into


— 8 B.C. Indus. & Com. L. Rev. 204 1966-1967


and registered pawnbrokers, which are regulated under separate

federal acts, these categories appear to embrace every participant in

the small loans market. As in the case of the American acts, the Small

Loans Act applies only to money loans, although “loan” is defined in

section 2(c) to include the purchase of a wage assignment .2 The act

does not apply to credit granted by the seller of goods.

Licensing and Supervision. Sections 5 and 13(1) of the act require

those in the business of making small loans (under $1,500) to

be licensed by the Minister of Finance. No license is required, however,

of lenders whose charges never exceed one per cent per month

on the unpaid principal. Technically at least, credit unions may fall

within this class of unlicensed moneylenders, since the charges on their

small loans generally do not exceed this designated rate. The Superintendent

of Insurance is empowered to investigate all unlicensed

lenders to verify that they are in fact not charging in excess of one

per cent, nor otherwise violating the terms of the act. Credit unions,

however, are not subjected to such scrutiny, perhaps because the job

is adequately performed by local authorities under the provincial

credit union acts.

The licensing requirement is an important feature of the Small

Loans Act, and serves two distinct functions: first, it permits the

licensing authority to limit access to the lending market; second, the

concomitant power of license revocation provides a continuing stimulus

for lender compliance with the terms of the act.

The standard for issuance of licenses differs sharply from that

found in many of the U.S. acts, including the Uniform Small Loan

force in 1939, but are today licensed under it. Subsequent licensees have all been corporations,

incorporated either by special act of Parliament (thus “small loans companies”)

or by the provinces (thus “moneylenders”). The Report of the Superintendent

of Insurance for Canada, Small Loans Companies and Money-Lenders Licenced Under

the Small Loans Act for the Year Ended December 31, 1962 [hereinafter cited as 1962

Report] indicates that as of 1962, there were 7 licensed small loans companies and 80

licensed moneylenders. Among the moneylenders were 1 partnership and 2 individuals.

The remainder were provincially-incorporated bodies. Id. at 68-69. In 1963, 559 of the

small loans business was conducted by wholly-owned subsidiaries of U.S. companies.

Canadian Hearings 819.

21 Whether the definition of “loan” found in § 2 is applicable to small loans companies

is not clear, since the provisions refer only to “moneylenders.” The structure of

the act suggests that the two business categories are mutually exclusive. On the other

hand, the act provides no separate definition of “loan” applicable to small loans companies.

If § 2(c) were read to apply only to moneylenders, and not to small loans companies,

the word “loan” would be undefined with respect to the latter, even though used

repeatedly in the provisions relating to such companies. Fortunately, for most purposes

it is unnecessary to determine the precise relationship between the two categories, since

most of the key provisions of the act are separately stated with reference to each.

Where significant, however, it is assumed that moneylenders and small loans companies

are mutually exclusive categories.

— 8 B.C. Indus. & Com. L. Rev. 205 1966-1967


Law.2 Sections 5(2) and 13(1) of the Canadian act provide the following

guideline: the “experience, character, and general fitness” of

the applicant must warrant the belief that he would carry on the

moneylending business “with efficiency, honesty and fairness to borrowers

. . . .” This standard focuses upon the personal qualities of

the applicant-his integrity and competence-rather than upon the

community need for lending facilities. The approach of the U.S. uniform

law, on the other hand, is to condition issuance upon a finding

that the “convenience and advantage of the community” will be promoted.

23 Under this standard, a license might be denied an exemplary

applicant if additional facilities would, for example, result in “excessive”

competition.24 A consequence of the Canadian licensing standard

is that once the business entity receives a license it is free to open

branch offices as it pleases. Under the approach of the U.S. uniform

law, however, a separate license is required for each office.2

Lending Powers. The Small Loans Act imposes restrictions upon

the lending powers of small loans companies which are different from

those imposed upon moneylenders. For example, small loans companies

are barred from lending on the security of real property.20 They

have under section 14(a), however, the power to “buy, sell, deal in

and lend money on the security of, conditional sale agreements, lien

notes, hire purchase agreements, chattel mortgages, trade paper, bills

of lading, warehouse receipts, bills of exchange and choses in action

. . ” Small loans companies may thus engage in sales financing

through the purchase of conditional sales agreements from retail merchants.

In contrast to the practice in the United States, these sales

financing activities are carried on in the same premises as the small

loans activities.2″ The sales financing aspect of a licensee’s business

is, however, wholly unregulated under the act.

22 Uniform Small Loan Law (Tent. Draft No. 7, 1942) [hereinafter cited as Uniform

Small Loan Law].

23 Uniform Small Loan Law § 4(b)2.

24 Sympathy for such a “convenience and advantage” standard is to be found In

Canada. In 1956, the Superintendent of Insurance observed: “Too many [lending]

offices must tend to encourage people to borrow …. As competition increases, expenses

are prone to rise through more aggressive advertising, the opening of additional lending

offices in close proximity to those of competitors, and in other ways.” Brief of the Department

of Insurance, Small Loans Act, p. 32, submitted to the Standing Committee of

the House of Commons on Banking and Commerce, 22d Panl., 3d Sess. (1956). He concluded,

however, that a “convenience and advantage” standard would “clearly be unconstitutional

since it would not be legislation respecting interest.” Ibid. In the event

excessive competition were to result in higher rates, however, it might be plausibly

argued that restrictive licensing was constitutionally justified as an aspect of interest


25 Uniform Small Loan Law § 4(b)2.

20 This can be inferred both from the definition of small loans companies in § 2(f)

and from the enumeration of powers of such companies in § 14(a).

27 Canadian Hearings 818 (testimony of the President of the Canadian Consumer

Loan Association).

— 8 B.C. Indus. & Com. L. Rev. 206 1966-1967


The act contains no restriction on a moneylender’s powers which

is analogous to that imposed on small loans companies. Such limitations

are left to the provincial authorities that charter the moneylender.

The powers granted moneylenders by provincial charters,

however, normally parallel those set forth in the act for small loans

companies2 Nothing in the act appears to bar moneylenders from

making loans over $1,500. In defining the powers of the small loans

companies, however, section 14(b) provides that they may “lend

money in sums not exceeding fifteen hundred dollars . . . .” Taken

literally, these words would appear to bar loans in excess of the stated

sum. Nevertheless, in view of the history and objectives of the act,

there probably was no intent to prohibit larger loans. Licensees do,

in fact, frequently lend greater amounts,29 and the enforcing officials

do not take issue with the practice.

