Citation:
DaimlerChrysler Services Canada Inc. v. Cameron,
2007 BCCA 144
Date: （略）
Docket: CA33795
Between:
DaimlerChrysler Services Canada Inc.
Appellant
(Plaintiff)
And
James Stuart Cameron
Respondent
(Defendant)
Before:
The Honourable Madam Justice Prowse
The Honourable Mr. Justice Low
The Honourable Madam Justice Kirkpatrick
G.G. Plottel and P. Chan
Counsel for the Appellant
R.D. Braun
Counsel for the Respondent
Place and Date of Hearing:
Vancouver, British Columbia
15 February 2007
Place and Date of Judgment:
Vancouver, British Columbia
8 March 2007
Written Reasons by:
The Honourable Madam Justice Kirkpatrick
Concurred in by:
The Honourable Madam Justice Prowse
The Honourable Mr. Justice Low
Reasons for Judgment of the Honourable Madam Justice Kirkpatrick:
[1] The appellant, DaimlerChrysler Services Canada Inc. (“Daimler”) (plaintiff in the Supreme Court), appeals from the order of the Supreme Court pronounced 26 January 2006 and entered 7 February 2006. Pursuant to that order, the chambers judge declared that Part 5 of the Personal Property Security Act, R.S.B.C. 1996, c. 359 (the “PPSA”) applies to the impugned lease agreement.
BACKGROUND
[2] The respondent, James Stuart Cameron (defendant in the Supreme Court), signed a lease agreement dated 5 October 2002. The lease was in respect of a 2003 Dodge Ram pickup truck. Mr. Cameron and Vernon Chrysler Dodge Ltd. were named lessee and dealer, respectively. The lease provided that the dealer would assign the lease to the appellant (then named Chrysler Credit Canada Ltd.), which is in the business of leasing vehicles. The contemplated assignment occurred on the date on which Mr. Cameron signed the lease.
[3] Daimler alleged that Mr. Cameron failed to make payments due under the lease. Consequently, Daimler repossessed the truck and sold it.
[4] In the Supreme Court, Daimler claimed damages approximating $30,000 from Mr. Cameron. Mr. Cameron contended that Daimler’s remedies were limited by Part 5 of the PPSA. The parties agreed to submit a special case to the court pursuant to Rule 33 of the Supreme Court Rules, B.C. Reg. 221/90. The question for the court was framed as follows: “Does Part 5 of the PPSA apply to the lease agreement that is the subject of this action?” The chambers judge answered this question affirmatively.
The Statutory Framework
[5] Sections 2 and 3 of the PPSA set out the scope of the Act. Subsection 2(1) provides that the Act applies
(a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and
(b) without limiting paragraph (a), to … a lease … if … [it] secure[s] payment or performance of an obligation.
Such a lease is generally referred to as a “security lease”.
[6] Subsection 3(c) of the PPSA extends the application of the Act to “a lease for a term of more than one year” that does not secure payment or performance of an obligation; that is, what is commonly termed a “true lease”. Such leases are deemed security interests.
[7] Notwithstanding that the scope of the PPSA encompasses leases in general, the characterization of a lease has critical implications on the rights and remedies available upon default.
[8] Paragraph 55(2)(a) of the PPSA states that Part 5, which sets out the rights and remedies on default, “does not apply to a transaction referred to in section 3”; namely, a true lease. In the event of default, the contractual rights and remedies as set out the lease, in addition to any common law rights and remedies, apply. As between the lessor and the lessee, a true lease never actually assumes the characteristics of a security interest.
[9] In contrast, a security lease is subject to Part 5. Accordingly, the relief available under Part 5 applies, and a lessor under a security lease is limited to the statutory remedies. With certain exceptions, a secured party, whose collateral constitutes “consumer goods”, must make an election as to remedies. The secured party ─ in this context, the lessor ─ may sue under the security agreement. Alternatively, the lessor may choose to enforce its security by seizure or repossession or accept a surrender of goods by the debtor lessee.
