Security Interests

Security Interests
If you are selling consumer goods that cost a lot, say over $1000, getting customers to put up the whole purchase price at once can be a barrier to sales. If you choose to sell on installment however, you might be left unable to get your customer to continue to pay.  If the customer is solvent, you can enforce compliance with the sales contract itself. However, in case of an insolvent customer, which will often be the greatest instance of problems, a security interest in the property provides you will at least get the property back. A security interest means that you maintain an element of ownership of the property until it is fully paid for. These interests in Alberta are regulated by the Alberta Personal Property Security Act, RSA 2000. This blog takes a short look at what security interests are in an installment context, and how you can use them. For more detailed advice, feel free to reach out to the clinic!
In order to create a security interest in the first place, you should write a contract that says that it creates a security interest. The security interest coming into force is called attaching. Generally, the security interest attaches when purchase price is paid and the purchaser takes possession of the goods.[1] In order for the security agreement to properly attach, certain procedural steps have to be taken, including giving the purchaser a written copy of the contract.[2]
To be effective in bankruptcy, security interests must be perfected prior to the bankruptcy. Registration can perfect the security, so long as the interest has been validly attached.[3] To be perfected by registration, the security interest must have attached, and the process under the act for registration must have been completed, but those steps can have happened in any order.[4] Generally this involves registering a financing statement. Financing statements may be registered before the security agreement is actually made.[5] When registering, it is very important that you have the correct legal name of the debtor and the correct description of the goods. It is useful to get the birth certificate of the debtor. It is also best if there is a serial number for the exercise equipment, and that security interest is included in the registration.[6]
In the reserve of the registration process, you must discharge the security interest once the goods have been completely paid. In the case of security interest solely in consumer goods, the security interest must be discharged not later than one month after all obligations under the security agreement have been performed, unless the registration lapses before then.[7]
When the purchaser is in default, meaning not having paid their installment, you, the secured party, can notify the purchaser/debtor of their obligation to pay, and apply any money taken as collateral to the pay off the remaining price of the goods.[8] Reasonable collection expenses can be deducted from money collected in either of these ways.[9] The secured party also has the right to seize the collateral or otherwise enforce the security agreement by any method permitted by law.[10]
The law relating to contracts of sale applies to security interests created in installment purchase agreements.[11] In Alberta, the Sale of Goods Act regulates these kinds of sales. Under that act, and under the common law, you can sue the purchaser for the price of the goods if they do not pay. [12] This remedy is available to you in addition to the remedies available from your security interest. You must however, choose one or the other. You can seize the property, or you can sue for the purchase price, you cannot do both, subject to certain exceptions.
Finally, these kinds of sales, when made to a retail consumer, are regulated by the Consumer Protection Act. Under this act, consumer sales contracts cannot be harsh or unfairly one sided, and cannot be entered into if you as seller know the purchaser cannot pay.[13] In particular for installment sales contracts, the total price of the goods must be made clear, and must be more prominent than the cost of individual installment payments.[14] Online sales are in particular regulated by the Internet Sales Contract Regulation 81/2001. Once a customer has entered into an online sales contract, the seller must provide the customer with a written or electronic version of the contract within 15 days of the signing.[15] This copy of the contract can be sent by email, fax, or mail to an address provided by the purchaser.[16] If you do not provide the customer with all the information required by the regulations or give the customer an explicit opportunity to accept or reject the contract, the customer can cancel the contract up to seven days after signing it.[17] If you do not provide the customer a copy of the contract, the customer can cancel the contract up to thirty days after signing it.[18] Finally, if you do not deliver the goods within 30 days of the date of delivery written in the contract, or within thirty days of the signing of the contract if no delivery date is specified, then the customer can cancel the contract.[19] The court can intervene to stop any of these cancellations if they would be inequitable.[20]
In the case of a credit agreement for purchase, which would include the kind of installment purchase plan discussed here, the Consumer Protection Act allows a customer to pay off the complete balance of the price at any point.[21] If the consumer pays off their debt early, the seller must also return a portion of all non-interest finance charges.[22]
This gives you a basic idea of some of the considerations in selling consumer goods on installment in Alberta.

Matt Hammer is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.

References
[1] PPSA s12.
[2] PPSA s11.
[3] S25.
[4] S19.
[5] S43(4).
[6] S30(6)(b).
[7] S50(2).
[8] S57(1).
[9] S57(2).
[10] s58(1)(a).
[11] s15.
[12] Sale of Goods Act, s39.
[13] Consumer Protection Act, s6(3).
[14] Consumer Protection Act, s6(4).
[15] Regulation, s5(1).
[16] Regulation, s5(3).
[17] Regulation, s6(1)(a).
[18] Regulation, s6(1)(b).
[19] Regulation, s6(2) and (3).
[20] Regulation, s7.
[21] Consumer protection act 68(2).
[22] Consumer Protection act 68(3) and 68(4).