The Law of Commercial Leasing in Canada 1999

3.  Enforcement and Remedies

3.1  Introduction

[58] One of the primary inducements to promulgation of UCC Article 2A was the difficulty surrounding prediction of the remedies available for breach of the parties obligations under a lease.70 In Canada, remedies issues appear to have caused much less difficulty, particularly since the 1987 Supreme Court decision regarding lessors' damages in Keneric Tractor Sales Ltd. v. Langille.71 In the context of a security lease, the rights of a lessor upon the lessee's default are governed by the inter partes provisions of the PPSAs. Otherwise, remedies fall to be determined at common law.

[59] The remedies available to both parties under Canadian law will be examined below, followed by a comparison of the remedial provisions of UCC Article 2A and of the Unidroit Convention on International Financial Leasing. The enforcement rights and remedies available to lessors under true leases and security leases respectively will be addressed separately, due to the applicability of the PPSA in the latter context.

3.2  Lessors' Remedies - the True Lease

[60] Litigation initiated by lessors on the grounds of a lessee's breach is overwhelmingly directed to enforcement of the lessee's contractual payment obligations. Although the proprietary aspect of a lease relationship entitles the lessor to resort in appropriate circumstances to proprietary remedies, the law of property in practice plays an extremely limited role in the resolution of problems arising from modern leasing relationships. Action by a lessor will almost always be premised on breach by the lessee of an express or implied contractual obligation, foremost of which is the obligation to pay rent and other prescribed sums.72

[61] Virtually every long-term lease provides for the payment of rent by way of instalments over its term. In addition, many leases provide for the exercise of an option to purchase upon payment of a defined sum, or a sum determined by a prescribed formula. So-called "open end" leases stipulate a termination payment according to which the lessee is obliged to pay any difference between the sum obtained by the lessor on resale of the leased goods (either to the lessee or a third party), and a predetermined amount. Other typical terms address the lessee's obligation in the event of loss or damage to the leased goods, and payments due for excess "wear and tear".

[62] Whatever their terms as to payment, modern commercial leases invariably provide for acceleration of the lessee's payment obligations in the event of default. They will also typically include a provision stating that a default by the lessee, including non-payment of any sum due under the lease, entitles the lessor to terminate the lease and to recover liquidated damages comprised of all unpaid instalments of rent due to the end of the term, along with any other sums payable by the lessee. In effect, failure to pay a single installment of rent at any point in the term of the lease entitles the lessor to recover the balance owing by the lessor, comprised of the cumulated sums payable for the remaining term, along with any past payments in arrears.

[63] The question of whether liquidated damages provisions of this kind are enforceable by lessors was the subject of considerable uncertainty before judgment was rendered by the Supreme Court in Keneric Tractor Sales Ltd. v. Langille.73 In its earlier decision in Canadian Acceptance Corp. Ltd. v. Regent Park Butcher Shop74, the Manitoba Court of Appeal had held that such a provision was not enforceable where the default consisted simply of non- payment of an installment of rent. While the lessor could terminate the lease according to its terms, it could recover only for unpaid sums already accrued due, plus interest. However, that case was substantially over-ruled by the Supreme Court in Keneric Tractor Sales.75

[64] The judgment in Keneric Tractor Sales addresses the enforceability of a liquidated damages provision only indirectly, in that it was directed to the distinct question of what damages were available at common law to a lessor for the lessee's breach of the obligation to pay rent. The Court held that the ordinary principles of contract damages apply, such that a lessor who has exercised a contractual right of termination is entitled to be put in the position it would have been in had the contract of lease been performed. In the case before it, the application of that principle meant that the lessor was entitled to recover the sum in which it was liable to its assignee under a recourse provision in the assignment (since, of course, they would not have had to pay anything to the assignee had the lessee not defaulted). That amount was calculated by taking the original purchase price of the leased tractors and deducting prepaid rent, adding a 20% margin and subtracting the sum received from sale of the repossessed equipment, less the costs of repossession, repair and resale. Though the Court pointed out that the assessment of damages must be subject to the usual limitations of remoteness and the duty to mitigate, those requirements were satisfied on the facts.

[65] Wilson J. further indicated that if the lessee had not known that the lease would be assigned to the finance company (such that the losses to which the lessor was subject under the assignment would be too remote) the lessor's recovery would be the value of unpaid rentals under the lease, discounted for early receipt, minus the proceeds of sale plus the expenses of repossession, repair and resale. In other words, since the lessee would have paid all the installments of rent due to the end of the term had it not breached the contract, the measure of damages for breach would properly include a sum equivalent to all unpaid rent.

[66] The principles expressed in Keneric Tractor Sales have since determined the damages available to a lessor for the lessee's breach, and have been used repeatedly as a basis for upholding liquidated damages clauses of the kind referred to earlier.76 A liquidated damages provision may be struck down as penal only if it does not represent a genuine pre-estimate of the damages suffered by the party enforcing it. The typical liquidated damages provision is clearly consistent with the damages that would actually be awarded for non-payment of rent under the principle laid down in Keneric Tractor Sales, since they would include all sums that the lessee would have had to pay under the entire term of the lease. A discount must in principle be given for the value of early receipt of the rent, as well as for any sums realized through the re-leasing or sale of the goods. 77

[67] The decision in Keneric Tractor Sales seems to have been accepted by the courts as having fully clarified the principles to be applied to determine a lessor's recovery for the lessee's breach, and thereby provided a clear basis for evaluation of the enforceability of liquidated damages clauses.78 Nevertheless, litigants continue to challenge such clauses on a remarkably regular basis, as is demonstrated by the number of recent cases in which the issue has been contested in the context of sign rentals.79 In general, the courts have had little trouble concluding that the lessor can recover all sums claimed, even where the liquidated damages clause does not include an appropriate discount for early payment of the accelerated rentals, provided that the outcome is not highly unreasonable. 80 The fact that the breach triggering the clause has occurred during a renewal term, such that the lessor has already recovered the full cost of the leased sign along with interest and other expenses, has proven no obstacle to its enforcement. 81

[68] The principles in Keneric Tractor Ltd. presuppose that the lessee's default entitles the lessor to terminate the lease. If the lease does not include a termination provision, resort must be had to the general common law principles governing discharge for breach. They require a determination of the sometimes difficult question of whether the breach amounts to, i) a repudiation, ii) a breach of condition or iii) a breach of an innominate term where the breach deprives the lessor of substantially the whole benefit of the contract. 82 However, since few modern leases omit a termination provision, this appears to be of little practical concern.

[69] In the rare case in which a lessee's non-payment would not entitle the lessor to terminate the lease, he or she may in effect cure her breach by compensating the lessor for losses associated with the missed payment and continuing with the contractual payment schedule. However, there is no general recognition of a right to cure a contractual breach in Canadian law.

[70] A lessor who exercises a contractual right of repossession of the leased goods under a true lease is subject to no procedural or substantive restrictions, other than those imposed by the contract of lease. In other words, there are no legal requirements relating to the giving of notices prior to seizure or disposition of the leased goods, or otherwise regulating the manner of disposition or the recovery of a deficiency. The lessor, as owner of the goods, is seen as having the right to deal with them as it pleases.

[71] In summary, a lessor under a true lease is subject to no statutory restriction in the exercise of contractual rights of termination and repossession of the goods, and may in general recover from the lessee all sums remaining due under the lease, either as common law damages or through the enforcement of a liquidated damages provision.

3.3 Lessors' Remedies - the Security Lease

[72] The term security lease is used as a short-hand reference to a contract structured as a lease that is primarily a device to secure repayment of a debt. The lessor retains title not because it has a genuine residual interest in the goods, but to facilitate repossession and disposition of the leased goods should the lessor default in payment. The goods are, from the lessor's perspective, merely collateral.

