Canadian Admiral Corp. Ltd. v. L.F. Dommerich & Co. Inc., [1964] SCR 238

Supreme Court of Canada

Canadian Admiral Corp. Ltd. v. L.F. Dommerich & Co. Inc., [1964] S.C.R. 238

Date: 1964-01-28

Canadian Admiral Corporation Ltd. (Defendant) Appellant;

and

L.F. Dommerich & Company Incorporated (Plaintiff) Respondent.

1963: October 10, 11; 1964: January 28.

Present: Cartwright, Martland, Judson, Ritchie and Spence JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Assignment—Manufacturer entering into factoring agreement—Assignment of accounts receivable—Debt from assignor to debtor resulting from independent transaction—Whether debtor may exercise right of set-off against assignee which it would have had against assignor.

A, a manufacturer of television sets, purchased materials from R, a manufacturer of electrical equipment, and made payment direct to that

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company. R subsequently entered into a “factoring agreement” with D, the substance of which was that R would assign its accounts receivable to D and D would notify the customers and make the collections for a stated charge to R. R notified A of its factoring arrangement and assigned A’s account to D. Thereafter the invoices to A, prepared by R and sent by D, were stamped with notices of assignment of the accounts to D.

R went into bankruptcy; at the date of the bankruptcy it owed A a considerable amount of money for certain equipment with which it had been supplied by A. In an action brought by D in respect of A’s purchases from R, A sought to set off in complete extinction of the claim the same amount owing by R to it. Judgment at trial was given in favour of D; an appeal from that judgment was dismissed by the Court of Appeal. A then appealed to this Court.

Held: The appeal should be allowed.

Per Cartwright, Martland and Ritchie JJ.: The debtor had as against the assignee the same right of set-off as he would have had against the assignor at the time at which he received notice of the assignment; it was for the assignee to make inquiries and, in the absence of fraud, the debtor was not under a duty to volunteer information. The circumstances fell short of establishing knowledge on the part of A that R would request or accept payment from D without disclosing to it that R was indebted to A in amounts which the latter was entitled to set off against its liability to R. A had no express notice that R was concealing the existence of this right of set-off from D or that the latter was not making such inquiries from R as were necessary to protect its interest. The course of dealing was not such as should necessarily have led A to realize that D was being deceived by R. In the absence of such knowledge A was not under a duty to volunteer information to D.

Mangles v. Dixon and others (1852), 3 H.L. Cas. 702, referred to.

Per Curiam: The Court of Appeal was in error in finding that the factoring agreement constituted an equitable assignment of future choses in action. It was an agreement to transfer book accounts each month on payments being made in accordance with the agreement and there was no transfer of any account either at law or in equity until R assigned the various accounts specifically at the end of each month. A received notice of assignment of each account for the first time when the invoice stamped with notice of assignment was received by it. The result was that on receipt of the invoice stamped with the assignment, A was not entitled after this date to set off against that invoice an indebtedness of R which arose subsequent to the date of notice of the assignment of that account but the converse also held true. A was entitled to assert with respect to any particular assignment that on the date when notice of that assignment was given, on a proper accounting between A and R, there was nothing owing to R.

No duty was imposed on A to speak and to warn of a potential right of set-off because it knew the course of dealing between D and R. A did not mislead D and was under no obligation to disclose its own dealings and to volunteer information. The onus was on D, as assignee, to satisfy itself as to the equities which might exist when it took the assignments month by month.

If this factoring agreement was to be treated as a present and immediate equitable assignment of future choses in action, another problem arose.

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It was then within the terms of The Assignment of Book Debts Act, R.S.O. 1950, c. 25, and was absolutely void against the creditors of R for non-compliance with the Act.

APPEAL from a judgment of the Court of Appeal for Ontario^[1], affirming a judgment of Smily J. Appeal allowed.

J.D. Arnup, Q.C., for the defendant, appellant.

J.J. Robinette, Q.C., for the plaintiff, respondent.

The judgment of Cartwright, Martland and Ritchie JJ. was delivered by

CARTWRIGHT J.:—The relevant facts are set out in the reasons of my brother Judson.

