Williams and Glyn’s Bank Ltd. v. Belkin Packaging Ltd., [1983] 1 S.C.R. 661

Supreme Court of Canada

Williams and Glyn’s Bank Ltd. v. Belkin Packaging Ltd., [1983] 1 S.C.R. 661

Date: 1983-05-17

Williams and Glyn’s Bank Limited Appellant;

and

Belkin Packaging Limited Respondent.

File No.: 16587.

1982: January 28; 1983: May 17.

Present: Laskin C.J. and Dickson, Estey, McIntyre and Chouinard JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR BRITISH COLUMBIA

Bills of exchange—Holder in due course—Defect in title—Holder involved in negotiating terms of note—Plan devised for replacement of old notes with new ones recognizing revised payment schedules—Default before change effected—Suit on old series of notes—Whether or not bank holder in due course—If not, whether bank can recover in absence of Belkin’s defences—Bills of Exchange Act, R.S.C. 1970, c. B-5, ss. 56, 74.

Respondent agreed to import British-made machines, with a deferred payment scheme involving the issuance of promissory notes. The scheme, designed by the purchaser, the vendor and the Bank to meet their special requirements, provided that the Bank, with the consent of the U.K. Export Credits Guarantee Department, would exchange the notes issued by the purchaser for new ones reflecting changes in delivery schedules. Before the notes issued reached maturity, respondent advised the bank of the need of an exchange. Respondent did not agree to the bank’s conditions and the old notes fell due. The Bank sued on the old series of notes and respondent unsuccessfully applied to stay the action pending arbitration as provided for in the contract. At issue here was whether or not the Bank was a holder in due course, and if not, whether the Bank as holder can recover on the notes because none of the defences could be raised against the Bank.

Held: The appeal should be dismissed.

The Bank was not a holder in due course as defined in s. 56 of the Bills of Exchange Act. As a co-author of the financial scheme, the Bank had notice of all the arrangements, including the defect which centred upon the

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negotiability of the note and which was an integral part of the scheme.

The Bank, as a holder for value not in due course, was subject to the equities attaching to the promissory note but not to the mere personal defences which would arise between Belkin and the vendor on any issue arising as between them directly. Although it held the note “until maturity”, the Bank was still not free from the “defects” or “equities” arising at the time the notes were negotiated. The restrictions arising from the plan to issue new notes recognizing a revised schedule for deferred payments could not be said to have been performed until it was determined whether or not the deferred payments would be further revised, and therefore whether or not further notes would be exchanged.

Whether or not the exchange process was complete was a matter for arbitration, notwithstanding any inference logically to be made as to the contract’s completion from the execution by the Bank of certain notes. The issue as to the extent to which a holder for value was subject to the contractual defences available in an action as between the parties to the promissory note was not before the Court.

Miliangos v. George Frank (Textiles) Ltd., [1975] 3 All E.R. 801; Gatineau Power Co. v. Crown Life Insurance Co., 1945 CanLII 33 (SCC), [1945] S.C.R. 655; Alcock v. Smith, [1892] 1 Ch. 238; Standard Bank of Canada v. Wettlaufer (1915), 33 O.R. 441; Assaf v. Sulman and Levant, 1943 CanLII 332 (ON CA), [1944] 1 D.L.R. 402; Interprovincial Building Credits Ltd. v. Soltys (1967), 1967 CanLII 602 (MB QB), 64 D.L.R. (2d) 194; Holmes v. Kidd (1858), 3 H. & N. 891; Federal Discount Corporation Ltd. v. St. Pierre and St. Pierre, 1962 CanLII 124 (ON CA), [1962] O.R. 310; Edcal Industrial Agents Ltd. v. Redl and Zimmer (1967), 1966 CanLII 413 (AB SCAD), 60 D.L.R. (2d) 289, referred to; Ashley Colter Ltd. v. Scott, 1942 CanLII 30 (SCC), [1942] S.C.R. 331; Nova (Jersey) Knit Ltd. v. Kammgarn Spinnerei GmbH, [1977] 2 All E.R. 463, distinguished.

APPEAL from a judgment of the British Columbia Court of Appeal (1981), 1981 CanLII 451 (BC CA), 123 D.L.R. (3d) 612, 28 B.C.L.R. 96, allowing an appeal from a judgment of McKenzie J. Appeal dismissed.

D.W. Roberts, for the appellant.

D. McK. Brown, Q.C., and Dan Gleadle, for the respondent.

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The judgment of the Court was delivered by

ESTEY J.—The appellant Bank, hereinafter referred to as “the Bank”, by its action on several promissory notes in the total amount of about £713,700, raises the issue of enforceability of those notes as a holder in due course or, failing that, as a holder for value, any conditions attaching to the notes having been performed. The respondent, Belkin, is the purchaser of a paper-making machine (and is hereinafter referred to as “Belkin”), and the vendor of that machinery is a corporate group including Millspaugh Limited (and is hereinafter referred to as “the vendor”). The Bank succeeded at trial but lost in the Court of Appeal, and now brings its appeal here. Certain facts of the transaction take on crucial significance, but to bring them into focus on the issues of law arising, it will be necessary to sketch out the history of the transaction.

By a contract dated July 31, 1974 Belkin agreed to buy a paper-making machine from the vendor, and under this contract was required to pay ten per cent of the total price in cash together with some other payments not here relevant, and the balance of the purchase price to be paid on a deferred basis by the issuance of a number of promissory notes representing semi-annual instalments of principal and interest as specified in the contract. The promissory notes were to be insured by the Export Credits Guarantee Department of the United Kingdom government, hereinafter for brevity referred to as “ECGD”. I omit all reference to the mechanics of the transaction which have no bearing on the issues to be encountered. The notes were duly issued and delivered and no difference arises between the parties as to the form of the notes or their delivery. The two significant portions of an extensive contract are as follows:

4.04 The DEFERRED PAYMENTS of the balance of the purchase price of the UK EQUIPMENT, by ten equal semi-annual instalments, commencing on the earlier of six months after the START-UP or 12 months after final delivery of the UK EQUIPMENT together with interest on the unpaid balance of the purchase price

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of the UK EQUIPMENT at a rate which will yield 7% per annum to a lender in the United Kingdom after deduction of withholding tax payable in Canada, such interest to be calculated semi-annually on 100% of the said balance from the date of completion of shipment of 60% of the value of the UK EQUIPMENT.

4.05 On or before the 1st day of October, 1974, the Buyer will deliver to the Seller promissory notes dated as of the respective payment dates and in the respective amounts for principal and interest as provided in paragraph 4.04.

The principal issues are:

a) Is the Bank a holder in due course of the promissory notes and therefore not faced with overcoming any of the difficulties which might be encountered were the vendor to attempt to collect on the notes themselves against the purchaser, Belkin?

b) If the answer to the first question is in the negative, then may the Bank as the holder recover on the notes on the basis that none of the defences, which the facts will reveal might arise in Belkin, may be raised against the Bank even though it is not a holder in due course but only a holder for value?

c) Presupposing that the Bank may recover judgment on these notes, which are payable in pounds sterling, is the appropriate date for conversion into Canadian dollars for the purpose of calculating the judgment to be the date of breach or the date of judgment?

Difficulties and delays arose in the performance of the contract, and it will be convenient to outline these by quotations from the judgment at trial. Concerning the initial program for the shipment of the machinery, the learned trial judge stated:

Shipment was programmed to begin in June of 1975 and completed (after an agreed extension) by 31 December 1975. So the only reference date which carried any degree of certainty was the “programmed date” of 31 December 1975.

Apart from the difficulty in maintaining the schedule for shipment of the parts of the machine was the question of providing the vendor with

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these promissory notes as soon as possible after the contract was executed so as to allow the vendor to discount the notes at the Bank to raise the necessary capital to build the machine. Belkin, as purchaser, had an interest in not wishing to expose itself to making payments on the notes until it had received a productive machine. This of course conflicted with the interest of the vendor who needed the notes to discount to the Bank in order to finance its operations under the contract. Considerable negotiations took place from the very outset between the parties to the contract and the Bank. The trial judge stated:

Ideas to combine these two prerequisites were offered and rejected and the bank not only was kept advised of the ideas passing between the seller and buyer but it was participating in the search for a solution and offering suggestions. Upon its entry into this matter, before the first contract was executed, the bank offered some explanation to Millspaugh about “an escrow arrangement”. The bank rejected a suggestion from Belkin which would have placed a qualification on the face of each note allowing the due date to be automatically altered, that is postponed, if delays occurred in shipment of the machine.

A further conflict of positions arose on the part of the Bank who, above all other considerations, wanted to have in its possession, prior to advancing any moneys to the vendor, promissory notes enforceable by the Bank against Belkin. It will be seen from the above excerpt that the commencement of these negotiations pre-dated the execution of the contract of sale. Indeed it was the Bank who, in the words of the trial judge, first “suggested that Belkin accept Millspaugh’s programmed dates as firm shipment dates for the purpose of dating and issuing the notes”. Numerous other suggestions were made and dropped at the objection of one party or the other. The trial judgment continues:

The notes as finally drawn were the work of many heads—that of Millspaugh, Belkin and the bank and they were in a form acceptable to ECGD. The first note of the series is here reproduced:

“Note No. P-1 July 17, 1975

On December 31, 1976, we promise to pay to the Order of MILLSPAUGH LIMITED, the sum of

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121,469.00 Pounds Sterling at the Williams & Glyn’s Bank Limited, 5/10 Great Tower Street, London, England.

