Canada: Assignments Of Conditional Sale Contracts

Last Updated: February 18 2015
Article by Stephen Crawford

In the automotive industry, it is common practice for a car dealer to enter into a lease or conditional sales contract with a customer and then assign the right to receive the stream of payments from that contract to a financing company. However, this type of transaction, if not carried out properly, may create risk for the financing company as a result of the provisions of the Personal Property Security Act (the "PPSA"). If the financing company does not perfect its security interest under the PPSA, it may lose its right to the stream of payments if the dealer were to go bankrupt.

Section 2(b) of the PPSA provides that, subject to certain exceptions, the PPSA applies to a transfer of an account or chattel paper even if the transfer does not secure payment or performance of an obligation. Chattel paper is defined in the PPSA as a document that evidences both a monetary obligation and a security interest in or a lease of specific goods. This is the case with leases and conditional sales contracts. Pursuant to section 20(1)(b) of the PPSA, a trustee-in-bankruptcy has priority over unperfected security interests. Thus, the financing company purchasing the stream of payments under a lease or a conditional sales contract will need to perfect the assignment from the dealer. Perfection with respect to these types of instruments can be carried out by either registration or possession. In the current environment, possession is not usually practical, as the financing company would need to possess the only original copy of the contract, and it is often the case that multiple original copies are signed. As such, perfection by registration is usually a better option. This may still cause complications for the financing company, as PPSA searches then need to be done and any necessary waivers obtained. When a financing company deals with hundreds or even thousands of dealers, this can become prohibitively expensive and time–consuming.

But will perfection always be necessary in these types of transactions? The case of Re Fifth Dimension Technologies Inc.1 involved a somewhat similar situation in which Hewlett-Packard ("HP") defeated the claim of a trustee-inbankruptcy by successfully arguing that the PPSA should not apply to the transaction in question. At first blush, the case might seem to have application to the automotive context; but upon further analysis, it becomes clear that the exception used by HP in this case would not apply to the types of transactions that normally take place in the automotive industry. Perfection against a dealer is still necessary. Nevertheless, the case presents an alternative way to structure transactions that would make PPSA registration unnecessary.

The facts in Fifth Dimension are somewhat complex due to the nature of HP's distribution system. The government wished to lease some HP computer equipment for some of its Indian and Northern Affairs offices; but HP's distribution system forced this type of computer equipment to be sold to authorized distributors, who then sell it to resellers, who then sell it to the end user. The government was unable to purchase the equipment directly from HP or the authorized distributors. One reseller, Fifth Dimension Technologies (5D), won the contract with the government. Thus, after HP sold the equipment to the distributor, 5D purchased the equipment from the distributor. In order to facilitate this purchase, HP provided funds to 5D slightly in excess of the purchase price. 5D later went bankrupt, and the trustee-in-bankruptcy argued that the funds transferred from HP to 5D were a loan that would engage the PPSA. On the other hand, HP argued – and the court ultimately accepted – that HP was purchasing the equipment back from 5D and then leasing it to the government. In other words, HP had sold the computer equipment to the distributor, who sold it to 5D, who then sold it back to HP for a profit.

HP's argument in Fifth Dimension was heavily supported by the facts. This type of transaction was commonplace for HP, which was happy to provide a profit margin to resellers like 5D because the resellers had gone through the work of finding customers. In fact, the inclusion of a profit margin for 5D in the funds paid to it indicates an outright purchase, since it would make no commercial sense to loan 5D a profit margin. The relevant documentation, including financial records, invoices and a trust agreement signed by 5D and HP, along with the actions of the parties and the lack of any loan documentation, made it clear that the transaction was meant to be an outright sale. Justice Polowin also found the firsthand evidence of HP's employees more credible than the hearsay testimony of the trustee-in-bankruptcy.

This finding on the nature of the transaction is important because section 4(1)(i) of the PPSA provides an exception to the application of the PPSA that applied to this situation. Section 4(1)(i) provides that the PPSA does not apply to an assignment of an unearned right to payment to an assignee who is to perform the assignor's obligations under the contract. This exception contemplates the replacement of one account holder for another – similar to the replacement of one secured party for another. Thus, there is no need for registration because the underlying transaction will already have been registered under the PPSA (or, if there was no reason to register initially, then there will be no reason to register upon assignment).

Fifth Dimension is one of the only reported cases to use this provision of the PPSA to prevent the statute's application. The key difference between this case and the transactions that would normally take place in the automotive industry is that HP purchased the equipment outright and then leased it to the customer, rather than merely purchasing the right to a stream of payments. This would mean that, in our automotive example, the financing company would need to purchase title to the car – which is usually undesirable for a number of reasons relating to liability, insurance and tax. Thus, although this case presents an alternative way to structure transactions, a financing company purchasing the right to streams of payments under conditional sales contracts from a dealer will still need to register its security interest against the dealer, or else structure the transaction as a loan and security agreement directly with the underlying consumer.


1 Re Fifth Dimension Technologies (2002), 4 PPSAC (3d) 31, [2002] OJ No 1260 (Ont SCJ).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions