Louis Belle-Isle Lumber Inc. v. Craft Finance Corp.
and Fernhill Homes Ltd. et al.1
by Jonathan Chait *
The relative rights of building suppliers, contractors, and “mort-
gage” creditors who contribute to and make possible construction
of buildings has been a subject of controversy and of considerable
legal difficulty. In recent years in the construction industry, there
has been more and more of interim financing by way of “mortgage”
loans registered against buildings in the course of their construction.
At the same time, suppliers and contractors have furnished mer-
chandise or done work partly before and partly after the date of
registration of the mortgage loan deed. The “mortgage” creditor,
supplier and contractor all have real rights against the property
being built. In addition the “mortgage” deed will usually contain a
dation-en-paiement (giving-in-payment) clause, which purportedly
permits the “mortgage” creditor in case of a default on the part
of the debtor (builder or owner, as the case may be) to take title
to the property with effect retroactive to the date of the registration
of the deed of loan, free and clear of all encumbrances subsequently
registered, including the privileged rights of suppliers and contractors.
A recent decision of the Quebec Court of Appeal, Louis Belle-Isle
Lumber Inc. v. Craft Finance Corp. and FernhilZ Homes Ltd., 2 has
to a large extent clarified the position and the rights of the various
parties involved in this conflict of interests.
The facts of this case may be briefly related. On or about Febru-
ary 1, 1963, the Plaintiff, Louis Belle-Isle Lumber Inc., entered into
a verbal contract with the Defendant, Fernhill Homes Ltd., for the
supply of lumber for fourteen duplexes to be constructed on land
owned by the Defendant. The lumber was supplied on various dates
from February 22, 1963, to March 29, 1963, inclusive.
By Deed of Loan registered on March 26, 1963, the Intervenant,
Craft Finance Corp., loaned the Defendant the sum of $105,000.00.
To secure the payment of this loan, the properties in the course of
construction and in which Plaintiff’s lumber was incorporated were
hypothecated.
1 Q.B., Montreal, No. 8647, Aug. 16, 1965.
* Of the Junior Board of Editors, McGill Law Journal; Second Year Law
2 See supra. This case has been appealed to the Supreme Court of Canada.
Student.
No. 2]
CASE AND COMMENT
On May 17, 1963, Louis Belle-Isle Lumber Inc. registered a
supplier’s privilege against the properties hypothecated in favor
of Craft Finance Corp. On June 14, 1963, Fernhill Homes Limited
was adjudged bankrupt.
The Deed of Loan contained the usual dation-en-paiement clause
stipulating that in the event of a default on the part of the debtor,
Craft Finance Corp. would have the right to become the absolute
owner of the properties, free and clear of all encumbrances, charges,
and privileges registered subsequent to the date of registration of
the deed of loan.
Following a default on the part of Fernhill Homes Ltd., Craft
Finance Corp. instituted an action to be declared owner of the proper-
ties hypothecated. Judgment was rendered on July 11, 1963, de-
claring Craft Finance Corp. the owner of the properties hypothecated
with effect retroactive to March 26, 1963, the date of registration
of the deed of loan.
On June 17, 1963, Plaintiff instituted action to have its privilege
declared good and valid. On August 20, 1963, Craft Finance inter-
vened in the action invoking their ownership and asked that the
privilege be cancelled and radiated in pursuance of their dation-en-
paiement clause.
The Intervenant contended that because the privilege was reg-
istered subsequent to the deed of loan, it was rendered null and void
by the operation of the dation-en-paiement clause and should be
radiated. Plaintiff’s reply to this contention was that the privilege
was born prior to the registration of the deed of loan on the date
of the commencement of the deliveries of the lumber.
The Court had to determine whether or not the Plaintiff’s right
of privilege had been affected in any way by the operation of the
dation-en-paiement clause. In order to determine this question, it
was first necessary for the Court to determine the date of birth
of the privilege.
An examination of the relevant articles of the Civil Code reveals
an apparent contradiction on the question of the effective date of
birth of a privilege.
Article 2013 states that:-
“The workman, supplier of materials, builder and architect have a privilege
and a right of preference over all the other creditors on the immoveable,
but only upon the additional value given to such immoveable by the work
done or by the materials.”
Article 2013e reads as follows:-
“The supplier of materials has a privilege on the immoveable in the con-
struction of which the materials supplied to the proprietor of builder have
McGILL LAW JOURNAL
[Vol. 12
been used, or for the construction of which they have been specially prepared.
However, in the case where the supplier of materials contracts with the
proprietor himself, such privilege is conserved only by registration, before
the expiration of thirty days after the end of the work, of a notice containing:
……………………………………………………………………………………………………………………
…..
Article 2103 states that:-
“The privilege of every person, except the workmen, mentioned in article
2013, is created and preserved by the registration within the proper delay
at the registry office of the division in which the immoveable is situated,
of a notice, drawn up in the form of an affidavit of the creditor or his
representative, sworn to before a justice of the peace, a commissioner of
the Superior Court, or a notary, setting forth the name, occupation and
residence of the creditor, the nature and amount of his claim, and the
cadastral number of the immoveable so affected.