This Promissory Note is issued pursuant to paragraph 4.05 of the contract made the 31st day of July, 1974 between Millspaugh Limited as Seller and the undersigned as Buyer and represents a principal payment of the purchase price.

BELKIN PACKAGING LTD.

“Morris Belkin” ”

Even after the issuance of the notes the parties maintained their different positions of interest with respect to their negotiability as will be seen from the following excerpt from the judgment at trial:

The bank advised ECGD of Belkin’s insistence that the notes only be released to Millspaugh if the undertakings to Belkin were received and “as these undertakings conflict with (ECGD’s) requirement that there should be no restriction on the negotiability of the Promissory Notes …” the bank sought ECGD’s “approval of the undertakings.”

ECGD replied that it was “prepared to accept the conditions contained in Belkin’s letters … and agree that these will not be regarded for bank guarantee purposes as restricting the negotiability of the notes.”

The matter was finally settled to the satisfaction of all three parties by a letter dated July 25, 1975 from the Bank to the vendor and thereafter communicated by the vendor to Belkin, although Belkin had requested the Bank to give the undertaking to Belkin. The essential part of the undertaking is as follows:

In connection with the Promissory Notes (“Notes”) which we are to purchase from you under these facilities, we confirm that:—

1. We will hold each of the Notes until its maturity date unless it is required to deliver such Notes or any of them to the Export Credits Guarantee Department by the terms of its guarantee;

2. We will not sell, transfer, assign or encumber the Notes or any of them other than a sale or transfer of the Notes to the Export Credits Guarantee Department or to Millspaugh Limited;

3. If and so often as the deferred payments under the Equipment Purchase Contract of 31st July 1974 are revised and subject to the consent of the Export Credits Guarantee Department, we will exchange

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the Notes or such of them as are to be altered for new notes drawn by Belkin Packaging Ltd. and payable to Millspaugh Limited in the amounts representing the deferred payments properly payable under the Equipment Purchase Contract.

It is understood that this undertaking will cease to be effective as soon as the final repayment dates for the Notes have been established and this letter should then be returned to us for cancellation.

On the mechanics of giving the undertaking, the trial judge observed:

As matters turned out the bank was willing to give its undertaking only to its customer Millspaugh, who, in turn, gave the same undertaking to Belkin who made no objection to this alteration.

The purpose of the whole exercise, of which a lot of detail has been excluded from the foregoing account, was to create a scheme which would enable Millspaugh to establish with the bank a “financial facility” which would purchase the notes at par from Millspaugh, without recourse to Millspaugh, and which would allow Millspaugh to draw on the proceeds of the purchase as shipment proceeded and at the same time would protect Belkin from having any obligation to honour the first and subsequent notes until enough time had passed to reach “the earlier of six months … or 12 months etc.” The bank would purchase the immature notes in order of maturation. It took about 10 months to mould the scheme into its final shape and certainly the bank had as large and as competent a hand in this process as anyone.

After the notes had been delivered under this scheme whereby the date of payment was the programmed date for delivery of the machine plus twelve months, the vendor gave a warranty to the Bank that:

We know of no restriction on the negotiability of the bills of exchange or promissory notes listed on the attached appendix.

Belkin’s solicitors furnished the Bank with a letter of opinion which stated in part:

We are of the opinion that the Promissory Notes, when so signed and sealed and delivered to you, are

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validly and properly issued by Belkin Packaging Ltd. and constitute legally enforceable obligations of Belkin Packaging Ltd. in accordance with the laws of Canada.

The narrative continues:

On November 17, 1975 the bank notified Millspaugh of its purchase of the first note for its full principal value and its deposit of the proceeds into Millspaugh’s account. When the bank purchased this note, maturing 31 December 1976, it knew that the series of notes of which this was the first was to be exchanged for a similar set with the first maturity 15 March 1977 and 6 monthly thereafter. From the bank’s point of view, when nothing had been finalized by 31 December 1976 with respect to the exchange of notes, the first note of the old series was noted for non-payment. On 30 December 1976 the bank was advised that the old notes were to be exchanged for new notes with the first due on 15 March 1977. Since the ECGD approval of the exchange had not by then been received by the bank, the old note due on 31 December 1976 was presented and when not paid then was noted for non-payment. Later on, when the ECGD approval for the exchange of notes was received, the bank offered to exchange the old immature notes for those of the new notes which had not matured so long as the bank received payment for the new note due on 15 March 1977. Belkin was not prepared to accept this suggestion so the bank never received the new notes and it bases this lawsuit on the 10 old notes none of which have been paid.

There is no doubt that the bank knew before 31 December 1976 of Belkin’s intention to substitute new notes for old nor is there doubt that the bank would have accepted them before 31 December 1976 had the exchange been offered by Belkin in time to accommodate the obtaining of ECGD approval. Why did Belkin not offer the exchange earlier? The answer to that begins with the reminder that it was essential that a delivery date be determined so that effect could be given to 4.04 which stipulated that no obligation to pay would arise until 12 months had elapsed after final delivery. As a consequence of discussions between Belkin and Millspaugh a final delivery date was agreed upon and new notes, keyed to that date, were drawn by Belkin with the first to fall due on 15 March 1977 and these new notes were sent to Belkin’s bank in London on 29 June 1976 to be exchanged for the old notes. On 10 March 1977 Belkin instructed its London bank not to pay any of the notes until Belkin gave authorization. Belkin’s reason

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was “because of the delay in the commencement of commercial production on all grades of the new paper machine.” The new notes never came into the bank’s hands.

At trial it was concluded that the undertaking by the Bank and the vendor to retain and exchange the notes from time to time as necessary until the contractual conditions had been met by the vendor, were “collateral arrangements or undertakings only and that they cannot be successfully raised by Belkin against the bank’s claim”. The trial court went on to find that the Bank was the holder of the notes in due course and that the undertaking of the Bank with reference to the right in Belkin to exchange the notes:

… did not, in my view, constitute “a defect in the title of the person who negotiated it” and no authority has been cited to me which is supportive of a contrary view.

The learned trial judge also found, notwithstanding the finding quoted above to the effect that the Bank entered the negotiations well before the formation of the supply contract, that:

The bank came into the picture after Belkin and Millspaugh had settled the terms of the supply contract and in no way can the bank be identified as being bound by its terms.

With respect, there is evidence in the record to support the earlier finding by the learned trial judge already quoted above. A further clause in the supply contract entitled either party to take differences arising under the contract to arbitration. That clause reads as follows:

Any dispute or differences arising out of or in connection with this contract and which cannot be settled by direct negotiations between the parties shall be submitted to arbitration according to the rules of the International Chamber of Commerce in Paris. The arbitration court will hold office in Vancouver, British Columbia.

The record reveals only that differences have arisen between the parties to the supply contract as to the performance thereunder by the vendor, and these have been put in arbitration under the British Columbia Arbitration Act. Belkin moved to stay the proceedings now before this Court and this issue was ultimately disposed of by the Court of Appeal of British Columbia without further

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appeal, by a dismissal of that application. The arbitration is therefore proceeding. The trial court concluded that the Bank was entitled to recover as holder in due course, and accordingly judgment was entered in favour of the Bank in the amount of 713,728.20 pounds sterling to be converted to Canadian dollars at the date of judgment.

The majority of the Court of Appeal, after noting on the earlier application by Belkin to stay these proceedings pending the outcome of the arbitration proceedings that the issue as to whether the Bank was a holder in due course was “one which must be decided as between the parties by the court”, then determined that the Bank was not a holder in due course. The majority, speaking through Macdonald J.A., stated:

… the restrictions affecting the notes when they were discounted by the Bank constituted a defect of title and, as the Bank took the notes with knowledge of those restrictions, it did not take them as a holder in due course. Subsequent events, including fulfilment of the undertaking, could not raise the Bank’s status to holder in due course.

The majority of the Court concluded:

A dispute has arisen between Millspaugh and Belkin Packaging with respect to the date of start-up or date of final delivery which dispute has not been resolved by negotiation. Such new notes as are required by the terms of the contracts will be issued to Millspaugh upon determination of date of start-up or final delivery as required by the contracts. The new notes will be issued in accordance with the award of an arbitration board under paragraph 23.01.

In my opinion the Bank, not enjoying the status of holder in due course, is claiming through Millspaugh and should only be entitled to recover under the notes if these defences are overcome.

Therefore it is my opinion that the most expeditious and just way to determine Belkin Packaging’s indebtedness to the Bank is to await the result of the arbitration proceedings. I would therefore allow the appeal, set aside the judgment, and grant the alternative declaration.

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Hutcheon J.A., while agreeing that the Bank is not a holder in due course, found that the conditions attaching to the notes had been fulfilled and consequently the notes were enforceable separately from the contract and the proceedings with reference thereto in the arbitration. His Lordship found that the arrangements, which were later embodied in the undertakings of July 29, 1975, were best set out in a letter passing from the vendor to Belkin on February 14, 1975 which stated in part:

… and should the final shipment be made later than the programmed date, we agree that a further set of Promissory Notes be raised bearing payment dates revised in accordance with the actual date of shipment. This procedure will enable Belkin to commence repayment of both Principal and Interest at the periods after delivery originally envisaged, and will also enable Millspaugh’s Bank to operate the finance facility.

Hutcheon J.A. then found, as did the trial judge, that “a final delivery date was agreed upon” on the basis of the second notes which were made out on December 16, 1976 and which bore a maturity date of March 15, 1977. The dissent therefore concluded that the Bank was not a holder in due course but that:

… it does not follow that it held the notes subject to the resolution of all the matters in issue between Belkin Packaging and Millspaugh.

The right view, in my opinion, is that the Bank held the notes subject only to the restrictions in the written undertaking of July 25, 1975.

In the view of the dissent, the Bank fulfilled the restrictions by holding the notes to maturity, and defeating the Bank’s right to enforce the notes would enable Belkin to profit from its refusal to exchange the new notes which they had issued and which were predicated on an admitted delivery date twelve months prior. Hutcheon J.A. put it this way:

In my opinion the notes were subject only to the restrictions in the written undertaking of July 25, 1975.

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As I have indicated I agree with the trial judge that the onus of raising and delivering new notes was on Belkin Packaging. It cannot be an answer to the action on the old notes that the Bank ought to sue on the new notes when those notes, at the instance of Belkin Packaging, were returned to Canada.

Hutcheon J.A. differed from the learned trial judge in the effective date for the calculation of the judgment in Canadian dollars. The trial judge, as we have seen, followed the House of Lords decision in Miliangos [Miliangos v. George Frank (Textiles) Ltd., [1975] 3 All E.R. 801] and adopted the judgment date as the conversion date whereas the dissent in the Court of Appeal would apply the date of breach as the conversion date following the decision of this Court in Gatineau Power Co. v. Crown Life Insurance Co., 1945 CanLII 33 (SCC), [1945] S.C.R. 655. In the view I take of the proper disposal of the immediate proceedings before the Court, this question need not be settled.

The notes were not, as we have seen, delivered on October 1, 1974 as required by the contract but on July 18, 1975 (and the equivalent notes under a parallel contract were issued on October 27, 1975 but, as in the courts below, all principal notes are here treated as though issued on July 18, 1975 under the original contract). It is clear from the record that the delay in issuance of these notes was occasioned by the lengthy, tripartite negotiations concerning the maturity date and the technique for issuance and re-issuance of these notes.

Before the notes were delivered, Belkin, through its solicitors, proposed to the Bank a set of conditions under which the notes would be delivered to the vendor. These conditions were repeated in the delivery documentation which accompanied the notes when forwarded by Belkin to the vendor; and the same conditions were relayed by the Bank to ECGD in its application of July 24, 1975 for approval of the arrangement for the purpose of obtaining the insurance or guaranty of these notes by ECGD. In the result, as found by all the judges

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in the courts below, the Bank and the other two parties, as well as ECGD, were all in agreement that these conditions attached to the notes at issuance with the agreement of all three parties, that is the Bank, Belkin and the vendor, and that the negotiability of the notes was restricted thereby. The fact that the final or formal channel of the Bank’s undertaking with respect to exchange of these notes went through the vendor and not directly or concurrently to Belkin was of no consequence and I respectfully agree with that conclusion. Similarly, the acknowledgment by the vendor that there were no restrictions on the negotiability of the notes, and the opinion of the solicitors for Belkin that the notes were enforceable at law against Belkin, both of which are quoted above, have no bearing on the determination of the issue as to whether the Bank is a holder in due course. The only difference between the three parties related to the consequence at law of these restrictions on the ability of the Bank to recover on the notes from Belkin.

The events surrounding the maturity date, December 31, 1976, are less clearly revealed in the evidence. The learned trial judge may be in error when he refers to the issuance of new notes in June 1976. Interest notes were then prepared and issued but there is no clear evidence that any principal notes were at that time issued. However, there does appear in the lengthy record at trial a letter from Belkin to the vendor dated December 21, 1976 in which reference is made to notes dated June 29, 1976. What is reasonably clear from all the testimony and contemporary documentation is that when ECGD finally approved the exchange of the December 16, 1976 notes for those of July 18, 1975, and the Bank then requested the exchange, Belkin refused to do so. It is also reasonably clear that Belkin did so, at least in part, because such exchange was made conditional by the Bank on Belkin then paying those second notes which had already matured on March 15, 1977 with interest from December 31, 1976. By May 1977 when this request for exchange was made, Belkin did not wish to make the exchange as by that time Belkin knew or believed that the machines did not conform to the specifications in the contract. For

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reasons to be set out later, these proceedings, in my view of the contract and of the law, are not the place to resolve this and other matters relating to the performance of the primary contract of purchase and sale entered into between the parties in July 1974.