Charges Permitted the Licensees and Other Terms of the Loan

Contract. The Canadian act, like the U.S. Uniform Small Loan Law,

provides a graduated scale of maximum charges applicable to different

ranges of the loan. The “cost of a loan” may not exceed 2 per cent

per month on the unpaid principal balance not exceeding $300; 1 per

cent on the amount exceeding $300 but not exceeding $1,000; and

2 per cent on the remainder.3 In the case of long-term loans (loans

up to $500 for over 20 months and loans exceeding that amount for

over 30 months), the loan cost ceiling is 1 per cent per month on the

unpaid principal balance.3 1 The statutory limits are almost invariably

charged.3″ These rates must, of course, be applied to the principal

balance outstanding at the time of payment, and not taken in

advance. The premise behind such a variable rate structure is, no

doubt, that the cost of lending is disproportionately high for smaller

or shorter term loans.

Assuming a borrower made an additional loan before an existing

one was repaid, it would frequently be to the lender’s advantage to

regard them as separate loans, since he could then impose the higher

rates permitted for smaller loans. The act, however, bars this. If such

an additional loan is made, either by the borrower or the borrower’s

spouse, the separate loans must be added, and the cost computed on

the new total.33

28 See Canadian Hearings 28 (testimony of the Superintendent of Insurance).

29 Outstanding balances of large loans on the books of licensees during 1962 totaled

almost $117 million, compared with about $482 million for small loans. 1962 Report at


30 Can. Rev. Stat. c. 251, §§ 3(2), 14(2) (1952), as amended by Can. Stat. c. 46,

  • § 2, 6 (1956).

31 Can. Rev. Stat. c. 251, § 3(3), 14(3) (1952), as amended by Can. Stat. c. 46,

  • 9 2, 6 (1956).

32 Royal Commission 211.

33 Can. Rev. Stat. c. 251, §§ 3(4)a, 14(4)a (1952), as amended by Can. Stat. c. 46,

  • 9 2, 6 (1956).

— 8 B.C. Indus. & Com. L. Rev. 207 1966-1967


Credit regulation is rarely effective if it extends only to that portion

of the loan charge the lender pleases to designate “interest.” Other

charges making up the cost of the loan, however styled, must also be

controlled. On this premise, no doubt, the “cost” of a loan was comprehensively

defined to mean the whole cost, whether designated “interest”


discount, deduction from an advance, commission, brokerage,

chattel mortgage and recording fees, fines, penalties or charges

for inquiries, defaults or renewals or otherwise, and whether

paid to or charged by the lender or paid to or charged by any

other person, and whether fixed and determined by the loan

contract itself, or in whole or in part by any other collateral

contract or document by which the charges, if any, imposed

under the loan contract or the terms of the repayment of

the loan are effectively varied …1.1

Thus far, few items have fallen outside the definition of “cost”

to be allowed as additional charges. Exceptions have been made, however,

for the following items: credit life insurance, though the imposition

of this charge is closely regulated;,” property insurance on property

given as security on the loan, provided the insurance is placed

through an agency other than that of the licensee; 0 court costs in the

event of default and attorney fees if permitted by provincial law;8 7

and certain expenses of recovery of the security on chattel mortgage

loans, including out-of-pocket expenses of seizure, charges by public

officials, and reasonable expenses of repair to render the seized chattel

saleable.” Expenses for storage and sale of the chattel and other de-

34 Can. Rev. Stat. c. 251, § 2(a) (1952). The preamble of the Small Loans Act

suggests that this listing is a tribute to the ingenuity of earlier generations of moneylenders

in devising various forms of additional charges to circumvent usury legislation

that reached only “interest.” Such legislation included the Interest Act, Can. Rev. Stat.

  1. 156 (1952), and the Money-Lenders Act, Can. Rev. Stat. c. 181 (1952) (repealed).

35 See the lengthy directive, Memorandum for Licensees Under the Small Loans

Act, Re Group Insurance on the Lives of Borrowers (April 3, 1959), issued by the

Superintendent of Insurance. The lender must offer the service through a group life

policy and on a wholly voluntary basis. While the maximum charge is not specified, the

lending institutions and the Superintendent of Insurance have informally agreed that

the premium will not exceed 590 per $100 of the initial amount of the loan. There has

been full compliance with this agreement. See Canadian Hearings 65 (testimony of the

Superintendent of Insurance). As of December 31, 1962, 59 of the licensees under the

act were offering group life insurance, the cost in one case being borne by the lender

and, in the other 58 cases, by the borrower. 1962 Report at viii. In 1962, 96.2% of the

small loans made were covered by credit life insurance. Id. at 53.

86 Report of the Superintendent of Insurance for Canada on Small Loans Companies

and Money-lenders Licenced Under the Small Loans Act, 1939, at 6 (1940).

37 Letter from K. L. Bullerwell, Administrative Officer of the Canadian Department

of Insurance, to the author, March 2, 1966.

38 Department of Insurance, Small Loans Act, 1939-Memorandum for Licensees

(March 12, 1940).

— 8 B.C. Indus. & Com. L. Rev. 208 1966-1967


fault costs, on the other hand, form a part of the cost of the loan, and

no additional charges for such expenses are allowed. 9

It has been pointed out above that licensees do grant loans in

excess of $1,500-the point after which there ceases to be regulation

of loan costs. The question arises whether the first $1,500 of such a

loan remains subject to the statutory limits. It does not.40 Once a loan

exceeds $1,500, no part of it is regulated. An exception arises when

the $1,500 figure is exceeded as a result of successive small loans to

the same borrower or the borrower’s spouse. In that case, the first

$1,500 of the loan remains subject to the statutory limits while the

charge on the excess is restricted to one-half of one per cent per


The Canadian practice of not regulating loans which are in excess

of the small loans limits is in contrast to the situation under many U.S.

small loans acts. In the United States, regulation generally takes place

against the back-drop of a broad usury statute. Thus, that portion of

the loan above the small loan limit42 is not exempt from operation of

the usury law.

The theory of the Canadian arrangement probably is that loans

over $1,500 are not typically made to the class of needy small borrowers

for whose protection the act was designed. A substantial school

of thought, represented by the Royal Commission on Banking and

Finance, is, however, of the view ‘that regulation should extend up

to $5,000, and that the maximum loan charge applicable to a balance

in the range of $300 to $5,000 should be one per cent per month.

Such a proposal may imply objectives broader than those of the classical

small loans act. In any event, such a change would raise the

ceiling, but would not eliminate the abrupt termination of regulation

once the ceiling was reached.