For the reasons which he has given I agree with his conclusion that the rights of the parties are to be determined on the basis that Admiral received notice of the assignment of each account for the first time when the invoice stamped with notice of assignment was received by it. At these times as between Admiral and Rotor the former had the right to set off against its debt to Rotor whatever amount was due from Rotor to it for the tuners delivered up to that time. The question as to which I wish to add a few words is whether, in the particular circumstances of this case, Admiral is prevented from taking advantage of this equity as between itself and Dommerich.

There is no doubt as to the general rule. The debtor has as against the assignee the same right of set-off as he would have had against the assignor at the time at which he receives notice of the assignment; it is for the assignee to make inquiries and the debtor is not under a duty to volunteer information. There is, however, an exception to this rule which is enunciated in the following passage from the judgment of the House of Lords, delivered by Lord St. Leonards L.C., in Mangles v. Dixon and others^[2]:

I must take care and guard myself upon this important point, as not for a moment meaning to say that if that notice of the bankers had shown that they had been deceived, that they were advancing money upon a ground that they misunderstood, and if the charterers, Messrs. Mangles and Co., had stood by, well knowing that circumstance, and had been silent, the result would have been the same: I agree that the case would be altogether different. It would then have been incumbent upon the

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Messrs. Mangles to disclose the real circumstances of the case to Messrs. Dixon; and if they had not done so, they would be just as much bound as it is now contended they ought to be bound.

The limitation of the exception is made clear by the following sentence at p. 734 of the same judgment:

I admit the books do not establish the rule; but I think the principle is perfectly clear, that where there is no fraud, nothing to lead to the conclusion in the mind of the party who receives the notice, that the party who gives it has been deceived and is likely to sustain a loss; I say it is clear that the former is not bound to volunteer information.

It is argued for the respondent that the course of dealing between the parties must have resulted in Admiral knowing that Dommerich would pay over to Rotor the amounts shewn due to Rotor in the invoices which had been assigned by it to Dommerich in ignorance of the fact that Admiral was entitled to the right of set-off which is now asserted. Stress is laid particularly on the facts, (i) that all invoices for goods sold by Rotor to Admiral had for some years been assigned to Dommerich, (ii) that the notation “Cheque payable to L.F. Dommerich & Co. Inc.” appeared throughout this period at the top of each page of Admiral’s ledger of accounts payable to Rotor, (iii) that a letter from Dommerich to Admiral dated March 10, 1959, asking for payment of a small balance said to be overdue, contained the following paragraph:

We trust that you understand that we as factors must account to our client for the value of any invoice on the maturity date of said invoice and must look to our customers for payment of interest for any additional time taken.

(iv) that the notice of assignment stamped on every invoice included the following paragraph:

Any objection to this bill or its terms must be reported on receipt of same to L.F. DOMMERICH & CO., INC., 271 Madison Ave., New York, 16, N.Y.

All these circumstances appear to me to fall short of establishing knowledge on the part of Admiral that Rotor would request or accept payment from Dommerich without disclosing to it that Rotor was indebted to Admiral in amounts which the latter was entitled to set off against its liability to Rotor. Admiral had no express notice that Rotor was concealing the existence of this right of set-off from Dommerich or that the latter was not making such inquiries

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from Rotor as were necessary to protect its interest. I am unable to find that the course of dealing was such as should necessarily have led Admiral to realize that Dommerich was being deceived by Rotor. In the absence of such knowledge Admiral was not under a duty to volunteer information to Dommerich.

For the reasons given by my brother Judson and those set out above I would dispose of the appeal as he proposes.

The judgment of Martland, Judson, Ritchie and Spence JJ. was delivered by

JUDSON J.:—L.F. Dommerich & Company Incorporated, as assignee of accounts payable to Rotor Electric Company Limited, obtained a judgment against Canadian Admiral Corporation Ltd. for $46,181 and held it on appeal^[3]. The question is whether Admiral may exercise a right of set-off against the assignee, which it would have had against Rotor, the assignor.

Until September 1954, Admiral purchased materials from Rotor and made payment direct to that company. In September 1954, Rotor entered into a “factoring agreement” with Dommerich, the substance of which was that Rotor would assign its accounts receivable to Dommerich and Dommerich would notify the customers and make the collections for a stated charge to Rotor.