[73] Such a lease falls within the scope of all the Canadian PPSAs,83 which prescribe the remedies available to the lessor upon the lessee's default. Simply stated, the lessor may seize the goods and dispose of them after giving notice to the lessee and other persons with an interest in them. 84 If a deficiency remains after application of the proceeds of sale to the expenses of realization and the outstanding debt, the lessor is entitled to recover it from the lessee.85 Alternatively, the lessor may elect to retain the collateral in satisfaction of the debt - a rarely chosen course of action. 86

[74] In addition to its right to realize against the leased goods as collateral, the lessor has the right to sue for contract damages for the lessee's breach. The PPSAs provide that a security interest does not merge merely because the secured creditor (lessor) has reduced its claim to judgment.87 This enables the lessor to exercise both its contractual and proprietary rights to the extent necessary to satisfy the obligations outstanding under the lease, provided of course that it may not recover more in total than what is owed. 88

[75] The PPSAs permit lessees to effectively cure a breach comprised of a default in payment at any time prior to disposition of the leased goods by paying the amount actually in arrears, plus any realization expenses already incurred by the lessor. 89 The lease is thereby reinstated, and payments resume according to the contractual payment schedule. Although the Act also confers a right to redeem the goods by payment of the entire amount secured,90 the lessee will rarely be in a position to exercise that right.

[76] Besides observing the procedural provisions of the PPSA, the lessor must act throughout in good faith and in a commercially reasonable manner.91 The statutory remedial regime thus enables the lessor to recover the debt due under the terms of the contract of lease, while protecting the lessee by ensuring that the best possible value is obtained from disposition of the leased goods. In addition, the lessee's rights of reinstatement protect him from the precipitate loss of the leased goods that might otherwise result from a late payment.

[77] The question of whether such a realization regime is appropriate in the context of security leases has already received a statutory response. However, the supplementary question of whether comparable provisions should apply to the lessor in a true lease remains open. The primary advantage of subjecting true long term leases to the inter partes enforcement provisions of the PPSAs would lie in the elimination of the need to determine whether a given transaction is a true lease or a security lease, assuming that the distinction could be avoided for purposes of the application of most if not all of those provisions.92 Such an approach is not entirely unfeasible. Under the PPSA, the lessor would retain the right to recover the leased goods, along with monetary damages calculated as provided in Keneric Tractor Sales. The imposition of the relatively minimal notice requirements accompanying disposition, and the conferral of rights of reinstatement on the lessee would not appear to unduly prejudice the lessor. 93Only those provisions that might impair recognition of the true lessor's reversionary interest in the leased goods would raise difficulties. In particular, the PPSA contemplates a statutory right of redemption which, applied to a true lease, would enable a lessee to acquire the goods in spite of the absence of a contractual option to purchase. Further, the PPSA entitles the lessee to any surplus realized on disposition of collateral, a provision that would inappropriately deprive the true lessor of the full value of its reversionary interest. 94

[78] To sum up, a lessor under a security lease may recover damages for the lessee's breach or default in the same manner as a lessor under a true lease. In addition, the lessor is entitled by statute to repossess and dispose of the leased goods in satisfaction of the lessee's contractual payment obligations. However, the security lessor's rights of repossession and disposition must conform with the procedural provisions of the PPSA, and with its general requirement of commercial reasonableness. In addition, the lessee may reinstate the lease or redeem the leased collateral by making the payments prescribed.

3.4 The Distinction Between a True Lease and a Security Agreement

[79] The discussion under the previous heading is premised on the assumption that the transaction in question is properly characterized as a security agreement, as that term is used in the Canadian PPSAs. If it is not, the inter partes provisions of the Act are not applicable. A lessor who intends to terminate a lease and repossess the leased goods must therefore ascertain whether the lease is "in substance" a security agreement in order to determine whether its realization activities are subject to the PPSA.

