Patry v. General Motors Acceptance Corporation of Canada, Limited et al. [Indexed as: Patry v. General Motors Acceptance Corp. of Canada]

48 O.R. (3d) 370

[2000] O.J. No. 1618

Docket No. C30690

Court of Appeal for Ontario

Carthy, Laskin and Rosenberg JJ.A.

May 11, 2000

Sale of goods -- Sale by mercantile agent -- Conversion -- Boat owner delivering boat on consignment to boat dealer -- Boat included in inventory of boat dealer -- Dealer's inventory subject to chattel mortgage -- Mortgagee seizing and selling boat -- Boat owner's action against mortgagee for conversion dismissed -- Mortgagee entitled to rely on s. 2(1) of Factors Act which addresses circumstances where person who does not have good title may nonetheless give valid title or valid security -- Mortgagee acting in good faith -- Good faith not including due diligence requirement -- Sale of Goods Act, R.S.O. 1990, c. S.1 -- Factors Act, R.S.O. 1990, c. F.1, s. 2.

Personal property security -- Chattel mortgage -- Sale by mercantile agent -- Conversion -- Boat owner delivering boat on consignment to boat dealer -- Boat included in inventory of boat dealer -- Dealer's inventory subject to chattel mortgage -- Mortgagee seizing and selling boat -- Boat owner's action against mortgagee for conversion dismissed -- Mortgagee entitled to rely on s. 2(1) of Factors Act which addresses circumstances where person who does not have good title may nonetheless give valid title or valid security -- Mortgagee acting in good faith -- Good faith not including due diligence requirement -- Sale of Goods Act, R.S.O. 1990, c. S.1 -- Factors Act, R.S.O. 1990, c. F.1, s. 2.

P owned a boat, which he delivered to Inter-Marine, a boat dealer, to sell. The boat was treated as part of the inventory of Inter-Marine and the inventory was subject to a chattel mortgage held by GMAC. When Inter-Marine went bankrupt, GMAC seized and sold the boat, and P sued GMAC for damages for conversion. The trial judge concluded that the boat was the property of P and that it had been delivered to Inter-Marine on consignment. The trial judge rejected GMAC's defence that its sale of the boat was protected by s. 2(1) of the Factors Act. Under s. 2(1) of the Factors Act, a defence was available where a mercantile agent is in possession of goods with the consent of the owner; the goods are mortgaged in the ordinary course of the mercantile agent's business; the mortgagee had no notice that the mercantile agent did not have authority to give the chattel mortgage; and the mortgagee took its chattel mortgage in good faith. The trial judge held that all of the requirements of s. 2(1) had been satisfied except the good faith requirement. He concluded that good faith under s. 2(1) had a due diligence requirement that had not been satisfied because, although GMAC knew that some of the boats in the inventory were to be brokered, it did not exercise due diligence to find out whether Inter-Marine owned P's boat. The trial judge awarded P damages of $44,021.67. GMAC appealed.

Held, the appeal should be allowed with costs.

s. 2(1) of the Factors Act, like several provisions of the Sale of Goods Act, specifies the circumstances in which a person who has possession of but not title to goods may nonetheless sell or mortgage the goods and by doing so preclude the true owner from claiming compensation from the buyer or the mortgagee. It is a compromise between the principle that owners should not lightly lose their property and the principle that for commerce to be workable, persons who buy or take security in good faith must be protected even though their seller may have no right to sell or give security. In this case, GMAC's reliance on s. 2(1) turned on whether it took the chattel mortgage in good faith. The trial judge erred in concluding that good faith imports a due diligence requirement. Acting in good faith under s. 2(1) means no more than acting honestly. Good faith, which is not defined in the Factors Act, should be interpreted in the same way as good faith in the Sale of Goods Act , where s. 1(2) provides that a thing shall be deemed to be done in good faith when it is in fact done honestly whether it is done negligently or not. The two statutes have the similar purpose of facilitating commercial transactions, and good faith should not be interpreted more restrictively under one than under the other. The evidence here established that GMAC acted honestly. Even if a more expansive meaning of good faith was warranted, bad faith should only be found if the court can infer from the surrounding circumstances that the buyer or mortgagee suspected something was wrong and refrained from asking questions because it thought any inquiries would reveal a defective title. Even accepting this broader meaning, GMAC did not act in bad faith in the circumstances. Accordingly, the appeal should be allowed.