The factoring agreement is in the form of a letter addressed by Dommerich to Rotor. I set out now the provisions with which we are concerned in this appeal:

You agree to do all your business through us; to promptly assign to us, as absolute owners, all accounts arising from sales of your merchandise made during the period of this agreement, together with your rights in the merchandise sold; and to furnish us with duly executed confirmatory assignments thereof in form satisfactory to us.

No sales or deliveries of merchandise shall be made without our written approval as to the amount, terms of sale and credit of the customer, and we agree to purchase all of such accounts receivable in accordance with the terms of this agrement. We assume any loss on sales finally approved by us in writing which is due to the insolvency of the customer, provided the customer has received and finally accepted the merchandise without dispute, offset or counterclaim¼

We will credit you on the last day of each month with the net of the current month’s sales, such credit to be as of the average due date of such sales, plus ten (10) days provided the terms of sale and the credit of the customers have been approved by us. This credit shall constitute our purchase price of the accounts assigned to us. We will remit to you on the

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average maturity date of customers’ invoices, in Canadian funds, or more often, if requested, but in remitting we may reserve a reasonable amount to protect ourselves against the returns and claims of, and allowances to, customers.

You will notify us promptly of all disputes and claims and settle them promptly at your own expense. Our purchase of an account arising out of the sale which is the subject of an offset, claim or dispute, is automatically rescinded forthwith and the amount theretofore credited to you for such sale, together with interest thereon from the date of such credit, at our sole option, may be charged back by us in your account. Irrespective of such rescission or chargeback, the assignment of such account to us shall continue in full force until we are fully reimbursed.

For our services we are to charge to and receive from you as of the fifteenth of the month in which the sales are made a commission of one and one-half (1½) per cent of the net amount of all sales.

When this agreement was signed, Rotor sent to Admiral a form letter dated September 13, 1954, notifying Admiral that Dommerich would act as its factor. A statement of the then current indebtedness of Admiral to Rotor was attached, with the following endorsement:

This account has now been assigned to L.F. Dommerich and Company, Inc. and should be paid to them when due.

Admiral then began to remit to Dommerich the amounts from time to time accruing due by it to Rotor. In addition, in a ledger kept by Admiral, called “Vendors Ledger”, showing the name of Rotor, a notation appeared in the ledger sheet commencing August 30, 1954, reading:

CHEQUE PAYABLE TO—

L.F. DOMMERICH & CO. INC.,

271 MADISON AVENUE,

NEW YORK 16, N.Y.

A similar notation appeared in the ledger throughout the whole of the relevant period.

The procedure followed is set out in the reasons delivered by Laidlaw J.A. Rotor prepared the invoices, addressing them to Admiral, and stamped each with two notices as follows:

Any objection to this bill or its terms, must be reported on receipt of same to L.F. Dommerich & Co., Inc., 271 Madison Avenue, New York 16, N.Y.

For valuable consideration received this account has been transferred and assigned to L.F. Dommerich & Co. Inc., 271 Madison Avenue, New York 16, N.Y., and is owned by and payable only to it in Canadian funds.

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Each invoice was given an account number. The invoices to Admiral and other purchasers of merchandise from Rotor were sent to Dommerich together with a document signed by Rotor in these terms:

 We hereby confirm that for valuable consideration received, we have transferred and assigned to you all our rights, title and interest in and to the attached accounts aggregating $                                              and numbered from                                    to                     and that, in consequence, they are owned by and payable only to you.

Dommerich sent to the various purchasers the invoices received from Rotor stamped with the assignment.

In the period from 1954 until the fall of 1959, Admiral issued to Rotor a large number of “debit memos”, primarily arising from “charge-backs” for defective transformers delivered by Rotor to Admiral. These debit memos were set off against amounts owing by Admiral to Rotor.

Before September 23, 1959, negotiations were carried on between the President of Admiral and the President of Rotor for the sale by Admiral to Rotor of certain equipment called “tuners” to be incorporated in stereo phonographs to be manufactured and sold by Rotor. Rotor issued to Admiral a purchase order for 550 stereo tuners, to be delivered in instalments. The total purchase price for such tuners was $43,942.52. The first delivery of these tuners was made by Admiral to Rotor on October 13, 1959, and the order was completed by the last delivery on November 25, 1959.