The question whether the Bank is a holder in due course must first be answered. I am in respectful agreement with all the judges of the Court of Appeal in their answer that the Bank was not a holder in due course. Section 56 of the Bills of Exchange Act, R.S.C. 1970, c. B-5, provides in part:

56. (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely:

(b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

Subsection (2) relates to fraud and other matters not here relevant. Section 74(b) of the Act sets out the advantages accorded to a holder in due course:

74. The rights and powers of the holder of a bill are as follows:

(b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill;

As it is not disputed that the Bank took the notes “in good faith and for value”, the only question is whether the Bank had “notice of any defect in the title” of the vendor who negotiated the notes to the Bank. As the Bank was at least the co-author of the scheme for the issuance and negotiation of these notes, it is clear beyond argument that the Bank had notice of all these arrangements. The only matter to be decided under the statute, therefore, is whether there was

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“any defect in title of … [the vendor] who negotiated it”.

The term “defect in title” was introduced into the Bills of Exchange Act when it was first enacted in 1882. The term was employed by the legislators rather than the better known term “equities attaching to the bill” as it appeared in the common law prior to the enactment of the statute because such language was unknown to Scottish law: Alcock v. Smith, [1892] 1 Ch. 238, at p. 263; but according to the drafter of the Act of 1882 the two terms were equivalent: Chalmers on Bills of Exchange, 13th ed., at p. 122.

The law with reference to this question is clearly summarized by the learned author of Falconbridge on Banking and Bills of Exchange, 7th ed., at pp. 665 and 667:

The general rule is that as between immediate parties, as, for example, if an action is brought by the original payee of a note against the maker, the defendant may set up any defence which he might have set up if the action had been brought on any simple contract. But if the parties to the action are not immediate parties, as, for example, if the endorsee of a note sues the maker, it becomes necessary to draw distinctions between different kinds of holders and between different kinds of defences.

A mere personal defence is one which does not relate to the instrument or affect the holder’s title, as, for example, a right of set-off arising out of another transaction between the maker and the payee of a note. The defence may be good as between the two parties between whom it arises, that is, between immediate parties, but it is not available as against a remote party.

A defect of title, as its former name (“equity attaching to the bill”) suggests, differs from a mere personal defence in that it relates to the instrument and affects the title to it.

An authority dealing with facts remarkably similar to those now before this Court in these proceedings is found in Standard Bank of Canada v. Wettlaufer (1915), 33 O.R. 441, where Clute J., after reviewing the authorities both before and after the passage of the Bills of Exchange Act,

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found that a Bank taking a bill with notice of an agreement that only the net indebtedness by the purchaser to the vendor at maturity of the note was recoverable under the note, was not a holder in due course when the Bank had notice of such arrangement. Clute J. stated, at pp. 450-51:

In the present case, the bank had not only notice of the arrangement, but was a party to it, and the acceptance was only signed upon the distinct understanding that there was to be no liability unless there was an indebtedness from the defendants at maturity of the bill. The bank was, therefore, in no better position than the New Hamburg Manufacturing Company [the vendor], and was not a holder in due course for value. … The bill was never in its hands as a holder for value without notice, under which it might claim payment in disregard of the condition upon which the acceptance was made.

The Court then withheld judgment in the action upon the note by the bank until the question of the net indebtedness between the parties to the note had been determined. In that case, such determination was left to be made by the liquidator of the vendor company.

The Bank can draw no assistance from the judgment of this Court in Ashley Colter Ltd. v. Scott, 1942 CanLII 30 (SCC), [1942] S.C.R. 331, where a bank was found to be a holder in due course of a promissory note endorsed to it by a vendor, on the basis of a finding that no restrictions as to the negotiability of the notes had been established between the parties to the notes. Consequently a defect in the condition of the lumber being bought and sold under the primary contract was no defence to the payor under the note in an action for collection by a party standing in the shoes of a holder in due course. Rinfret J., as he then was, stated, at p. 339:

To escape liability, as was said by the learned Chief Justice of the Appeal Division, it was necessary for the appellant “to show that the (respondent was) controlled by an equity inherent in the transaction and which (was) not compatible with the assignment of the notes. …” No such equity existed in the present case.

The Ontario Court of Appeal in Assaf v. Sulman and Levant, 1943 CanLII 332 (ON CA), [1944] 1 D.L.R. 402, was dealing with the position of a bank holding a

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cheque on notice of an arrangement between the parties to the cheque that “the cheque would be good as soon as I made delivery of the merchandise”. Gillanders J.A., for the Court, found at p. 406 that such a statement:

… read literally, gave notice of some arrangement between Sulman and Carr affecting the cheque being “good.” If it was not “good” in the hands of Sulman before delivery of the merchandise, it remained subject to the same equity in the hands of the plaintiff. The merchandise never having been delivered, the cheque did not become “good” in the plaintiffs hands.