The Lease
[10] In the instant case, the lease was on a printed form. The term of the lease was 48 months, ending 5 October 2006. Pursuant to the lease, Mr. Cameron was obliged to pay $1,092.30 monthly. He was also required to pay $0.12 per kilometre if the truck was driven over 2,000 kilometres monthly.
[11] Mr. Cameron was required to maintain the truck in good condition and operating order, and to make all requisite repairs. Further, the lease imposed restrictions on Mr. Cameron’s use of the vehicle: he was obliged both not to use the truck unlawfully or inappropriately and to keep the truck free of others’ claims.
[12] The lease did not include a down-payment or trade-in allowance.
[13] Mr. Cameron had an option to purchase the truck at the expiration of the lease term for $29,851.20. The option purchase price (to which the parties refer as the truck’s “Residual Value”) was 54 percent of the manufacturer’s suggested retail price of $55,280 before the dealer installed accessories. The figure of 54 percent was derived from a table prepared by Daimler to forecast various vehicles’ values at the end of their respective lease terms.
[14] Mr. Cameron had the right to terminate the lease anytime before the end of the lease term. However, if he invoked this right, he was required to either exercise the option to purchase or pay an early termination liability and return the vehicle to Daimler.
[15] If Mr. Cameron exercised the option to purchase prior to the expiration of the lease, he had to pay the Residual Value plus the unpaid monthly payments for the balance of the lease term, plus any other charges payable under the lease, less unearned lease charges on an actuarial calculation method.
[16] If Mr. Cameron terminated the lease without exercising the option to purchase, he had to pay the early termination liability, which the lease defined as all past due monthly amounts, plus all monthly payments not yet due, plus any amounts due under the lease, plus the Residual Value, minus the net amount that Daimler received in a reasonable sale, minus any insurance monies received by Daimler, minus any unearned lease charges.
[17] Mr. Cameron was also required to pay the early termination liability if Daimler terminated the lease. Regardless of who terminated the lease, Mr. Cameron’s ensuing payment obligation would ensure that Daimler obtained at least the Residual Value.
[18] Upon default, Daimler could take immediate possession of the truck, obtain the early termination liability and sue for damages to be calculated in accordance with the terms of the lease described above.
ISSUE
[19] The sole issue on this appeal is whether the learned chambers judge erred in deciding that the lease agreement is subject to Part 5 of the PPSA. In other words, is the lease a true lease or a security lease as found by the chambers judge?
DISCUSSION
Standard of Review
I preface my consideration of the issue on appeal with a discussion of the applicable standard of review. In the instant case, the parties agreed to state a question of law – the applicability of Part 5 of the PPSA to the instant lease – in the form of a special case for the opinion of the court. In essence, the court was asked to determine the applicable legal principles in characterizing a lease for the purposes of Part 5 of the PPSA.
[20] It is well-established that the standard of review of this Court on questions of law is one of correctness: Bell v. Bell (2001), 153 B.C.A.C. 10, 15 R.F.L. (5th) 23.
Characterization of the Lease
[21] Paragraph 2(1)(a) of the PPSA reflects the centrality of the substance test in characterizing a lease as either a security lease or a true lease. The court must scrutinize the relationship between the lessor and lessee to ascertain whether in that relationship, the indicia of a security agreement are evident. If, in substance, the impugned transaction creates a security interest, it is a security agreement, irrespective of its form and the parties’ subjective intention when they entered into it (Ronald C.C. Cuming, “True Leases and Security Leases under Canadian Personal Property Acts” (1983), 7 Can. Bus. L.J. 251 at 264).
[22] The process of characterization is guided by numerous factors. In his article at 285, Professor Cuming refers to a helpful list of factors derived from American jurisprudence. The factors that support a finding that the lease is a security lease include:
1. whether there was an option to purchase for a nominal sum;
2. whether there was a provision in the lease granting the lessee an equity or property interest in the equipment;
3. whether the nature of the lessor’s business was to act as a financing agency;
4. whether the lessee paid a sales tax incident to acquisition of the equipment;
5. whether the lessee paid all other taxes incident to ownership of the equipment;
6. whether the lessee was responsible for comprehensive insurance on the equipment;
7. whether the lessee was required to pay any and all licence fees for operation of the equipment and to maintain the equipment at his expense;
8. whether the agreement placed the entire risk of loss upon the lessee;
9. whether the agreement included a clause permitting the lessor to accelerate the payment of rent upon default of the lessee and granted remedies similar to those of a mortgagee;
10. whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease;
11. whether the lessee was required to pay a substantial security deposit in order to obtain the equipment;
12. whether there was a default provision in the lease inordinately favourable to the lessor;
13. whether there was a provision in the lease for liquidated damages;
14. whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of the lessor; and
15. whether the aggregate rentals approximate the value or purchase price of the equipment.
[23] Various Canadian courts have been influenced by similar considerations. In the case of Re Bronson (1995), 34 C.B.R. (3d) 255, [1995] B.C.J. No. 1579 (Q.L.) (S.C. Master), aff’d [1996] B.C.J. No. 216 (Q.L.) (S.C.) followed by the chambers judge, the master rendered his decision by considering, inter alia, Professor Cuming’s list of factors.
[24] Another relevant factor is the term of the lease. A lease for a short period generally indicates a true lease, since the leased property will have a significant residual useful life upon expiration of the lease and can be leased again or sold by the lessor (Ibid. at 269).
[25] In the instant case, the chambers judge embarked on the characterization process by setting out the pertinent terms of the lease and classifying each such term as indicative of a true lease or security lease or as equivocal. A term was considered to be equivocal if it related merely to form or the parties’ subjective intention.
[26] The chambers judge found the following terms to be equivocal: the title of the document i.e. “Retail Lease Gold Key”; the description of the respondent as “lessee”; the lessee’s obligation to continue complying with the lease if the truck was destroyed and the lessor supplied a replacement truck; the absence of a mandatory sale; the requirement to return the truck at the end of the term if the option to purchase was not exercised; the lessee’s purported acknowledgment on the printed form that the lease is a true lease and that he will have no ownership interest in the truck or its replacement parts unless the option to purchase is exercised; and the statement on the printed form that the document records the whole agreement between the parties.
[27] The chambers judge also recognized that numerous terms indicated a true lease. First, the chambers judge found the absence of a down-payment or trade-in allowance consistent with a true lease because the lessee would start with no equity in the vehicle. Second, the chambers judge found that the excess kilometre charge compensated for extra wear and tear on the truck, which would presumably reduce market value at the end of the lease term. Accordingly, the term reflected a true lease. Third, the chambers judge found that the lessee’s obligation to maintain the truck’s good condition evidenced a true lease because it ensured the reasonableness of the truck’s value upon expiration of the lease. Fourth, the term prohibiting against unlawful or inappropriate use of the truck and imposing a responsibility on the lessee to keep the truck free of others’ claims was found to be consistent with a true lease because it protected Daimler’s equity in the truck. Fifth, the option purchase price indicated a true lease. The chambers judge accepted that the option purchase price represented a genuine effort to estimate accurately the truck’s value at the end of the lease term. An option purchase price set at market value generally demonstrates that the lessee will acquire no equity in the truck.
[28] However, the chambers judge found the default provisions in the lease were indicative of a security lease. The lease provided that upon default, the lessor could take immediate possession of the truck, obtain the early termination liability and sue for damages. As I have mentioned, early termination liability consisted of all past due monthly amounts, plus all monthly payments not yet due, plus any amounts due under the lease, plus the Residual Value, minus the net amount the lessor received in a reasonable sale, minus any insurance monies received by the lessor, minus any unearned lease charges. In essence, the lease secured the payment of the Residual Value by the lessee in the contingency of default.
[29] In my view, the chambers judge correctly identified the factors relevant to the characterization process. It also cannot be said that she erred in her classification of the pertinent terms as indicative of a true lease or a security lease or as equivocal.