[80] The PPSA addresses the issue of characterization in very general terms. It provides that the Act applies "to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral."95 A security interest is defined as an interest in goods and other defined categories of personal property "that secures payment or performance of an obligation."96

[81] The question of whether a particular transaction is functionally a lease or a security agreement is the subject of a significant though not enormous body of caselaw. While a degree of uncertainty will inevitably remain in connection with some variants of a lease transaction, it seems that a reasonably clear approach to characterization has emerged. 97

[82]  In the United States, legislators have attempted to facilitate characterization by defining a series of detailed criteria determining whether a transaction creates a lease or a security interest. However, the difficulty involved in attempting to define decisive rules is evident in the terms of the amended UCC provision itself. In addition to laying down a set of positive indicia of a security interest, §1-201(37) includes a list of features that are not to be regarded as conclusive of the issue. Nevertheless, these detailed provisions have not eliminated the need to litigate the issue in difficult cases, and the caselaw emerging from that litigation continues to be inconsistent. 98

[83] While the question may merit further study, this author's provisional view is that little is to be gained by emulating the UCC attempt to define the characteristics of a lease that is in substance a security agreement with greater particularity.

3.5 Lessees' Remedies

[84] A lessee's remedies for breach of the express or implied terms of the lease fall to be determined at common law. Lessees will most often be affected by either a breach of contractual obligations relating to the quality or performance of the goods, or a breach affecting the lessor's title in such a way as to interfere with the lessee's continued possession or with her ultimate acquisition of title through exercise of an option to purchase. A lessee under a finance lease of course has no grounds for a contract remedy against the supplier of the leased goods, given the absence of a contractual relationship.

[85] There is no doubt that the lessee may, subject to contractual waiver or exclusionary provisions, recover damages for any breach by the lessor. Since Keneric Tractor Sales Ltd. v. Langille,99 it is clear that the quantum of damages recoverable is to be determined under ordinary contract principles. However, the unique characteristics of a lease may make it difficult in some circumstances to accurately assess the lessee's loss. A buyer who fails to receive contracted for goods or who properly rejects a deficient tender can quite readily be compensated on the basis of the cost of acquiring a directly equivalent substitute. A lessee, however, may not so easily find a directly equivalent substitute for the unfulfilled lease, or may have good reasons for not choosing to replace the lease with an exact equivalent.

Nevertheless, difficulties of this kind do not appear to have manifested themselves in the Canadian caselaw, and they are not beyond the ability of the courts to redress through proper application of common law principles.100

[86] The more difficult question is whether a lessee may reject the goods and terminate her obligations under the lease in the event of the lessor's defective performance. Under general contract law, the victim of a contractual breach is entitled to terminate a contract if the breach is a repudiation,101 a breach of condition or a breach of an innominate term where the breach goes to the root of the contract.102 Unfortunately, the principles governing the question of discharge for breach have not been articulated and applied with uniform clarity by Canadian and commonwealth courts. The regrettable misuse of the catch-all phrase "fundamental breach" is particularly troubling.103 While a reasonably clear set of governing principles can be extracted from the more carefully reasoned authorities, a degree of uncertainty in the extent to which those principles are applied by lawyers and judges prevails.

[87] Assuming that the circumstances of a case warrant the conclusion that the lessor's breach to entitles the lessee to terminate the lease, an additional problem presents itself. In contracts for the sale of goods, the Sale of Goods Act prescribes that a buyer loses the right to reject non-conforming goods once he or she has "accepted" them. The circumstances constituting acceptance are defined.104 If the principles of sales law are applied by analogy to the implication of terms in a contract of lease, perhaps they can and should be similarly applied to remedies issues. Though Canadian authority on the point is scarce, a distinguished commentator on British hire-purchase law expresses this view:

The right to rescind the agreement or to treat it as discharged for breach of condition will in any event be lost if the hirer expressly or by implication affirms the agreement with knowledge of the breach or if he has derived substantial benefit under the agreement. The right to rescind will also be lost where the parties cannot be restore to their status quo, e.g. by reason of destruction of the goods.105

[88] This suggests that the concept of "acceptance" is not directly applicable to leases, though "affirmation: may well amount to substantially the same thing.106

[89] To summarize, a lessee may sue the lessor for common law damages on the grounds of the lessor's breach of a contractual obligation, though determination of the quantum of damages may be difficult in some circumstances. In addition, the lessee may terminate the lease and reject the leased goods if the lessor's default qualifies at common law as a discharging breach, unless she is viewed as having affirmed the lease. Whether acceptance of the goods is equivalent to affirmation is unclear.