An unintended result of the Canadian system is that relatively

few loans are made in the $1,000-$1,500 range. The policy of one

company, for example, permits it to make loans in the “dead” area

between $1,000 and $1,500 only if it is “trapped” by competitive pressure,

but in no event for an amount “in excess of $1222 on up to

$1500. ‘ 14 Such a policy reflects a preference for the higher rates permitted

for smaller loans, or the unregulated rates for those over



39 Ibid.

40 See Canadian Hearings 27 (testimony of the Superintendent of Insurance).

41 Can. Rev. Stat. c. 251, §§ 3(4)b, 14(4)b (1952), as amended by Can. Stat. c. 46,

  • § 2, 6 (1956).

42 $300 under the Uniform Small Loan Law and $200 to $5,000 under the various

state laws. Curran 21.

43 Royal Commission 382.

44 Canadian Hearings 835 (testimony of the President of the Canadian Consumer


— 8 B.C. Indus. & Com. L. Rev. 209 1966-1967


Loans must be made repayable in approximately equal installments

of principal, plus interest computed on the outstanding balance, which

results in declining payments as the loan cost decreases, or of principal

and cost of loan, which results in uniform payments, but with a growing

proportion allocated to principal as the loan cost decreases.4 In

the event of default, no special charges are permitted. The borrower

merely continues to pay the ordinary contract rate. If, however, the

default continues beyond the due date of the final installment, one

per cent interest per month from that date may be charged on the

installments in default .4 No such interest charge for default, nor any

loan cost, may be compounded; nor may either be deducted or received

in advance.47 This, of course, bars the use of the discount form

of loan contract. Prepayments of any portion of the principal balance

are permitted on any regular payment date, and no penalties whatever

may be assessed for such payments.4

Compulsory Disclosure of Loan Costs by Licensees. The disclosure

problem is confronted at two points: first, in the lender’s advertising

practices; second, in his manner of stating loan costs in the

contract. Neither aspect is in any way regulated by the act. However,

in a manner perhaps less formal than commonly encountered in the

United States, lenders’ advertising practices are in fact regulated. The

Superintendent of Insurance has testified that

from the time the licensee is first licensed we get proof copies

of proposed advertising, and always copies of the contracts.

In fact the licensees are generally anxious to have us look at

them to comment on them …. [The requirement] is not in

the act. But as a matter of practice we do it …. [The companies]

have been very cooperative in their advertising ….

[O]ur disposition has been to keep them away from superlatives

and anything of any unjustifiable nature.4 9

With respect to disclosure in the loan contract, it has been previously

observed that under limited circumstances the Interest Act

Loan Association). It is interesting to observe that in many of the loans for over $1,500,

the companies depart from the method of charging rates under the Small Loans Act, and

utilize instead the add-on or discount method. Canadian Hearings 860 (brief of the

Canadian Consumer Loan Association).

In 1962, the number of loans between $1 and $500 was 642,108; between $501 and

$1,000, 584,825; and between $1,001 and $1,500, 77,222. 1962 Report at v, 64. The rate

charged by small loans companies on loans over $1,500 seems to average about 1Y2%

monthly. Royal Commission 210.

45 Can. Rev. Stat. c. 251, §§ 6(1), 14(5)a (1952), as amended by Can. Stat. c. 46,

  • § 4, 6 (1956).

46 Ibid.

47 Can. Rev. Stat. c. 251, §§ 6(2), 14(5)b (1952).

48 Can. Rev. Stat. c. 251, §§ 6(3), 14(5)c (1952).

49 Canadian Hearings 68.

— 8 B.C. Indus. & Com. L. Rev. 210 1966-1967


indirectly presses a lender to disclose interest in terms of annual rate,

upon penalty of being restricted to a five per cent interest charge.5″ The

question arises, however, whether this applies to transactions under

the Small Loans Act. Are “loan costs” under the Small Loans Act

“interest” under the Interest Act? The Superintendent of Insurance

believed they were. And, in fact, all licensees do state loan costs in

terms of both monthly and annual rates in their contracts.5 The practice,

moreover, is to provide every borrower with a copy of the loan

contract,52 though the act does not require this.

  1. The Bank Act

Growth in personal installment lending by chartered banks has

been rapid since 1958.’ 3 The Federal Bank Act,5 4 which provides the

general framework of bank regulation, contains some provisions that

bear on such consumer loans.5″ This, however, is an incidental effect

rather than the original purpose, since the relevant provisions were

in effect long before banks entered the consumer loan market. Section

91(1) of the Bank Act, governing “interest and charges,” provides:

[N]o bank shall in respect of any loan or advance payable

in Canada stipulate for, charge, take, reserve or exact any

rate of interest or any rate of discount exceeding six per cent

per annum and no higher rate of interest or rate of discount

is recoverable by the bank.55

The annual interest rate of most banks actually ranges from 9%

per cent to 11% per cent. This amount of loan charge may be justified

despite the statutory language just quoted. First, the six per cent

statutory maximum applies to rate of interest or rate of discount, at

the lender’s option. Assume a loan of $100, for example, was arranged

on a one-year installment basis at the discount rate of six per cent

50 See p. 204 supra.

51 Canadian Hearings 27 (testimony of the Superintendent of Insurance).

52 Ibid.

53 See chart, Canadian Hearings 803-04. The total of outstanding bank loans at the

end of 1963 has been broken down as follows:

loans secured by motor vehicles $319,000,000

loans secured by other personal property 51,000,000

other personal loans repayable by installments 465,000,000

other personal loans 597,000,000

Total $1,432,000,000

Id. at 109 (brief of the Bank of Canada).

54 Can. Stat. c. 48 (1953-1954).

55 The Small Loans Act, it will be remembered, expressly excluded chartered banks

from its provisions. See pp. 204-05 supra.

GO Section 91(2) permits the following exceptions: The bank may charge a minimum

of $1 on loans and advances over $25 and a minimum of 500 on those under that


— 8 B.C. Indus. & Com. L. Rev. 211 1966-1967


authorized by the statute. Six dollars would be deducted in advance,

leaving net proceeds of $94. The borrower would be obliged to repay

the principal amount of $100 in twelve equal monthly installments.

Such an arrangement would produce a yield in the 94 per cent to

114 per cent range noted above, if calculated in terms of simple

annual interest.5 The reason that a given discount translates into a

higher simple interest rate is, of course, that the former is figured

on the original amount of the loan, and the latter on the declining

balance. Second, section 93 (2) of the act provides that “no bank shall

directly or indirectly charge or receive any sum for the keeping of an

account unless the charge is made by express agreement between the

bank and the customer.” This could be interpreted to authorize additional

charges for the loan “account,” so long as the parties expressly

agree.”8 Third, neither “rate of interest” nor “rate of discount” are

defined in the act, nor is any method of computation prescribed.