[30] The chambers judge ultimately concluded that the impugned transaction was a security lease. She followed Re Bronson, in which the master (sitting as a registrar in bankruptcy proceedings) found a security lease after considering that the default clause secured the payment of the lease payments and the option price and that the lessor knew it would receive the vehicle’s full value and the full benefit of the lease payments in the event of default.
[31] The traditional analysis used in determining whether a lease is a true lease or a security lease is reflected in the following passage from Re Ontario Equipment (1976) Ltd. (1981), 125 D.L.R. (3d) 321, 33 O.R. (2d) 648 at paras. 8-10 (H.C.J.), aff’d (1982), 141 D.L.R. (3d) 766, 35 O.R. (2d) 194 (C.A.):
It is of the essence of a lease intended as security within the meaning of the Personal Property Security Act that the property in the subject of the lease is to pass ultimately to the lessee, who is obliged to pay the lessor what might be reasonably regarded as the purchase price with interest and carrying charges over the life of the lease. In such a case the transaction is not unlike a conditional sale agreement or hire purchase agreement.
What I consider to be a practical definition of the distinction between a true lease and a lease by way of security was adopted in Re Crown Cartridge Corp., Debtor (1962), 220 F. Supp. 914, by Croake D.J. from the decision of Referee Asa S. Herzog:
The test in determining whether an agreement is a true lease or a conditional sale is whether the option to purchase at the end of the lease term is for a substantial sum or a nominal amount. … If the purchase price bears a resemblance to the fair market price of the property, then the rental payments were in fact designated to be in compensation for the use of the property and the option is recognized as a real one. On the other hand, where the price of the option to purchase is substantially less than the fair market value of the leased equipment, the lease will be construed as a mere cover for an agreement of conditional sale.
The critical issue in every case is the intention of the parties and this depends upon the facts of the case. In Re Speedrack Ltd. (1980), 1 P.P.S.A.C. 109, 33 C.B.R. (N.S.) 209, 11 B.L.R. 220, for example, the facts led to the conclusion that the lease was a security for the financing of the ultimate purchase of the subject-matter, and the failure to register a financing statement left the security interest unperfected and subordinate to the interest of the trustee in bankruptcy.
[32] As I have noted, the master in Re Bronson considered the factors enumerated by Professor Cuming. However, the pivotal consideration for the master was the default clause in the lease agreement. He stated at para. 47:
It strikes me that it is clear from the default clause that this agreement secures the payment of the lease payments and the option price. If defaults occur, the full amount of the lease payments become due, the option price becomes due and the lessee will be given credit for the net sale price, but if that is insufficient to cover the amount due, it will still be liable for a portion of the residual price. The lessee will be given credit for the residual value if the net sale proceeds are less than the residual value. In that case the lessee would only be liable for the lease payments, not the residual value portion and the lessor would have sustained the loss.
[33] In arriving at that conclusion, the master at para. 41 referred to Standard Finance Corp. v. Econ Consulting Ltd., [1984] 4 W.W.R. 543, 28 Man. R. (2d) 99 (Q.B.) and, in particular, to the default clause in the lease in question:
In referring to the default clause of the lease in the Manitoba case, the court said at p. 548:
In particular, the lease (Ex. 1) contains an acceleration clause which, under its terms, purports to permit the plaintiff lessor, on default, to recover as liquidated damages all amounts due or to become due under the lease. As was pointed out in the article by Cuming “True Leases and Security Leases under Canadian Personal Property Security Acts” (1983), 7 Can. Business L.J. at p. 279:
However, while the relationship between the lessor and the defaulting lessee may be one of creditor and debtor, an acceleration clause should, at least in some cases, be viewed as foreign to the lessor-lessee relationship. Unlike a defaulting buyer or borrower, a lessee is generally not obliged under the rules of damages to pay a specific predetermined sum to the lessor. The lessor may well be entitled to damages for breach of contract, but there is no certainty that those damages will be assessed as the equivalent of all rental payments owing under the lease with or without deduction of an amount realized from the sale of the lease[d] chattels by the lessor.
