CONSUMER PROTECTION LEGISLATION DOES NOT NECESSARILY RELIEVE AN ASSIGNOR FROM THE OBLIGATION TO HONOUR A GUARANTEE TO PAY AN ASSIGNEE

C.L. Hagan Transportation Ltd. v. Canadian Acceptance Corp. [1974] SCR 491, 1973 CanLII 151 (SCC)

Statutory protections for purchasers do not necessarily extend to sellers who assign financing documents to assignees. The Supreme Court of Canada held that an assignor was still bound to pay the assignee under a chattel mortgage even though the (pre-PPSA) Saskatchewan Limitation of Civil Rights Act made the purchaser’s primary obligation unenforceable. The assignment contained a personal guarantee of payment which was enforceable.

Drafters should ensure that clients are aware of any indemnity or guarantee clauses in an assignment of financial obligations. The assignee will want such protections, while the assignor will attempt to limit or avoid them, to protect itself from liability should there be a default on the primary obligation.

In C.L. Hagan Transportation Ltd. v. Canadian Acceptance Corp., (1974) (SCC), the defendant Hagan sold a tractor to the MacDonalds, which they financed with a chattel mortgage and promissory note. Hagan then assigned the mortgage and endorsed the promissory note to Canadian Acceptance Corporation Limited (CAC). The MacDonalds eventually defaulted on payment for the tractor. CAC brought proceedings against Hagan (the assignor) to recover payment under the assignment agreement. The trial court ruled in favour of Canadian Acceptance Corporation that the Limitation of Civil Rights Act did not extend to an assignee and assignor where a personal covenant for payment existed. Hagan appealed the decision to the Saskatchewan Court of Appeal and the Supreme Court of Canada, but they were unsuccessful at each level. The Supreme Court of Canada stated: “There is an analogy (which I need not pursue) to the present case in bankruptcy cases which hold that the discharge of a primary debtor by operation of law does not release the guarantor.”

To read the full case on CanLII, click here.