At the time of the first delivery of these tuners to Rotor on October 13, 1959, the amount owing by Admiral on invoices issued by Rotor for goods sold by Rotor to Admiral was $62,470.67. Because the President of Rotor had been associated in some way with another business which had failed and had paid nothing to creditors, the President of Admiral wanted to ensure that his company would always owe more to Rotor than Rotor would owe to Admiral. He had the account checked and learned that his company then owed to Rotor something in excess of $60,000.

The result was that Admiral’s supervisor of accounts payable held enough in reserve on the accounts payable to Rotor to offset what was on the accounts receivable from Rotor. At some stage someone wrote a memorandum in Admiral’s ledger relating to Rotor “Leave balance at $43,942.52.”

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By arrangement between counsel for the appellant and the respondent at the trial, the precise accounting between the parties was not gone into at the trial, it being understood that if this became necessary, it would be dealt with on a reference. As a result, the individual remittances and invoices, together with any accompanying memoranda as to the particular debt in respect of which Admiral was making payments to Rotor’s assignee, were not filed as exhibits. This probably led to the comment of the trial judge that the evidence did not show what accounts were due and payable from time to time by Rotor to Admiral although the ledger sheet did show the dates when they were charged. He went on to find, however, that there was no right of setoff, because of the prior knowledge of the appellant “of the assignments being made of these last-mentioned accounts to the plaintiff.”

Rotor went into bankruptcy; at the date of the bankruptcy Rotor owed Admiral $43,942.52 for the tuners. Dommerich, in this action, claimed from Admiral $49,871.57, of which Admiral paid $5,699.44 without prejudice to its position. The claim is for $43,942.52, against which Admiral seeks to set off in complete extinction of the claim the same amount owing by Rotor to it.

The trial judge made a clear finding against the evidence given on behalf of Rotor that there was an agreement between the two companies (Admiral and Rotor) that Admiral would not “contra the accounts”.

Dommerich did not argue at the trial that the original factoring agreement constituted an equitable assignment of future accounts owing by Admiral to Rotor, and the reasons for judgment do not deal in any way with the point. The trial judge dealt with the matter on the basis that Admiral must have known (even if its President did not) of the existence of the factoring agreement and that the invoices were being assigned to the respondent. His opinion was that it would be contrary to the principles of equity to permit such a set-off as was claimed by Admiral. He also held that the type of set-off here claimed arose from an independent transaction and was not the type of “off-set” or counter-claim which had been referred to in the factoring agreement. On the question whether the onus was upon Admiral or Dommerich to make inquiry, he held that Admiral should have inquired whether Dommerich was

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aware that such a claim of set-off might arise, or should have notified Dommerich that such accounts were arising. He therefore gave judgment in favour of Dommerich for $43,942.52, with interest from the date of the writ.

The Court of Appeal held that Admiral knew that Dommerich was the assignee not only of existing debts owed by Admiral to Rotor but also of future debts, and that Admiral was not entitled to impair Dommerich’s rights by any setoff or counter-claim for an independent debt between Admiral and Rotor unconnected with the dealings giving rise to the assignment from Rotor to Dommerich. The Court of Appeal also held on a point raised by Dommerich for the first time that the factoring agreement of 1954 constituted an equitable assignment of all future debts owing by Admiral to Rotor.

With respect, I think there was error in finding that the factoring agreement constitued an equitable assignment of future choses in action. I have set out the relevant provisions above and I can find nothing in them beyond an agreement between Rotor and Dommerich binding each of them to do certain things in the future. The document does not contain words of present effect or transfer which could bind the subject-matter when it might come into existence (4 Hals., 3rd ed., p. 493). It is an agreement to transfer these book accounts each month on payments being made in accordance with the agreement and there was no transfer of any account either at law or in equity until Rotor assigned the various accounts specifically at the end of each month. That specific assignment is set out on p. 244 of these reasons. Admiral, therefore, received notice of assignment of each account for the first time when the invoice was submitted in accordance with the procedure outlined above. The result was that on receipt of the invoice stamped with the assignment, Admiral was not entitled after this date to set off against that invoice an indebtedness of Rotor which arose subsequent to the date of notice of the assignment of that account but the converse also holds true. Admiral was entitled to assert with respect to any particular assignment that on the date when notice of that assignment was given, on a proper accounting between Admiral and Rotor, there was nothing owing to Rotor.