Reference was made in the article to the decision of the Manitoba Court of Appeal in Can. Accept. Corp. Ltd. v. Regent Park Butcher Shop Ltd. (1969), 67 W.W.R. 297, 13 C.B.R. (N.S.) 8, 3 D.L.R. (3d) 304 (Man. C.A.), and to the remarks of Dickson J.A. at p. 310 (D.L.R.):
We do not suggest that all acceleration clauses are in the nature of a penalty and unenforceable. On the contrary, in a mortgage given to secure the due payment by instalments of a sum due, a provision making the total sum due enforceable on any default is not to be considered a penalty … The same holds true with respect to instalments of purchase price payable under a sale agreement. Here, however we are not dealing with a mortgage nor with a sale agreement. We are dealing with a lease, and in our opinion a provision accelerating the due date of rental payments on default is as foreign to a lease of chattels as to a lease of land.
[34] As is evident from the above passage, the master relied in part on the decision of Canadian Acceptance Corp. Ltd. v. Regent Park Butcher Shop Ltd. (1969), 3 D.L.R. (3d) 304, 67 W.W.R. 297 (Man. C.A.).
[35] However, as counsel for Daimler has demonstrated, Regent Park was specifically overruled by the Supreme Court of Canada in 1987 in Keneric Tractor Sales Ltd. v. Langille et al., [1987] 2 S.C.R. 440, 43 D.L.R. (4th) 171. In Langille, the issue was the proper calculation of damages for breach of a chattel lease. The Court decided that the law of damages for breach of real property leases ─ as modified by the 1971 decision of Highway Properties Ltd. v. Kelly, Douglas & Co., [1971] S.C.R. 562, 17 D.L.R. (3d) 710 ─ should apply equally to chattel leases, such that damages for the loss of the benefit of the lease over its unexpired term are recoverable. Thus, the court held that accelerated damages can be awarded to a chattel lessor, subject to the obligation to mitigate. Specifically, the court stated at 453:
The damages flowing from the breach of a chattel lease, like the damages flowing from the breach of a land lease, should be calculated in accordance with general contract principles. To the extent that Regent Park reflects a different approach it should not be followed.
[36] Consequently, the court awarded damages under ordinary contractual principles concerning damages for breach of contract. The court determined the lessee’s liability to be, in addition to any arrears, the value of the unpaid rentals under the leases (discounted for early receipt), minus the proceeds of sale, plus the expenses of repossession, repair and resale (Langille, supra at 457).
[37] As counsel for Daimler has argued, the basis for calculating damages does not distinguish a true lease from a security lease. The ability to claim accelerated damages in Langille was not a consequence of the character of the lease, i.e. a true lease or a security lease. Rather, it was simply the proper measure of damages for breach of a chattel lease. Generally, the basis for calculating damages can provide only some insight as to whether an impugned lease secures payment or performance of an obligation. I emphasize that it cannot serve as a decisive factor.
[38] Counsel for Mr. Cameron contends that the default provisions ─ in particular, the acceleration of lease payments and the obligation on the part of the lessee to compensate the lessor for the full amount of the Residual Value ─ has the combined effect, as in Re Bronson, of ensuring that the lessor receives full payment for the subject property. Mr. Cameron contends that it is the cumulative effect of these provisions, and not simply the acceleration of rent, that was considered to be significant in Re Bronson.
[39] It appears to me unhelpful to focus on default provisions and render them determinative of whether a lease is a security lease. The fundamental question is whether a lease secures payment or performance of an obligation.
[40] The decision in Child & Gower Piano Company Ltd. v. Gambrel, [1933] 2 W.W.R. 273 (Sask. C.A.) articulates this point at 281-82:
In Stroud’s Judicial Dictionary, vol. 3, p. 1815, it is stated that a security is “anything that makes the money more assured in its payment or more readily recoverable”. Security for a debt, in the ordinary meaning of the term, carries with it the idea of something or somebody to which, or to whom, the creditor can resort in order to aid him in realizing or recovering the debt, in case the debtor fails to pay; the word implies something in addition to the mere obligation of the debtor. When a person buys goods from a merchant, his promise to pay, whether express or implied, is not security, nor does the promise to pay become security merely because it is reduced to writing.