Therefore, various other loan charges might be justified in addition

to the maximum rate. 59 Whatever the theory, “banks have taken the

view that the charges under these plans do not involve a breach of

Section 91 of the Bank Act and this interpretation has not been challenged

by the authorities.”8 0

It is interesting to contrast the provisions regulating loan charges

in the Bank Act with those of the Small Loans Act. For example, the

Small Loans Act defines the maximum loan charge with considerable

precision; 1 the Bank Act merely refers to “rate of interest or rate

of discount.” In addition, the maximum rate of charge under the Bank

Act differs from that permitted for an equivalent loan under the Small

Loans Act.62 Also, the Small Loans Act regulates the rates only on

loans under $1,500; the Bank Act provides no cutoff point.

Why are there differences in the regulation of similar loans by the

two types of lending institutions? The phenomenon is probably not

the product of policy, but rather the unintended result of an explosive

57 It appears to be the common practice for banks to disclose their rate of loan

charge neither in terms of true interest rate nor in terms of total dollar charge. See

Canadian Hearings 29 (testimony of the Superintendent of Insurance), 478 (brief of

Professor Ziegel). This produces considerable dissatisfaction in other segments of the

lending industry, which fear the existence of a public illusion that banks merely charge

an annual rate of six per cent. See, e.g., id. at 148 (testimony of a representative of the

Ontario Credit Union League).

58 See id. at 29 (testimony of the Superintendent of Insurance).

50 See id. at 190-91 (testimony of the Executive Secretary of the Canadian Federation

of Agriculture).

60 Royal Commission 127. Though not apparently required to do so by the act, at

least some banks permit a borrower to prepay a discount loan with “a corresponding

equitable rebate in the cost of the loan.” See Canadian Hearings 478 (brief of Professor


61 See p. 207 supra.

62 Ibid.

— 8 B.C. Indus. & Com. L. Rev. 212 1966-1967


growth in the consumer-credit industry to which the law has not yet

adjusted. The maximum loan rate prescribed by the Bank Act was

originally intended to protect small borrowers who, until recently,

were mainly business borrowers. Banks are today often unwilling to

lend at such rates, however, and the act therefore works against these

borrowers by “denying them access to bank funds and sending them

elsewhere to borrow at interest rates which are often well in excess of

the rates which banks would charge.””8 This same practice may similarly

be driving consumer borrowers to more expensive sources of



  1. Credit Unions

Canada was the continental birthplace of the credit union movement

. 4 In 1900 the first credit union, or as it was called, “caisse

populaire,” was established in Quebec, modeled after the cooperative

“Peoples’ Banks” of Europe. From that province, the institution

gradually spread across Canada and into the United States. The

Canadian credit union movement today consists of the “caisses populaires”

of French-speaking Canada and the “credit unions” of English-

speaking Canada. The traditional objective of these institutions

was to promote thrift by collecting the savings of members and lending

this money to them at favorable rates for “provident or productive

purposes.”65 Today these institutions play a vital role in the Canadian

consumer-credit market,0 6 and legislation regulating them has been

passed in every province.”

Maximum Rate of Charge. Loan rates are limited by statute in

every province except Newfoundland and Quebec. This limit is generally

set at one per cent per month computed on the unpaid balance

of the loan.68 Within this limit the union is free to set its own rates.

As with every statute imposing loan charge limits, the question

63 Royal Commission 129.

64 Id. at 155. For a general account of the history and operations of the Canadian

credit union movement, see id. at 155-71.

Or E.g., Ont. Rev. Stat. c. 79, § 4(1)b (1960).

66 See chart, Canadian Hearings 803-04.

67 Alba. Rev. Stat. c. 67 (1955), as amended by Alba. Stat. c. 19 (1961); B.C.

Stat. c. 14 (1961), as amended by B.C. Stat. c. 15 (1964); Man. Rev. Stat. c. 54 (1954),

as amended by Man. Stat. c. 12 (1964); N.B. Stat. (2d Sess.) c. 2 (1963), as amended

by N.B. Stat. c. 24 (1964); Newf. Rev. Stat. c. 172 (1952), as amended by Newf. Stat.

No. 4 (1963) ; N.S. Rev. Stat. c. 64 (1954), as amended by N.S. Stat. c. 20 (1964) ; Ont.

Rev. Stat. c. 79 (1960), as amended by Ont. Stat. c. 14 (1964); P.E.I. Rev. Stat. c. 38

(1951), as amended by P.E.I. Stat. c. 9 (1963); Que. Stat. c. 57 (1963); Sask. Stat. c.

40 (1962), as amended by Sask. Stat. c. 24 (1964).

08 E.g., Ont. Rev. Stat. c. 79, § 29(2) (1960); N.S. Rev. Stat. c. 64, § 47 (1954)

(50 minimum charge permitted for any loan even if actually more than 1%).


— 8 B.C. Indus. & Com. L. Rev. 213 1966-1967


arises as to which items are to be included in the calculation (and

therefore subject to the statutory limit) and which excluded (therefore

collectible in addition to the statutory limit). Credit union laws,

in contrast to the small loan laws of both Canada and the United

States, devote little attention to this problem. Several acts make no

mention of additional charges, but are content merely to limit “interest”

rates.6 9 Others provide that the rate limit applies to interest

together with “all charges and penalties,” 70 or to interest together

with “all charges incident to making the loan. ‘ 71 Prepayment penalties

are not normally barred by express language in these statutes.

With their emphasis on thrift, however, one would scarcely expect

credit unions to penalize members for excessive zeal in repayment.

Credit unions do not typically charge the highest rate the market

will bear and, therefore, do not seek to test the limits of legality.