Dickson J., then sitting as a trial judge in Inter-provincial Building Credits Ltd. v. Soltys (1967), 1967 CanLII 602 (MB QB), 64 D.L.R. (2d) 194, came to the same result with reference to a promissory note held by an assignee who had notice of an arrangement between the parties to the note that the obligation to pay was conditional upon the performance by the payee of the terms of the contract relating to the construction of a building.

The test as to whether the conditions attaching to a bill of exchange relate to the bill itself or are merely collateral to it is not always easy to apply. It has been said that “… the equities must arise out of the original transaction”, per Williams J. in Holmes v. Kidd (1858), 3 H. & N. 891, at p. 893; and in the words of Crompton J. in the same case at p. 894:

The case therefore differs from that of a right of set-off against the indorser, which is merely a personal right not affecting the bill.

Although made in a judgment not directly concerned with the issues here before the Court, I find the comments of Kelly J.A. in Federal Discount Corporation Ltd. v. St. Pierre and St. Pierre, 1962 CanLII 124 (ON CA), [1962] O.R. 310 (Ont. C.A.), to be of assistance in considering the effect under s. 56 of the Bills of Exchange Act of the restrictions placed upon these notes by the parties to them.

It is not necessary for the support of ordinary commercial transactions that the holder of a bill of exchange should under all circumstances be permitted to shield

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himself behind the guise of a holder in due course and attempt to separate his character as holder in due course from the debilitating effect of facts and circumstances actually known to him at the time he acquired the bill or which were reasonably inferable from facts and circumstances which were brought to his knowledge.

In the examination of any transfer to decide if it constituted the transferee a holder in due course the plaintiffs actual involvement with the transferor will be a major factor; on this account the whole relationship between the plaintiff and its transferor must be examined and considered.

These observations were made in a case where the relationship between the endorser and the endorsee was closer than that which existed here but the tenor of the reasons for judgment reflects the general trend in modern authorities on this subject.

I find that the amply evident intent of the Bank and its associates, Belkin and the vendor, in this financing venture, was to create a note which would, in the last analysis, allow Belkin to replace it so many times as necessary so that the final note would mature on the expiry of one of the periods specified in the contract. At the same time, all three parties were struggling with the need to retain the guaranty of ECGD which required free negotiability of the note. The compromise scheme of necessity went to the very root of the note and its character under the Act. The scheme was a “defect” within the meaning of s. 56 in that it was centred upon the negotiability of the note. The Bank cannot therefore meet the test of s. 56 of a holder in due course.

What then is the position of the Bank as a holder for value, not in due course? As such, the Bank is, as we have seen, subject to the equities attaching to the promissory notes but not to mere personal defences which would arise in and be available to Belkin and the vendor on any issue arising as between them directly. Can it therefore be said that the Bank, having held the note “until maturity”, is therefore free from the “defects” or “equities” arising at the time the notes were negotiated? The difficulty which the Bank must overcome is that arising under the third condition in its

[Page 679]

undertaking to the vendor, already quoted above from the letter dated July 25, 1975. That restriction refers to the deferred payments and the notes issued under s. 4 of the contract reflecting or securing those payments, and provides that the Bank will exchange the notes for new notes drawn by Belkin and representing “the deferred payments properly payable under the …” contract. The undertaking is prefaced by the words “If and so often as the deferred payments under the … Contract … are revised…” Obviously, it cannot be said with any certainty that this clause of the undertaking has been performed unless and until a determination has been made as to whether the deferred payments can be further revised and hence further notes exchanged. This in turn relates to a finding as to “final delivery” and “start-up”, as the expressions are used in the 1974 contract. All of these are matters for determination in the arbitration.

It is argued by the Bank that the execution of notes in either June or December of 1976 showing a maturity date of March 15, 1977 is an inferential admission by Belkin, the maker of the notes, that one or other of the contract events has occurred, either six or twelve months prior to March 15, 1977, and accordingly the exchange process under the third paragraph of the undertaking has been completed. Logical as this may appear, it is obviously a matter for determination by the arbitrator, and there are many facts already mentioned in these reasons which bear upon this issue in addition to the deduction which may be made from the very existence of the notes dated December 16, 1976. Furthermore, as already observed in another context in these reasons, Belkin had, at least by March 1977, expressed its dissatisfaction with the performance of the contract by the vendor, and this of course goes to the question as to whether or not the contract has been performed as required by law and the question as to whether the promissory notes are supported by consideration; as well as other issues which can be raised in these circumstances by one party or the other.