[41] In my view, it cannot be said that the default provisions in the lease in question create any separate security. They simply represent the calculation of the amounts owing by the lessee upon a breach of the agreement.
[42] As can be seen, the crux of Daimler’s argument is that the chambers judge erred in her characterization of the lease by placing undue emphasis on the default provisions of the lease and, accordingly, by failing to accord proper weight to the option purchase price.
[43] In my respectful view, the learned chambers judge did err in according such influence to the default provisions that they effectively decided the characterization issue.
[44] In British Columbia Personal Property Security Act Handbook, 4th ed. (Scarborough: Carswell, 1998) at 35-36, Professors Cuming and Roderick J. Wood provide insight on the role of the option purchase price in the characterization process:
A clause in a lease giving the lessee the option to purchase the goods at less than their expected market value (as determined at the date of execution) indicates that the lessee has acquired an equity in the goods not unlike that which he would have acquired under an instalment purchase contract. Consequently, the transaction is likely to be characterized as a security agreement. However, the fact that at the end of a lease term roughly equivalent to the useful life of the goods the lessee can purchase the goods at their then market value does not prevent characterization of the transaction as a security agreement. If one or more of the major indicia of a security agreement are present, the transaction may be a security agreement. Accordingly, if the lease is for all or the greater part of the useful life of the leased equipment and the lessee is obligated to pay rental equivalent to the capital cost of the goods and an appropriate credit charge, the fact that the lessee is given the right to buy the goods at the end of the term for their then small market price should play no role in the characterization process. A consideration of the option price is relevant to the characterization of the transaction only if the option can be exercised at a time when the goods have significant commercial value. It may be possible to show that the option price was not designed to ensure that the lessor is fairly compensated for his interest in the goods, but was included for some other purpose (such as satisfying income tax authorities). This provides strong evidence that the parties recognize that by the time the option is exercise[d] the lessor has been fully compensated through rental payments and that it matters little to either the lessor or the lessee that the option is or is not exercised.
[45] It is also instructive to reproduce the following passage on default provisions from Professor Cuming’s article at 278-79:
Since an economic realities or substance test for characterization of leases involves a close examination of all aspects of the relationship between a lessor and a lessee, it follows that lease provisions dealing with the rights and remedies of a lessor in the event of default cannot be ignored. If a lessor is given remedies equivalent to those of a secured seller or lender, there is some evidence that a security agreement is involved. However, if it is the only evidence pointing to this conclusion, the transaction should be characterized as a true lease. Default remedies cannot, by themselves, be a determinant because most lessees do not default; consequently, the other provisions in the leases are the ones which in practice govern the relationship of the parties. As is the case with other peripheral indicia of security agreements, default rights and remedies have corroborative value and are relevant to the extent that they help to tip the balance.
[Emphasis added.]
[46] In the instant case, it appears that the learned chambers judge accorded more than “corroborative value” to the default provisions. They did more than “tip the balance”. Instead, the default provisions played a determinative role in her decision that the impugned transaction was a security lease. It is important to bear in mind that the other factors considered by the chambers judge were classified as either equivocal or indicative of a true lease.
[47] In my view, having regard to the relevant considerations, the impugned transaction is a true lease that comes within the definition of s. 3 and, therefore, is excluded from Part 5 of the PPSA.
[48] Accordingly, I would accede to the appellant’s argument.
CONCLUSION
[49] For the foregoing reasons, I would allow the appeal. It follows that the answer to the question in the stated case is: No, Part 5 of the PPSA does not apply to the lease agreement that is the subject of this action.
“The Honourable Madam Justice Kirkpatrick”
I agree:
“The Honourable Madam Justice Prowse”
I agree:
“The Honourable Mr. Justice Low”
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