The statutory rate is widely interpreted by the credit unions to apply

to every conceivable charge. “There is [sic] no hidden charges or

penalties in the credit union loan business,” the Ontario Credit Union

League has asserted.7″ Even the cost of credit life insurance is generally

included within the maximum rate. 3 In addition, “because of

the underlying philosophy of credit unions, delinquents are treated as

reasonably and fairly as possible, and everything possible is done to

help a borrower in difficulty, including the postponement of principal

payments, and sometimes the waiving or reduction of interest.”‘ 4

Credit unions probably constitute the only significant segment

of the consumer moneylending market which generally charges less

than the maximum permitted by statute. The methods by which this

is accomplished, however, vary. Some of these institutions follow the

practice of charging, initially, the maximum one per cent rate because

of the ease of calculation this permits. They then refund a portion in

the form of an annual rebate.75 Others charge less from the outset.”0

Whatever the technique, the Royal Commission has estimated that

the effective charges of credit unions, “after allowance for insurance

benefits and the partial rebates of loan interest which are a regular

part of the annual distribution of some co-operatives’ income, range

between 8% and 10% for most credit unions and a little lower for

the larger ones and for rural societies.””1

69 E.g., N.S. Rev. Stat. c. 64, § 47 (1954).

70 E.g., Ont. Rev. Stat. c. 79, § 29(2) (1960).

71 N.B. Stat. (2d Sess.) c. 2, § 23 (1963).

72 Canadian Hearings 165.

73 Id. at 140 (testimony of the General Manager of the Ontario Credit Union


74 Id. at 167 (brief of the Ontario Credit Union League).

75 Id. at 165 (brief of the Ontario Credit Union League).

76 Id. at 255 (brief of the Credit Union National Association).

77 Royal Commission 158.

— 8 B.C. Indus. & Com. L. Rev. 214 1966-1967


It should also be noted that such interest regulation takes place

in the face of the constitutional allocation of the interest power to

Parliament. The legislation, however, has apparently never been challenged;”‘

nor is it likely to be, so long as credit unions are content

to operate within the one per cent rate limit.

Maximum Amount of Loans. Most of the provinces set no general

limit on the amount unions may lend to individuals. In some

acts, no mention is made of the subject;79 in some, the matter is left

to the directors; 0 and in others, it is to be determined by the bylaws.

81 A substantial number of the acts do, however, set limits on

the size of unsecured loans and specify at least some of the types of

security that may be accepted for loans exceeding that amount. The

dividing line is generally drawn between $300 and $500. Some laws

permit this unsecured amount in addition to the unencumbered value

of any shares the member holds in the union,8″ while others regard

an assignment of shares or deposits as good security.83 Several expressly

give the union a lien on a member’s shares and deposits to

the extent of his debt.” Another form of acceptable security mentioned

in some of the acts is “an endorsement of a note” 8 or real

estate.86 Presumably, the statutory designations of valid security

are not intended as exclusive. Some acts expressly provide that loans

may be made upon such security as is satisfactory to the credit committeeY

Though not required in the acts, it is the widespread practice of

credit unions to disclose loan charges in terms of both total dollar

cost and interest rate. 8 Not surprisingly, the Credit Union National

Association recommended legislation requiring such disclosure for the

“extenders of every kind of credit.”8 9

78 See Canadian Hearings 28 (testimony of the Superintendent of Insurance).

79 E.g., Quebec.

80 E.g., Alba. Rev. Stat. c. 67, §§ 28(1)b(ii), (1)f (195); N.B. Stat. (2d Sess.)

  1. 2, § 14f (1963).

81 E.g., Ont. Rev. Stat. c. 79, § 15(c) (1960).

82 E.g., B.C. Stat. c. 14, § 18(3)a (1961).

83 E.g., N.B. Stat. (2d Sess.) c. 2, § 18(2) (1963).

84 E.g., Ont. Rev. Stat. c. 79, § 27(2) (1960).

85 E.g., N.B. Stat. (2d Sess.) c. 2, § 18(2) (1963).

86 See Sask. Stat. c. 40, § 70 (1962). This section also prescribes that the maximum

loan which may be made on the security of real estate is a percentage of its value, and

provides that a loan higher than that percentage can be made if guaranteed by any

organization approved by the supervisory authority.

87 E.g., Man. Rev. Stat. c. 54, § 63(3) (1954).

88 The Credit Union National Association has stated:

Our credit unions stress the fact that their rates include all borrowing

costs, and they are careful to provide each borrower with full information

about the amount of his repayment, and the total cost of the loan expressed

both in dollars and cents and in terms of per centum per annum.

Canadian Hearings 255.

89 Id. at 257.

— 8 B.C. Indus. & Com. L. Rev. 215 1966-1967


Summary. In both the United States and Canada, the form and

tone of credit union legislation differ sharply from that of small loan

legislation. The latter type was a reaction to moneylenders who had

repeatedly and ingeniously taken advantage of needy and helpless borrowers.

The legislation therefore aimed at precise control of the terms

of the lending agreement.

Credit unions, on the other hand, developed as membershipcontrolled

cooperative ventures dedicated to the service of their members.

The statutes tend to focus on guaranteeing their continued

democratic operation under sound financial practices. Provisions are

made to insure that the membership will have knowledge of and control

over the activities of the society. The credit union’s bylaws are

regulated, and it is subject to inspection and supervision by government

officials and sometimes also by the credit union league or

“central” with which it may be affiliated. Substantial reliance is placed

on such devices and on the underlying benevolent objectives of the

movement, rather than on detailed control of the terms of the loan


  1. Retail Installment Sales

The principal types of retail credit sales arrangements prevalent

in Canada roughly parallel those found in the United States.0 Each

country utilizes the short-term, thirty-day charge account, under

which payment in full is expected of the purchaser shortly after receipt

of the bill. No finance charge is made, and the seller normally

retains no security interest in the goods. There is no relevant regulation,

and such accounts are not further considered herein.

The revolving charge account is also found in both countries.

Under this arrangement, the buyer may make purchases from time

to time and charge them to his account. He is billed for accrued

charges, usually on a monthly basis. He then has the option either

to pay the entire amount, in which case there is no finance or “service”

charge, or to pay a lesser amount down to a specified minimum, in

which case a finance charge is computed on the unpaid balance and

added to the following bill. The service charge is sometimes stated as

a flat amount for a given range of account balance (e.g., $.60 for

an account balance between $35.01 and $45.00; $.75 for an account

balance between $45.01 and $55.00, etc.) and sometimes as a

percentage per month on the outstanding balance as of a given date.

90 For Canada, see generally id. at 461-65 (brief of the Retail Council of Canada);

for the United States, see generally Curran 10-13. For a comparative study of conditional

sales arrangements covering the Commonwealth countries and the United States,

see generally Goode and Ziegel, Hire-Purchase and Conditional Sale-A Comparative

Survey of Commonwealth and American Law (1965).