[90] Issues relating to a lessee's rights of termination appear not to have raised any appreciable litigation in Canada. This is no doubt largely due to the presence in most leases of contractual provisions comprehensively defining the parties rights of termination and cure.

3.6 Contractual Waivers - The "Hell or High Water" Provision

[91] A lessee's right to pursue a remedy on the grounds of the lessor's breach of contract may be and often is limited or relinquished by way of an exclusionary provision or waiver included in the lease agreement. Such a waiver precludes the lessee both from initiating an action for breach, and from raising the lessor's breach as a defence in an action by the lessor to enforce the lessee's payment or other obligations.

[92] Particularly where a lease is used fundamentally as a secured financing device, the lessor will wish to protect the value of the lease by dissociating the lessee's payment obligations from problems relating to the leased goods. In other words, the lessor's objective is to create defined and enforceable terms of payment pursuant to which the credit advanced to the lessor in connection with acquisition of the goods will be recovered. If the lessee were permitted to defend the lessor's claim for rent and other payments on the grounds of deficiencies relating to the use or performance of the goods, the lessor would lose its ability to recover the planned return on its capital in any predictable fashion. Accordingly, financing leases will invariably include a provision of the kind often referred to in the United States as a "hell or high water" clause. It is aptly described by one writer as follows:

The essence of this structure is a provision requiring that the lessee, once it accepts the leased item, to pay its rent in all events (i.e., come hell or high water) without regard for the proper function of the item or the conduct of the lessor with respect to the subject or any other transaction.107

[93] In explanation of the commercial practice supporting such a provision, the author (counsel to a large American leasing company) continues as follows:

This sort of provision, while it may seem harsh, in practice makes good sense for the interest of all concerned. The lessor is expending the cash needed to purchase the equipment from its vendor (or foregoing the cash proceeds which would be realized from a sale of used equipment out of its inventory) but is also assuming the credit risk associated with the lessee's ability to make the contracted payments as well as (in most cases) the residual risk associated with the equipment value at lease expiration. In return, the lessor needs at least the assurance of a legal entitlement to the contracted rent in order to permit both the financing activity described infra and any semblance of rational planning or forecasting of capital requirements, both of which ultimately impact the availability of capital for future transactions 108

[94] Such a provision is designed to protect a financial institution who is a lessor under a finance lease, or who assumes the lease under an assignment from the original supplier-lessor. However, such provisions may also be used to prevent a lessee from asserting claims against a supplier-lessor.

[95] The use of a "hell or high water" clause in a lease that is primarily a financing device is legitimate, provided that the lessee is properly appraised of his or her position and appropriate measures can be taken to address performance issues outside the parameters of the lease itself (e.g., through warranties extended by a manufacturer). Subject to the ordinary contract law considerations of misrepresentation, unconscionability and assent, there is no doubt that such provisions are enforceable in Canada.

3.7 Lessors' Remedies under UCC Article 2A

[96]    The remedies provisions of UCC Article 2A, which operate only in the absence of contrary contractual provision, are complex and for that reason will be reviewed here in very summary form. They are designed to address both the lessor's right to terminate the lease and the quantification of damages for the lessee's breach.

[97] A lessor is entitled to terminate the lease if the lessee wrongfully rejects or revokes acceptance of the goods, fails to make a payment when due or repudiates the lease. It may also do so pursuant to a contractual provision to that effect, or if the default (whether or not of the type just enumerated) substantially impairs the value of the lease contract to the lessor. The right of termination or cancellation of the lease is accompanied by a right to repossess the goods and recover damages. In the event of a default by the lessee that does not invoke the lessor's right to terminate, the lessor may pursued the remedies provided in the lease and recover damages.109 The lessor is under no obligation to give notice prior to repossessing goods following cancellation of the lease, or prior to disposing of them.110

[98] The general thrust of those provisions does not differ markedly from the common law principles that would determine the lessor's right to terminate a lease in Canada, except that a single instance of non-payment would not ordinarily invoke that right in the absence of a contractual provision to that effect. If, however, the lease is a security lease falling within the inter partes provisions of the PPSA, a single non-payment is a default triggering the lessor's rights of realization.111