Article 2103 appears to say that the registration creates and
preserves the privilege, whereas 2013 C.C. and 2013e C.C. refer to
conservation of the privilege by registration. In the Superior Court,
Bertrand, J., basing himself on Art. 2103, dismissed the Plaintiff’s
action on the ground that the right of privilege arose subsequent to
the registration of the anterior Deed of Loan and was consequently
extinguished by the exercise of the dation-en-paiement clause.
The Court of Appeal was of a contrary view, holding that regis-
tration does not give birth to the privilege, but rather protects and
conserves it. Montgomery, J.,3 stated that Article 2103 must be read
together with Articles 2013 and 2013e. Article 2103 merely sets out
the formalities to be observed in order to render enforceable the
privilege. This would seem to be the most reasonable interpretation
because in order to conserve a privilege by registration it must exist
prior to the registration. Article 2013e precludes the notion which
seems to be implied in Art. 2103 C.C., that registration gives rise
to the right of privilege 4 Registration rather protects and con-
serves it.
Extensive jurisprudence r supports the proposition of Giroux o
that a privilege is born without formalities.
3 At page 6 of his notes.
4 This question is discussed at some length in Nadon Brick and Stone Ltd. V.
H. Brummer Construction Co. Ltd. et al, C.S., Montreal, No. 613, 137, March 26,
1965 (Andr6 Sabourin, J.) at page 3.
5 See Vachon V. Bigras, (1927) 33 R.L. n.s. 168; Munn and Shea Limited V.
Hogue Limitie and Davis, 44 B.R. 198, [1928] S.C.R. 398; Gadbois v. Stinson-
Reeb Builders Supply Company, [1929] S.C.R. 587 at 596; Kirallah v. Gagnon,
61 B.R. 264 at 280; La Perrelle Lumber Co. Ltd. v. Langlois et Lizotte, 77 C.S. 1;
Pagg v. Beach Construction Co. Ltd., [1953] C.S. 284.
6 Geo.-M. Giroux, Le Privilege Ouvrier (1933), No. 314, 315, 320 and 322.
No. 2]
CASE AND COMMENT
The next question was to determine the exact date when the
privilege was born. The leading case on the subject is Munn and
Shea Limited v. Hogue Limitge and Davis.7 An action was instituted
by the Respondent, Hogue Limit~e, a supplier of materials against
the Defendant, Davis, on a privilege affecting lots owned by Davis.
Before the hearing, Appellant, Munn and Shea Limited, inter-
vened in the case and prayed for the dismissal of the action, on the
basis that it became owner of the immoveables before the privilege
was registered. The Court of Appeal’s ruling s that the privileged
rights of the supplier commenced from the date of the delivery
of the materials was confirmed by a unanimous judgment of the
Supreme Court.9
Another view is that the privilege originates with the contract
and first delivery of the merchandise or the commencement of work
by the contractor.10
The delivery of the materials had begun prior to the registra-
tion of the Deed of Loan, but a number of deliveries were made
after this date. The Court was thus faced with the problem of
determining whether the privilege for materials supplied or work
done after the registration of the Deed of Loan was subordinate to
the dation-en-paiement clause in the Mortgage Deed and was subject
to cancellation and radiation in the event of implementation of this
clause. The Court held that the privilege subsisted even as to ma-
terials supplied after the registration of the Deed of Loan.
It would, it is submitted, have been unreasonable to hold other-
wise. The Plaintiff, before making its first delivery, searched the
title at the Registry Office and found that it was free and clear.
No mortgage deed or balance of sale with a resolutory clause had
been registered against the properties. Then it began to deliver the
materials in execution of its contract. Surely the law does not re-
quire that the supplier, before each subsequent delivery, should visit
the Registry Office in order to ascertain whether the owner had
dealt with the property in such a manner so as to prejudice his
rights. If the Court had decided otherwise, it would have put the
supplier in the almost impossible position of not being able to go
ahead with the contract unless he made searches at the Registry
7 [1928] S.C.R. 398.
8 (1928) 44 B.R. 198.
9 [1928] S.C.R. 398.
10 Nadon Brick and Stone Ltd. v. H. Brummer Construction Co. Ltd. et al,
cited at note 4, supra; Clairment Delisle Inc. v. L & S. Construction Corp., et al,
C.S., Montreal, No. 609, 512, May 21, 1965, (Andr6 Nadeau, J.) at p. 4.
McGILL LAW JOURNAL
[Vol. 12
Office prior to each delivery. In the case of a contractor, it would
require daily searches at the Registry Office since the contractor
incorporates work daily on the immoveables as it executes its con-
tract.
The position of the mortgage creditor is different, however. He
sees what is actually going on by way of construction on the proper-
ty which he takes as security for his loan. It would then be a simple
matter for him to find out who is supplying materials or working
on the property and to take the necessary precautions to protect his
rights, such as securing renunciations of privilege or proper waivers
of priority or ensuring payment to such contractors and suppliers.
It follows, then, that a supplier or contractor who assures him-
self that there is no registration which would defeat his right of
privilege is justified in proceeding to execute his contract, without
fear of having his privilege radiated by the operation of a dation-
en-paiement clause. This judgment accordingly clarifies satisfacto-
rily the rights of the mortgage creditor, supplier, and contractor,
and indicates what steps each should take to ensure the preserva-
tion of his rights.