APPEAL from a judgment in an action for conversion.

Statutes referred to Factors Act, R.S.O. 1990, c. F.1, ss. 1(1), 2(1) Factors Act, 52 & 53 Vict., c. 45 (U.K.) Sale of Goods Act, R.S.O. 1990, c. S.1, ss. 1(2), 24, 25 Authorities referred to Bridge, The Sale of Goods (Oxford, 1997) Benjamin's Sale of Goods, 5th ed., Tony Guest ed. (London: Sweet & Maxwell, 1997) Fridman, The Sale of Goods in Canada, 4th ed. (Toronto: Carswell, 1995)

Edward M. Hyer, for appellants. David A. Tompkins, for respondent.

The judgment of the court was delivered by

[1] LASKIN J.A.: -- This appeal concerns a priority dispute between the appellant General Motors Acceptance Corporation of Canada ("GMAC") and the respondent Gaston Patry. Patry owned a boat, the "St. Tropez", which he delivered to Inter-Marine, a boat dealer, to sell. GMAC, which financed the inventory of Inter-Marine, held a chattel mortgage on the boat. When Inter- Marine went bankrupt, GMAC seized and sold the inventory, including the St. Tropez. Patry sued GMAC for damages for conversion. The trial judge concluded that Inter-Marine held the St. Tropez on consignment and that title remained with Patry. He awarded Patry damages of $44,021.67. Although GMAC raised several issues before us, this appeal turns on the narrow question of the meaning of "good faith" in s. 2(1) of the Factors Act, R.S.O. 1990, c. F.1, a statute rarely considered by this court. Section 2(1) provides that if a mercantile agent who possesses but does not own goods, sells or mortgages the goods and the requirements of the section are met, the buyer or the mortgagee is protected from any claim by the owner of the goods.

The Facts

[2] The main issue at trial was who owned the boat -- Patry or Inter-Marine -- when GMAC seized it in November 1991. Patry had owned the St. Tropez, a 32-foot motor cruiser, since 1985. In October 1989 he decided to sell it and buy a smaller boat that would be easier to handle. He asked Inter-Marine to sell the St. Tropez under an arrangement that Inter-Marine called the "partnership purchase program". Under the program Inter- Marine would refurbish and sell the boat and assure Patry a fixed return of $79,000 less refurbishing costs, regardless of the sale price. In return, Patry agreed to buy a new or used boat from Inter-Marine.

[3] The program, which Inter-Marine detailed in a letter to Patry dated October 24, 1989, provided that Patry could deliver the St. Tropez to Inter-Marine on consignment or as a trade-in for the boat he agreed to buy. The letter also provided that the St. Tropez "will be treated in all aspects as part of our inventory and will have the opportunity to be financed through GMAC."

[4] Patry decided to buy a 1990 Eclipse for approximately $43,500. He signed a standard marine purchase agreement on November 2, 1989. The agreement contained a box called "description of trade-in" in which the St. Tropez was listed. Another box called "trade-in allowance" showed a customer credit of $30,195.25. The agreement also contained a handwritten notation "balance due in full to customer upon completion of sale of St. Tropez."

[5] In mid-November Patry took possession of the Eclipse and eventually sold it. He also arranged for Inter-Marine to pick- up the St. Tropez. When Inter-Marine took possession of the St. Tropez it borrowed $73,700 from GMAC on the security of a chattel mortgage against the boat. Under the terms of the chattel mortgage Inter-Marine covenanted that it had clear title to the St. Tropez.

[6] Inter-Marine was unable to sell the St. Tropez. Patry, however, made no request for its return, although his lawyer wrote Inter-Marine in November 1990 demanding payment of the customer credit. In November 1991 Inter-Marine went bankrupt. GMAC seized the St. Tropez and sold it through an auction house in June 1992 for $40,500.

[7] At trial, GMAC contended that the purchase agreement of November 2, 1989 unequivocally showed that Patry had sold the St. Tropez to Inter-Marine as a trade-in for its purchase of the Eclipse and therefore Inter-Marine owned the boat when it gave GMAC the chattel mortgage. The trial judge, however, found the written documents ambiguous and therefore admitted parol evidence to assist him to decide whether Patry had sold the St. Tropez to Inter-Marine or had merely delivered it on consignment. Both Patry and the sales manager of Inter-Marine testified that Inter-Marine had taken the St. Tropez on consignment, not as a trade-in, and that the standard marine purchase agreement was used for convenience but did not reflect the true nature of the arrangement. The trial judge accepted their evidence and concluded that the arrangement concerning the St. Tropez was a "true consignment".

[8] He next considered whether GMAC could rely on s. 2(1) of the Factors Act. He concluded that GMAC had satisfied all the requirement of the section but one, the good faith requirement. He did not find that GMAC had been dishonest. Nonetheless, he found GMAC had acted in bad faith because, though knowing that some of the boats in Inter-Marine's inventory were to be brokered, it did not exercise due diligence to find out whether Inter-Marine owned the St. Tropez.

Discussion

[9] I am sceptical whether the trial judge's conclusion that Inter-Marine held the St. Tropez on consignment can be supported. If it was a consignment then Patry owned two boats, one of which he had not paid for, and the other he had not demanded back for two years. Even the sales manager for Inter- Marine conceded that characterizing the arrangement for the St. Tropez as a consignment made no commercial sense.

[10] However, even assuming that Inter-Marine held the St. Tropez on consignment, in my opinion, the trial judge erred in holding that GMAC could not rely on s. 2(1) of the Factors Act. Section 2(1) provides:

2(1) Where a mercantile agent is, with the consent of the owner, in possession of goods or of the documents of title to goods, a sale, pledge or other disposition of the goods made by the agent when acting in the ordinary course of business of a mercantile agent is, subject to this Act, as valid as if the agent were expressly authorized by the owner of the goods to make the disposition, if the person taking under it acts in good faith and has not at the time thereof notice that the person making it has no authority to make it.

[11] Section 2(1) of the Factors Act, like several provisions of the Sale of Goods Act, R.S.O. 1990, c. S.1, specifies the circumstances under which a person who has possession of but not title to goods may nonetheless sell or mortgage the goods and by doing so preclude the true owner from claiming compensation from the buyer or mortgagee. Section 2(1) reflects a compromise between two competing principles: one principle is that owners should not lightly lose their property; the other is that for commerce to be workable the law needs to protect persons who buy or take security on goods in good faith even though the seller may have no right to sell or give security: see Fridman, The Sale of Goods, 4th ed. (1995), at pp. 130-31.

[12] To rely on s. 2(1) and preclude Patry from claiming compensation from it, GMAC had to establish the following:

(i) Inter-Marine was a mercantile agent;

(ii) Inter-Marine was in possession of the St. Tropez with Patry's consent;

(iii) Inter-Marine pledged or mortgaged the St. Tropez to GMAC in the ordinary course of its business as a mercantile agent;

(iv) GMAC had no notice that Inter-Marine did not have the authority to give the chattel mortgage; and

(v) GMAC took the chattel mortgage in good faith.

[13] The trial judge found that the first four requirements had been satisfied and I agree with him. A mercantile agent is defined in s. 1(1) of the Factors Act to mean one who has "in the customary course of business as an agent, authority either to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods." Inter-Marine met this definition. Moreover, Inter-Marine had possession of the St. Tropez with Patry's consent. A pledge is defined in the Factors Act to include giving security on goods. Thus, the chattel mortgage to GMAC was a pledge under s. 2(1). And the trial judge found on the evidence that GMAC did not have notice Inter-Marine had no authority to give the chattel mortgage.

[14] Thus, whether GMAC could rely on s. 2(1) turned on whether it took the chattel mortgage in good faith. Normally, good faith and notice will coincide. If a party has notice of an agent's lack of authority, it may not claim to be acting in good faith: see M.G. Bridge, The Sale of Goods (1997), at pp. 447-48. Here, however, GMAC did not have notice of Inter- Marine's lack of authority. Still, Patry contends that GMAC did not act in good faith.