[99] The quantum of damages recoverable by the lessor is defined by a range of formulas tailored to the circumstances associated with breach. Detailed provisions address (i) damages accompanying the disposition of goods by a "substantially similar" new lease112 (ii) damages accompanying disposition of goods by sale or by a lease that is not "substantially similar"113 (iii) damages accompanying an election to retain the goods114 , and (iv) damages otherwise required to put the lessor in as good a position as performance would have done.115 In addition, special provisions govern an action for the rent, where the lessee has committed a breach of the kind justifying termination, or where such action is contemplated by the contract.116 Liquidated damages provisions are endorsed, subject to a "reasonableness" qualification.117

[100] The operation and efficacy of these provisions is difficult to evaluate without further detailed investigation of American caselaw and the prevailing practices in the American leasing market.118 However, it is not self-evident that the promulgation of such a complex statutory regime would be a worthwhile enterprise, particularly in view of the fact that it would likely be supplanted by a contractually defined remedial scheme in most leases.

[101] Article 2A also contains provisions specifically referable to a finance lessor's remedial rights against the lessee. In non-consumer finance leases, the lessee's promises under the lease contract become irrevocable and independent upon the lessee's acceptance of the goods. The benefit of that provision is explicitly extended to assignees. 119 As explained in the Official Comment,

This section extends the benefits of the classic "hell or high water" clause to a finance lease that is not a consumer lease. This section is self-executing; no special provision need be added to the contract.

[102] The Comment goes on to point out that the provision recognizes the function of the finance lessor in a tripartite relationship, in which the lessee is looking to the supplier to perform the essential covenants and warranties.

3.8 Lessors' Remedies under the Unidroit Convention on International Financial Leasing

[103] The provisions of the Unidroit convention relating to the remedial rights of finance lessors are much less detailed that those of the UCC. 120 It has been described as stating the rights of the lessor in terms that, in most respects, are consonant with a lessor - lessee relationship rather than the lender - borrower relationship that a finance lease substantively represents.121 However, the lessor may contractually define its rights such that "the lessor's ultimate recovery may be equivalent to that of a lender or a seller of the leased goods."122

[104] The convention differs from Article 2A in that the lessor may terminate the lease only where the lessee's default is "substantial". In addition, the lessee is given a right to cure default. More importantly, it does not endorse the "hell or high water" clause as a default statutory rule limiting the lessee's right to raise deficiencies in the leased equipment as against the lessor.S123 However, it does not preclude the operation of such a contractual provision.

[105] It would appear that the convention has little of consequence to offer by way of precedent for the development of a domestic Canadian remedial regime.

3.9 Lessees' Remedies under UCC Article 2A

[106] The provisions of UCC Article 2A regarding the lessee's rights of termination, rejection of the goods and damages are no less detailed than those relating to the remedies of the lessor. Though the complexity of these provisions does not commend them, they do address issues that are not clearly resolved under Canadian law.

[107] Rights of cancellation paralleling those of the lessor are specified, in the event of a substantial breach. 124 Of particular interest are the provisions addressing the lessee's acceptance of the goods, including his or her right to revoke acceptance.125 The bar to rejection created by these provisions is considerably more flexible than either the correlative acceptance provisions of Canadian sales law, or the result that would obtain on application of the common law principles of termination for breach.126 A lessee who has accepted goods known to be defective on the understanding that the defect will be cured may subsequently revoke his or her acceptance. Moreover, acceptance may be revoked in appropriate circumstances where the nonconformity relied upon was not discovered prior to acceptance, or where a default by the lessor substantially impairs the value of the leased goods. An example of the latter situation offered in the Official Comment would be a failure by the lessor to fulfill its obligation to maintain leased equipment or to supply other goods which are necessary for the operation of the leased equipment.

[108] Special rules apply to finance leases, under which the lessee is precluded from revoking acceptance if made with knowledge of a nonconformity with respect to the lease agreement, as opposed to the supply agreement. Acceptance made without knowledge of such nonconformity may be revoked in limited circumstances.127

[109] Like so much of Article 2A, the provisions relating to acceptance and revocation of acceptance are not easily understood,128 and have been criticized in some quarters. 129 However, they demonstrate the importance of rethinking the problems of acceptance in the modern world of commercial leasing.