— 8 B.C. Indus. & Com. L. Rev. 216 1966-1967


With some sellers, the percentage rate varies depending upon the balance

outstanding; with others, it remains constant. Though not required

by statute, some sellers remit a portion of the finance charge

if the account is paid before maturity. 1

In both Canada and the United States, the credit sale of higherpriced

durable goods is traditionally arranged under a retail installment

sales contract covering a single purchase. 92 The seller gives

possession of the goods to the buyer who agrees to pay the cash price

plus finance charges over a specified period of time. The seller usually

retains a security interest in the property in the form of a conditional

sales agreement or chattel mortgage. While a feasible alternative, the

chattel mortgage is rarely used for this purpose.93

A greater degree of flexibility is introduced into the purchase

of such higher-priced items by the add-on or open-end form of the

retail installment sales contract. Such a contract differs from the traditional

single-item installment sales contract by expressly permitting

further purchases on the same account. When this right is exercised,

the amount of the new purchase and finance charge is added to the

old balance, resulting in a new schedule as to the number and size of


As in the United States, the Canadian seller frequently does not

retain the installment sales contracts until maturity. He sells such

contracts at discount to a sales finance company, or to some other

participant in the sales financing market, which thereafter collects

the payments. The finance company then credits part of the finance

charge to the dealer as his payment for having obtained the business

for it. Instead of paying him immediately, “the company normally

credits the amount to a ‘reserve’ account against which losses, or deductions

resulting from rapid repayment, are charged.’ 4 ” In addition,

the finance company and seller share the risk of default. “In most

cases, the company accepts part of the risk by agreeing to find the

goods if the buyer has ‘skipped,’ repossess them and deliver them to

the dealer who then repurchases the contract, usually by a charge

against his reserve with the company.” 95

Thus, as in the United States, there tends to be a close relationship

between dealer and finance company. Generally, however, under

the terms of the sale contract, the buyer’s defenses against the seller

are waived as against an assignee of the contract. The finance com-

01 See Canadian Hearings 465 (brief of the Retail Council of Canada).

92 Succeeding purchases require a separate contract or revision of the original contract.

93 Goode and Ziegel, op. cit. supra note 90, at 13.

94 Royal Commission 205-06.

05 Ibid.

— 8 B.C. Indus. & Com. L. Rev. 217 1966-1967


pany’ is thus insulated from such defenses, and its detached position

is often fortified by its status as holder in due course of the buyer’s

promissory note. While Canadian courts have recently demonstrated

a tendency to deny the company such insulation, 0 legislation has not

yet dealt with the problem. National legislation does govern some of

the institutions that participate in the installment sale process-small

loans companies, for example, part of whose business is sales financing

-but it does not regulate the process itself. Any effort to intervene

in this area would probably raise a substantial constitutional issue as

to the authority of Parliament.

The provinces have, on the other hand, legislated with respect

to many aspects of vendor credit. 7 The treatment varies widely

among the provinces in a number of respects. First, variations exist

as to the scope of the regulated transactions. In some provinces, for

example, the legislation pertains only to sales in which the seller retains

a security interest in the goods; in others, it applies generally

to installment sales or to a defined category of retail installment sales.

Second, there are variations in the functional aspect of the transaction

governed. Thus, the object of legislation may be to regulate finance

charges and minimum down-payments, to require disclosure of finance

charges, or to protect the purchaser’s equity in the goods in the event

they are seized by the seller because of the purchaser’s default. Finally,

there are significant variations among the provinces in the

substance of analogous provisions.

The principal aspects of vendor credit legislation can be classified

as follows: (1) The regulation of finance charges. Potentially,

at least, this embraces the regulation of the initial finance charge,

penalties, the rebate of “unearned” charges in the event of prepayment

of the credit balance, and, in the case of sales finance companies,

the dealer’s reserves maintained by the finance company and rebates

to the dealer.” (2) The requirement of disclosure of finance charges,

either in the advertising practices of the seller or in the sales contract,

and in the case of revolving charge accounts, in the periodic statements

to the buyer. (3) The protection of the buyer’s interest in the

property in the event of repossession by the seller.

Cutting across the substance of such protective measures is the

issue as to how they are to be enforced. To what degree should lender

compliance depend upon the buyer’s desire or ability to enforce his

96 See Goode and Ziegel, op. it. supra note 90, at 112 & n.14.

97 For a useful general review and critique of the Canadian legislation, see Ziegel,

Retail Instalment Sales Legislation: A Historical and Comparative Survey, 14 U. Toronto

L.J. 143 (1962).

98 These reserves and rebates are generally not subject to regulation. The exception

is Nova Scotia. N.S. Stat. c. 4, § 11(n) (1965).


— 8 B.C. Indus. & Com. L. Rev. 218 1966-1967


statutory rights in a lawsuit? To what degree should enforcement be

remitted to the public authority through criminal prosecutions? Should

the power to license, inspect, and supervise be given to some specialized

administrative authority? In the moneylending field, the Small

Loans Act utilizes all of these techniques, although its effectiveness

no doubt depends largely upon the provisions for administrative supervision.

A few provincial statutes have begun to utilize a similar device

with respect to vendor credit transactions.

Regulation of Finance Charges. As has been noted above,99 the

limitations found in Dominion legislation on maximum interest or loan

charges do not apply to finance charges imposed in connection with

the credit sale of goods. Such charges are not viewed as interest, but

rather as an increase in the price of goods for the risk of selling on

time.100 This produces the anomaly, from the point of view of credit

regulation, that if a person borrows $1,000 from a small loans company

to finance the purchase of an automobile, the loan cost and

other aspects of the transaction are rigidly controlled; but, if he buys

the car with a credit balance of $1,000 due the seller, the finance

charges are, in general, unregulated. And this is so even though,

typically, the automobile vendor will promptly sell the sales contract

to a finance agency.

Disclosure of Finance Charges in the Contract. The question of

compulsory disclosure is not so much whether it is desirable or not,

but the form it should take. Consumer representatives and the credit

unions have traditionally favored disclosure in terms of annual interest.

Lenders have opposed such a requirement, preferring disclosure

in terms of the dollar amount of credit charges. Among the

arguments heard during the Canadian Hearings in support of the

latter method were the following: (1) Disclosure in terms of annual

percentage rate serves no useful purpose since borrowers are interested

in the dollar amount of charges and monthly payments. (2) Disclosure

in terms of annual percentage rate introduces a spurious degree

of accuracy since there are various ways to calculate this rate,

each producing a different result. (3) To translate credit charges into

annual percentage rates is a difficult undertaking at best, and in some

situations impossible.