There is some significance in the way in which the case was pleaded and put in at the trial. The statement of claim

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is based upon a series of specific assignments with a balance owing of $49,871.57 at the date of the writ, and the case was put in at the trial pursuant to this statement of claim. The sole basis of the judgment at trial was the imposition of a duty to speak and to warn of a potential right of set-off because Admiral knew the course of dealing between Dommerich and Rotor.

But Admiral was in no way concerned with the arrangements between Dommerich and Rotor except to pay in accordance with the assignments when notice was received. The arrangement was entirely for the financial advantage and convenience of Rotor and Dommerich. Dommerich earned a fee and Rotor avoided the trouble of running a collection department. I can see no reason why such an arrangement should impose additional duties on Admiral as a purchaser of Rotor’s products or restrict the rights which it would otherwise have in dealing back and forth with this supplier and customer. Dommerich could have instructed Rotor that it was not to get into a position which might enable a customer to exercise a right of set-off and could have examined Rotor’s books to see that this instruction was being followed.

On the other hand, what kind of notice should Admiral have given to Dommerich? Should it have said: “We are now selling goods to Rotor and may have a right of set-off?” Should it have gone further and said that because of doubts concerning the financial position of Rotor, it intended to keep its accounts in such a way that it would not be caught in a bankruptcy. It was for Dommerich to look after its own business and for Admiral to mind its own business. Admiral did not mislead Dommerich and was under no obligation to disclose its own dealings and to volunteer information. The onus was on Dommerich, as assignee, to satisfy itself as to the equities which might exist when it took these assignments month by month.

If this factoring agreement is to be treated as a present and immediate equitable assignment of future choses in action, another problem arises. It is then within the terms of The Assignment of Book Debts Act, R.S.O. 1950, c. 25, and is absolutely void against the creditors of Rotor for non-

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compliance with the Act. This document was never registered. The Act requires registration within thirty days of its execution, together with an affidavit of an attesting witness and an affidavit of bona fides. Admiral was a creditor entitled to the protection of the Act and the fact that Admiral knew in a general way of the arrangement between Dommerich and Rotor does not remove it from this classification. I cannot understand the criticism of Laidlaw J.A of Admiral’s position on this branch of the appeal. It was Dommerich that argued for the first time in the Court of Appeal that the factoring agreement was an equitable assignment. To answer this argument counsel for Admiral put forward a defence based upon The Assignment of Book Debts Act.

Dommerich, on appeal, claimed to appropriate the payments already made by Admiral to the accounts arising after October 13, 1959. This was fully answered on the argument by Admiral, whose payments were dearly appropriated to the accounts arising before that date.

I would make the following order. The appeal should be allowed with costs both here and in the Court of Appeal and the judgment at trial and in the Court of Appeal set aside. The order should include

(a) a declaration that the letter of September 1954 is not an equitable assignment of future debts owing to Rotor by Admiral;

(b) a declaration that with respect to each assignment from Rotor to Dommerich after October 13, 1959, Admiral is entitled to set off amounts owing to it by Rotor for goods delivered by Admiral to Rotor prior to notice of such assignment; and is obligated to Dommerich with respect to the accounts covered by such assignment for any difference between the total of such accounts and the allowable set-off;

(c) if the plaintiff so elects within 15 days from the delivery of these reasons, a direction for a reference to the Master at Toronto to determine what amount, if any, is owing by Admiral to Dommerich on the basis of an accounting with respect to each assignment on the basis set out above.

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If the plaintiff elects to take a reference, the costs of the trial and of the reference are reserved to the trial judge. If the plaintiff does not so elect, the action is dismissed with costs.

Appeal allowed with costs.

Solicitors for the defendant, appellant: Arnoldi, Parry, Campbell, Pyle, Godfrey & Lewtas, Toronto.

Solicitors for the plaintiff, respondent: Garvey, Ferris & Murphy, Toronto.