TO SEIZE OR NOT TO SEIZE?
THAT IS THE QUESTION
CONSUMER GOODS AND THE PERSONAL PROPERTY SECURITY ACT
Consumer Goods: To Seize or to Sue and Standard of Conduct
When a consumer enters into any one of a number of types of ‘rent to own’ agreements (i.e., a car, appliance or furniture lease, etc.), the business is likely to rely on a ‘security lease’ to complete the transaction. A security lease is a form of contract that gives customers the option to buy the consumer goods at the end of the lease term. This form of lease provides the business owner with a security interest in the goods being leased as a means of redress should the customer default on their payment obligations under the agreement.
However, a security lease is not an open door invitation for the secured party (i.e., the business owner) to take whatever steps it wants against a defaulting customer. Two separate but related sets of considerations need to be kept at the forefront of any decision-making process. The first is the oft-repeated ‘seize or sue,’ and the second is the legal standard of conduct expected of the secured party.
Shakespeare Would be Proud: To Seize or to Sue?
Since the introduction of the Personal Property Security Act (the “Act”), a new set of ‘seize or sue’ rules for security agreements involving consumer goods has governed British Columbia businesses and consumers. Importantly, under the Act: (1) the ‘seize or sue’ provisions only apply to consumer goods; and (2) they only apply to transactions that use a security agreement, of which a security lease is included.
Consumer goods are defined in the Act as goods that are used or acquired for use primarily for personal, family or household purposes. The Act also holds that a security agreement is any agreement that creates or provides for a security interest. As an example of the distinctions raised by the Act, the clear sale of a commercial vehicle to a business, relying only on a Motor Vehicle Purchase Agreement, would not be subject to the seize or sue provisions, whereas a 48-month security lease of a vehicle to a consumer to be used for personal or family purposes would.
Once it is determined that the goods are consumer goods, and that they are being acquired by way of a security agreement (i.e., a security lease), the secured party is thereafter limited to one of two options in the event the customer fails to make payment under the lease. It can:
- seize the goods in full satisfaction of the remaining amount owed; OR
- sue the customer for the outstanding amount owed to the secured party;
remembering always that it cannot do both. Moreover, in the event the customer has already paid two-thirds or more of the amount of the obligation secured, the secured party cannot seize the goods. It can only sue for the remainder.
Lest Ye Be Judged: The Standard of Conduct
Having decided on which option (seize or sue) to utilize against a defaulting party, the secured party has only taken the first steps in recovering the debt. Its standard of conduct thereafter may well determine whether it collects the debt. As will be seen below, the ‘commercially reasonable’ test is the common thread that holds the standard together. In addition, relevant standards of conduct under a security agreement apply almost exclusively to the secured party. This means the defaulting customer in possession of the vehicle is rarely held to the same standard as the secured party.
The test for commercial reasonableness has been determined to be an objective and pragmatic one. It asks, ‘given the facts of the matter, what would the reasonably prudent business person in similar circumstances do?’ In the case of a secured party realizing on their security, the test to meet is a high one: they must act like an agent or fiduciary of the defaulting customer for the purposes of the sale.
Next, and carrying on from commercial reasonableness, the Act requires actions be taken in ‘good faith’. In the context of a secured party realizing on its security, this requires that they act in a manner that cannot be seen to be highhanded, spiteful or vindictive. However, whereas ‘commercially reasonable’ is a specified standard, ‘good faith’ is subjective, the result being that a court could find a secured party negligent or liable for failing to meet the commercially reasonable test, while at the same time finding that they did act in good faith. Nonetheless, where the secured party is in a superior bargaining position, extra caution should be taken to ensure that it acts reasonably which leads to acting in good faith.
Finally, many security agreements contain language that purports to expressly limit a secured party’s obligations to the customer or relieves them of any liability for improper actions. However, British Columbia courts have shown a strong willingness to ‘read down’ or interpret provisions of the security agreement so as to find, for example, an implied obligation to act in a commercially reasonable manner in a particular circumstance. This is especially true in situations of standard form contracts where the customer has little or no ability to negotiate the terms of the contract presented to them by the business that is selling the consumer goods. Attempts to limit these risks should include contract clauses to the effect that ‘this agreement contains the entire agreement between the parties’ and ‘the secured party may act in its sole discretion in enforcing its rights in this agreement.’
Play It Again Sam
Normally, a secured party, like a lessor, is in a position of some power or control. However, in British Columbia, consumer protection for security agreements involving consumer goods has evolved to place significant checks and balances on that power. Seize or sue applies to leases and other security agreements involving consumer goods. When a business has to seize consumer goods, it must do so in good faith and in a commercially reasonable manner. Once seized, the secured party cannot sue for the remaining amount owed, although it should be remembered that these rules do not apply to business deals. For more information on British Columbia’s seize or sue rules, drop us a line and one of our team members will be happy to help out.