[15] Patry submits and the trial judge found that good faith under s. 2(1) imports a due diligence requirement. I disagree. In my view, acting in good faith under s. 2(1) means no more than acting honestly. Good faith is not defined in the Factors Act but it is defined in the Sale of Goods Act. Section 1(2) of the Sale of Goods Act provides that "a thing shall be deemed to be done in good faith within the meaning of this Act when it is in fact done honestly whether it is done negligently or not." I think good faith under the Factors Act should be interpreted in the same way: see M.G. Bridge, supra, at pp. 447-49.

[16] The two statutes have a similar purpose, to facilitate commercial transactions. And the contexts in which the good faith requirement appears in the two statutes are similar. Under s. 2(1) of the Factors Act, a mortgagee acting in good faith can acquire valid security though the mortgagor did not have the authority to give it. Under s. 24 of the Sale of Goods Act, a buyer acting in good faith can acquire good title to goods even though the seller's title was defective; and, under s. 25, a person receiving goods in good faith may acquire good title though the goods may previously have been sold to or be subject to a lien in favour of another person. In other words, both s. 2(1) of the Factors Act and ss. 24 and 25 of the Sale of Goods Act address circumstances in which a person who does not have good title to goods may nonetheless give valid title or valid security to parties acting in good faith and without notice of a defective title. Therefore, good faith should not be interpreted more restrictively under one of these acts than under the other.

[17] If good faith under the Factors Act means acting honestly, even if negligently, then GMAC is entitled to rely on s. 2(1) to defeat Patry's claim. The evidence shows that GMAC acted honestly. Neither Patry nor the trial judge suggested otherwise.

[18] Even if a more expansive meaning of good faith is warranted, bad faith should only be found if the court can infer from the surrounding circumstances that the buyer or mortgagee suspected something was wrong and refrained from asking questions because it thought any inquiries would reveal a defective title. Benjamin's Sale of Goods, 5th ed. (1997), at p. 346 considers this broader meaning in discussing "good faith" under the similarly worded English Factors Act of 1889:

The expression "in good faith" is not defined in the Act of 1889 but would appear to mean "honestly," that is to say, not fraudulently or dishonestly. It is submitted that negligence or carelessness is not in itself sufficient evidence of bad faith and the fact that the person dealing with the agent did not behave with the prudence to be expected of a reasonable man does not mean that he acted in bad faith. On the other hand, negligence or carelessness, when considered in connection with the surrounding circumstances, may be evidence of bad faith. But the facts and circumstances should then be such as to lead to the inference that the disponee must have had a suspicion that there was something wrong, and that he refrained from asking questions because he thought that further enquiry would reveal an irregularity.

(Footnotes excluded)

[19] Even adopting this broader meaning, the evidence in this case falls far short of showing that GMAC suspected or should have suspected Inter-Marine did not have good title to the St. Tropez. GMAC did know that Inter-Marine was brokering, and thus did not own, some boats in its inventory. But Inter-Marine had assured GMAC it would only borrow money on the security of boats it owned. No evidence was led that Inter-Marine had previously given security on a boat that it did not own. And in the document evidencing the chattel mortgage Inter-Marine warranted good title to the St. Tropez. At best, GMAC was aware of one isolated and unrelated irregularity concerning its financing of Inter-Marine's inventory. That isolated incident did not warrant further inquiry about the St. Tropez.

[20] And what if GMAC had inquired about title to the St. Tropez? Presumably it would have been given a copy of the November 2, 1989 purchase agreement, which on its face showed that Inter-Marine had received the St. Tropez as a trade-in. To insist, as Patry submits, that GMAC was obliged to make further inquiries of Patry himself, goes far beyond what is required to satisfy the good faith requirement in s. 2(1) of the Factors Act. Indeed, to impose this obligation on GMAC would defeat the very purpose of s. 2(1), which is to permit business to be conducted expeditiously without extensive and time-consuming inquiries into title.

[21] I would allow the appeal, set aside the judgment of MacKenzie J. and dismiss the action. GMAC is entitled to its costs of the trial and the appeal.

Order accordingly.