This last argument was advanced with particular vehemence by

those retailers who offered revolving charge accounts. 0 1 The reduc-

99 See pp. 206, 218 supra.

100 For a discussion of the time-price doctrine prevalent in the United States, see

Curran 13-14, 84-90; Warren, Regulation of Finance Charges in Retail Instalment Sales,

68 Yale Lj. 839, 840-51 (1959).

101 Service charges on revolving charge accounts are unregulated in Canada, in

contrast to the case in some of the United States. For the U.S. practice, see Curran


— 8 B.C. Indus. & Com. L. Rev. 219 1966-1967


tion of service charges in such accounts to annual interest would, they

claimed, be literally impossible owing to the unpredictability of the

dates and the amounts of both payments and purchases. 102

The argument for percentage-rate disclosure was perhaps best

summarized in the report of the Royal Commission.0 3 It acknowledged

that there were different formulas for calculating yield, but that

the variations were not great. Besides, a single formula could be

adopted, since “comparability is more important than the precise

level.”‘ 014 As to the argument that borrowers were more interested in

dollar cost than percentage rate, the Commission responded that the

latter information “will certainly not do any harm-and may well do

much good . . .. “105 The Commission conceded that it is difficult to

calculate the annual rate of a revolving charge account, but suggested

it might be enough if the customer were shown the effective charge

under a typical plan.

Protection of the Buyer’s Interest in the Property in the Event

of Repossession. Every province makes some provision for protection

of the buyer’s interest in the property in the event of his default.100

Generally, the seller must retain the property for twenty days during

which period the buyer has the right to redeem.07 The amount he

must pay to redeem varies from merely the existing deficit to the entire

balance of the contract price together with charges such as interest

o and the actual “costs and expenses of taking and keeping

possession.” 09 The opportunity to redeem on condition that he pay

off the entire balance due on the contract is, of course, of dubious

utility to the over-extended debtor.

If the buyer does not redeem the property, the seller may resell

  1. In several of the provinces the sale must be by public auction if

the seller wishes to preserve his right to a deficiency judgment.’ In

the others, the sale may be made either privately or by public auc-

102 Canadian Hearings 466-70 (brief of the Retail Council of Canada).

103 Royal Commission 382-83.

104 Id. at 383.

105 Ibid.

106 Alba. Rev. Stat. c. 54, § 19 (1955); B.C. Stat. c. 9, § 14 (1961); Man. Rev.

Stat. c. 144, § 3 (1954); N.B. Rev. Stat. c. 34, § 14(1) (1952); Newf. Stat. No. 62, §

12(1) (1955), as amended by Newf. Stat. No. 67, § 2 (1962); N.S. Rev. Stat. c. 47, §

11 (1954); Ont. Rev. Stat. c. 61, § 9(1) (1960); P.EJ. Rev. Stat. c. 28, § 10(1)

(1951); Que. Civ. Code, c. 73, arts. 1561a-j (1947), as amended by Que. Stat. c. 47

(1948); Sask. Stat. c. 97, § 14(1) (1957).

The repossession and resale provisions of these statutes, or their earlier versions,

are analyzed in chart form in Ziegel, Uniformity of Legislation in Canada, The Conditional

Sales Experience, 39 Can. B. Rev. 165, 231 (1961).

107 E.g., B.C. Stat. c. 9, § 14(1) (1961); Ont. Rev. Stat. c. 61, § 9(1) (1960).

108 E.g., Ont. Rev. Stat. c. 61, § 9(1) (1960).

109 E.g., B.C. Stat. c. 9, § 14(1) (1961).

110 E.g., N.B. Rev. Stat. c. 34, § 14(3) (1952).


— 8 B.C. Indus. & Com. L. Rev. 220 1966-1967


ion.”‘ In most cases, the statutes provide that notice of the intention

to sell and of other details must be given to the buyer or to the buyer

and guarantor.” 2 In some cases, however, notice is required only when

the price of the goods exceeds $30 and the seller intends to seek recovery

for any deficiency.” 8 In several of the provinces, the seller

must elect between repossession and the right to seek the balance of

the contract price,” 4 and thus is denied the right to a deficiency judgment.

The Quebec Installment Sales Act.”” Since they represent an

effort at broad protection of consumer interests in conditional sales

agreements, it is useful to review some provisions of the Quebec act.

The act does not cover sales exceeding $800 and some classes of

goods, such as the automobile,”” but does impose a ceiling on finance

charges.117 It also requires a minimum down-payment of fifteen per

cent and provides a graduated scale of maximum maturity periods

depending on the amount of the deferred payments. These provisions

contribute to a similar result-prevention of the financial over-commitment

of the buyer. The rate limitation does so by making it unprofitable

for the lender to extend credit to poor risks, thereby invoking

the seller’s self-interest to establish minimum credit standards.

Such standards are also created by the minimum down-payment and

maximum maturity requirements, both of which bar credit to buyers

unable to comply.

Deferred payments must be equal except that the last one may

be for a smaller amount. The buyer may prepay single payments or

the entire balance, and in so doing is entitled to a reduction of the

finance charge.”” Furthermore, the contract must disclose the regular

cash price, the time price, the down-payment, and the amount of each

payment, and the buyer must be given a duplicate of the agreement.” 9

It must be easily readable and, if printed, in at least six-point type. 20

In the event of default, the seller must elect between suing for

the installments due or repossessing the goods.’ In the event of re-

111 E.g., N.S. Rev. Stat. c. 47, § 11(2) (1954).

112 E.g., Ont. Rev. Stat. c. 61, § 9(2) (1960) (to buyer only); N.B. Rev. Stat. c.

34, § 14(3) (1952) (to buyer and guarantor).

118 E.g., N.S. Rev. Stat. c. 47, § 11(3) (1954).

114 E.g., Alba. Rev. Stat. c. 54, § 19 (1955); Man. Stat. c. 15, §§ 3(1), 4 (1965).

115 Que. Civ. Code c. 73 (1947), as amended by Que. Stat. c. 47 (1948).

116 Que. Civ. Code c. 73, art. 1561j (1947).

117 Que. Civ. Code c. 73, art. 1561d (1947). The Civil Code allows the court to

reduce or annul finance charges which it determines to be excessive or unconscionable.

Que. Civ. Code arts. 1040c-d, added by Que. Stat. c. 67, § 1 (1964).

118 Que. Civ. Code c. 73, art. 1561b (1947), as amended by Que. Stat. c. 47 (1948).

119 Que. Civ. Code c. 73, art. 1561c (1947).

120 Que. Civ. Code c. 73, art. 1561e (1947).

121 Que. Civ. Code c. 73, art. 1561f (1947).



possession, the buyer or his creditors may redeem within twenty days

of repossession, 22 “though it is not clear whether the amount which

must be paid is the whole of the unpaid balance of the time price or

only the installments-unaffected by any acceleration clause-which

are actually in arrears.’ ‘ 23

The sanction for violation of various provisions of the act is that

the seller loses his security interest in the property, leaving him only

his right to sue for the contract balance. 24

  1. The Unconscionable Transactions Relief Acts

In 1960, Ontario passed the Unconscionable Transactions Relief

Act,’ 25 providing that where the “cost of the loan” is “excessive” and

“the transaction is harsh and unconscionable,” the court may relieve

the debtor from the obligation to pay any excessive sum, order repayment

of any such amount already paid, and set aside or revise the

loan contract- 26 “Cost of the loan” is defined in section 1 (a) to mean

“the whole cost to the debtor of money lent and includes interest,

discount, subscription, premium, dues, bonus, commission, brokerage

fees and charges” except certain official fees.

The constitutionality of the act was upheld in 1963 in Attorney-

General v. Barfried Enterprises Ltd.127 It is useful to consider this

case because of its implications as to the constitutional distribution

between Dominion and provincial legislatures of power to regulate

loan charges. Sampson, the borrower, had executed a first mortgage

to Barfried Enterprises, obligating himself to pay a principal amount

of $2,250 with interest at seven per cent per annum. The amount

actually advanced by the lender to Sampson, however, had been only

$1,432.50. The difference represented a “bonus” of $750.00 (retained

by the lender) and a “commission” of $67.50 (paid to a firm of mortgage

brokers owned or controlled by the lender). 12 Sampson brought

suit under the Unconscionable Transactions Relief Act to have the

122 Que. Civ. Code c. 73, art. 1561h (1947).

123 Ziegel, supra note 97, at 154-55.

124 Que. Civ. Code c. 73, art. 1561i (1947).

125 Ont. Rev. Stat. c. 410 (1960). L

126 Ont. Rev. Stat. C. 410, § 2 (1960).

127 [1963] Can. Sup. Ct. 570, 42 D.L.R.2d 137 (1963). Encouraged by that dedsion,

three provinces recently enacted virtually identical laws. Alba. Stat. c. 99 (1964);

N.B. Stat. c. 14 (1964); N.S. Stat. c. 12 (1964). A similar statute had earlier been

enacted in Newfoundland. Newf. Stat. No. 38 (1962). Legislation has also been enacted

in Quebec, but it applies to finance charges in connection with sales transactions, as

well as money loans. Que. Civ. Code arts. 1040c-d, added by Que. Stat. c. 67

(1964). Similar legislation has been introduced in two other provinces, British Columbia

and Saskatchewan. See Canadian Hearings 57. The present status of these bills is unknown

to the writer.

128 Re The Unconscionable Transactions Relief Act (Ontario), [1962] Ont. 1103,

1104, 35 D.L.R.2d 449, 450 (1962).


— 8 B.C. Indus. & Com. L. Rev. 222 1966-1967


terms of the mortgage revised. The trial court granted relief by reducing

to $1,500 the principal sum due on the mortgage, while increasing

the interest to eleven per cent per annum.

The Ontario Court of Appeals reversed,”9 holding that the

Constitution delegated to the federal government exclusive legislative

authority over interest, and that this included compensation for the

use of money, whether denominated bonus, discount, or premium.

Furthermore, the court held that the Ontario act conflicted with the

Federal Interest Act which permits any person to “stipulate for, allow

and exact, on any contract or agreement whatsoever, any rate of interest

or discount that is agreed upon,” unless Parliament otherwise

provides. 130

The Supreme Court of Canada reversed. 3′ It found no conflict

between the Ontario act and the Interest Act, since “it is settled that

a bonus is not interest” within the meaning of the Interest Act.’32 Nor

did the Ontario statute infringe on Parliament’s exclusive legislative

power of interest. It related rather to “annulment or reformation of

contracts” and, therefore, was legislation with respect to “property

and civil rights in the province.”‘1 33 The court declared that “the fact

that interference with such a contract may involve interference with

interest as one of the constituent elements of the contract is incidental.


The court concluded that most of the items of compensation

making up “cost of the loan” in the Ontario act were not interest, because

“the day-to-day accrual of interest seems to be an essential

characteristic.”‘ 3 5 Did the court mean that the constitutional power to

regulate interest extended only to “day-to-day” accruals, but not to

components of the loan charge expressed in any other terms? If so,

how could Parliament effectively regulate loan charges? Was the Federal

Small Loans Act, with its sweeping definition of loan “costs,”‘ 136

now unconstitutional because its regulation extended to charges which

do not accrue on a day-to-day basis? Or did the court mean merely

that the exclusive federal power to regulate interest did not imply

exclusive power over other loan costs? If so, federal legislation would

129 Supra note 128.

130 Can. Rev. Stat. c. 156, § 2 (1952).

131 Supra note 127.

132 Id. at 575, 42 D.L.R.2d at 145. The court cited cases decided under § 6 of the

Interest Act. Why a “bonus” was not, however, a “discount” under § 2 was not discussed.

133 See the British North American Act, 1867, 30 Vict. c. 3, § 92(13).

134 [1963] Can. Sup. Ct. at 577-78, 42 D.L.R.2d at 147.

135 Id. at 575, 42 DJL.R.2d at 145. The implications of this remark have caused a

good deal of concern and comment among Canadian observers. See, e.g., Canadian Hearings

43-56 (testimony of the Superintendent of Insurance).

136 For that definition see p. 208 supra.


— 8 B.C. Indus. & Com. L. Rev. 223 1966-1967


not necessarily be precluded. Provincial and Dominion power might

overlap “in which case neither legislation will be ultra vires if the

field is clear . .* .”‘. In the event both jurisdictions acted, however,

federal power would presumably prevail. 88 The full implications of

the Barfried case for the respective powers of Dominion and province

have yet to be clarified.

Nor is the intended scope of coverage of unconscionable transactions

relief acts yet clear. It seems likely that they will have little

significance for those moneylending transactions governed by the Federal

Small Loans Act or the Bank Act, since the provinces probably

lack authority to interfere significantly with such loans, and in any

event, loans complying with federal law are unlikely to be deemed

“unconscionable.” In addition, it should be noted that they restrict

themselves, except in the case of the Quebec act, to instances of unconscionable

money loans rather than “transactions in goods.”’80 So long as

vendor credit is not viewed as “money lent,” these Canadian acts

will, of course, not permit a review of harsh clauses in installment

sales contracts. Thus, the unconscionable transactions relief acts will

probably prove of limited significance in relation to consumer loans,


137 Attorney-General for Canada v. Attorney-General for British Columbia, [1930]

A.C. 111, 118 (P.C. 1929) (Can.).

18 See ibid; [1963] Can. Sup. Ct. at 580, 42 D.L.R.2d at 139 (concurring opinion).

139 Compare Uniform Commercial Code § 2-302.

— 8 B.C. Indus. & Com. L. Rev. 224 1966-1967