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The Bank relies upon the decision of the House of Lords in Nova (Jersey) Knit Ltd, v. Kammgarn Spinneret GmbH, [1977] 2 All E.R. 463, where defences relating to unliquidated damages by way of set-off were raised without success against a plaintiff seeking to enforce a bill of exchange. It need only be said with reference to that judgment that the Court was not there faced with a contract under which an arbitration clause was present, as we have here, nor was there any question of equities attaching to the bills of exchange relating to the enforceability of those instruments in the hands of the holder. On this appeal, the notes are clearly subject to attached equities whose continued existence cannot be determined without reference to the arbitration proceedings, which of course lies entirely outside the Court in this action. In short, if Belkin is not found in the arbitration to be obligated under the contract to issue notes because the necessary underlying contractual events had not occurred, the situation is quite different from that arising in the Nova case, supra.

The situation in the United States law with reference to a person who is not a holder in due course has been specified with clarity in the Uniform Commercial Code:

[¶ 3306] Sec. 3-306. Rights of One Not Holder in Due Course.

Unless he has the rights of a holder in due course any person takes the instrument subject to

(b) all defenses of any party which would be available in an action on a simple contract; and

(c) the defenses of want or failure of consideration, non-performance of any condition precedent, non-delivery, or delivery for a special purpose (Section 3‑408); and

(d) the defense that he or a person through whom he holds the instrument acquired it by theft, or that payment or satisfaction to such holder would be inconsistent with the terms of a restrictive indorsement…

[¶ 3408] Sec. 3-408. Consideration.

Want or failure of consideration is a defense as against any person not having the rights of a holder in due course. … Partial failure of consideration is a

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defense pro tanto whether or not the failure is in an ascertained or liquidated amount.

The rights of a holder for value in Canada have not been so clearly defined in the Bills of Exchange Act, nor indeed in the common law. As we have seen in Ashley Colter Ltd. v. Scott, supra, Rinfret J., as he then was, took the view that a partial failure of consideration between the immediate parties to the bill cannot affect the title and the right of recovery under the bill, of remote parties (p. 338). This case is critically reviewed in Equities as to Liability on Bills and Notes: Rights of a Holder not in Due Course (1980-81), 5 Can. Bus. L.J. 53, by Professor Benjamin Geva. A result favourable to the conclusions of that learned author is found in the judgment of the Alberta Court of Appeal in Edcal Industrial Agents Ltd. v. Redl and Zimmer (1967), 1966 CanLII 413 (AB SCAD), 60 D.L.R. (2d) 289. Professor Geva does concede at p. 78, however:

The fact that partial failure of consideration not in an ascertained and liquidated amount cannot be raised as a defence against a holder not in the due course is overwhelmingly accepted.

The contrary view to that advanced by the majority in Edcal, supra, can be found in Negotiation of an Overdue Bill of Exchange or Promissory Note (1970), 8 Alta. L.R. 75, by Professor Donald. Professor Donald’s view is in accord with that expressed by the learned authors of Chalmers on Bills of Exchange (13th ed.), p. 104; and Falcon-bridge on Banking and Bills of Exchange (7th ed.), pp. 618-20.

In this appeal, however, inasmuch as the issues before the Court are confined to a determination of the entitlement of the Bank in an action to collect on these promissory notes, the question as to the extent to which a holder for value is subject to the contractual defences available in an action as between the parties to the promissory note, is not before the Court. Consequently, a review of the present state of the law in this country with respect to the defences available to the obligor in an action brought by a remote holder must await

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an appropriate case where that issue arises on the facts.

The Bank, therefore, as a holder for value in the circumstances of these proceedings, must hold the note subject to the terms of its undertaking, detailed above, and in particular paragraph (c) thereof. Therefore, the crystallization of those rights and their enforceability must await the outcome of the arbitration to determine, within the terms of the contract under which these notes arose, whether the terms of the undertaking, particularly the third paragraph, have been performed. Expressed another way, it is to the outcome of the arbitration that one must look in order to determine whether or not these defences relating to the conditions attaching to the promissory notes have been overcome by the Bank.

In the result, therefore, I conclude that the Bank is not a holder in due course and that a determination of the extent of Belkin’s liability to the Bank in respect of these notes must await the outcome of the proceedings before the board of arbitration. It is therefore not necessary, in my view of the appropriate disposition of this appeal, to consider the issue arising with reference to the appropriate conversion date from pounds sterling to Canadian dollars. I therefore would dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant: McAlpine, Roberts & Hordo, Vancouver.

Solicitors for the respondent: Russell & DuMoulin, Vancouver.