[110] The same could be said of Article 2A's provisions regarding the lessee's damages. In particular, special rules are established for quantification where (i) the lessee seeks a replacement lease to "cover" the lessor's default,130 or (ii) the "cover" provisions are not relevant, in which case damages depend upon the difference between contract rent and market rent.131

[111] As has been noted above, a lessee's remedies against the lessor in a finance lease are extremely limited. That fact is compensated to some extent by the express acknowledgment of rights against the supplier of the leased goods. However, while the lessee can clearly sue the supplier for damages for breach of the warranties contained in the supply contract, Article 2A does not appear to permit rejection of the goods on that ground.132 In the result, a lessee under a finance lease will be bound to the keep the goods in most circumstances, albeit with a right to compensatory damages.

3.10 Lessees' Remedies under the Unidroit Convention on International Financial Leasing

[112] Unlike UCC Article 2A, the Convention takes the position that non-delivery of the goods or non-conformance with the supply agreement may give the lessee under a finance lease rights against the lessor. Prima facie, the lessee has (i) a right to reject a non- conforming tender, (ii) a right to withhold rental payments until a conforming tender is made, and (iii) a right to terminate the leasing agreement and recover sums paid in advance.133 However, the lessee may lose these rights through application of a choice of law rule referable to the rights the lessee would have as a buyer from the lessor. Since the position of a lessee under the Convention will vary according to the choice of law rule adopted it cannot be taken as representative of a satisfactory uniform remedial regime.

[113] Like Article 2A, the Convention provides for enforcement by the lessee of the supplier's obligations under the supply contract, which obligations are declared owing directly to the lessee.134 However, a breach by the supplier does not entitle the lessee to terminate or rescind the supply agreement without the consent of the lessor, precluding rejection of non- conforming goods.

3.11 Conclusions

[114] Canadian law governing the remedies available to parties to a lease is reasonably well defined. Rights of termination on both sides are ordinarily provided for by contract, and are otherwise determined by the ordinary contract law principles defining discharging breach, though some uncertainty exists regarding the effect of acceptance of the goods on the lessee's rights of rejection. In the case of security leases falling within the PPSA, the lessor's exercise of rights of termination, repossession and disposition of the leased goods is qualified by the procedural requirements of the statute, by the general statutory obligation to act in good faith and in a commercially reasonable manner and by the lessee's statutory rights of reinstatement and redemption.

[115] Each of the parties is entitled to contract damages for the other's breach of contract, subject to any contractual limitation or waiver (which will ordinarily operate in favour of the lessor). The quantification of damages is based on the general contract rule that the party not in breach should be put in the position he or she would have been in had the contract been performed. Though quantification may be difficult in some circumstances, it is clearly possible.

[116] Article 2A attempts to define both rights of termination and the quantification of damages more precisely, offering a complex set of rules designed to respond to the particular circumstances of the breach. The right to terminate may depend upon the severity of the breach, the possibility of cure and, in connection with termination by a lessee, the effect of acceptance. Damages are to be assessed on the basis of the availability and choice of substitute performance.

[117]  Though the Canadian law determining the remedies of parties to a lease is notably deficient on points of precision and detail in comparison to its American counterpart, there is little reason to conclude that it is seriously inadequate in the context of the typical non- consumer transaction.135 Nothing would be gained by an attempt to extend the antiquated Sale of Goods Act remedial regime to modern contracts of lease. Nor is there an apparent need to create an entirely new Article 2A style remedial structure.

[118] However, consideration might be given to the extension of the PPSA inter partes enforcement provisions to true leases of significant duration, subject to some exceptions in favour of lessors repossessing goods under a true lease. Such a course would further reduce if not entirely eliminate the need to differentiate between a true lease and a security lease for purposes of determining the applicability of the PPSA. In addition, it would offer some protection to defaulting lessees with limited encroachment on the enforcement rights of lessors.

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