This commentary was first published in the Financial Post on November 21, 2008.
One of the important roles of the Supreme Court of Canada is to resolve conflicts among lower courts on difficult issues of law and, in the commercial sphere and other areas of consensual law, to develop rules and doctrines that promote predictability of outcomes and enhance the free-flow of goods and services among contracting parties.
Judged by these standards, the Supreme Court's decision last month in Saulnier vs. Royal Bank of Canada will disappoint many, not because of what the court said but because of what it failed to say.
The immediate issues before the court were whether a bank can acquire a valid security interest in a commercial fishing license issued by the federal Department of Fisheries and Oceans and held by a Nova Scotia fisher, and whether a trustee in bankruptcy acquires the fisher's interest in the license if the fisher becomes bankrupt.
However, fishing licenses are only a small subset of a much larger realm of licenses issued by a multitude of government agencies --federal, provincial and municipal. Typical examples are milk quotas for dairy farms, tobacco quotas for tobacco farmers, nursing home licenses to care for the elderly, taxicab licenses, landing licenses for aircraft at commercial airports and broadcasting and cable licenses.
The difficulty in all these cases is the great uncertainty surrounding the legal status of the licenses and, in particular, whether the licenses can be transferred, whether they can be used as collateral for a loan from a bank and whether the license vests in the trustee if the licensee becomes bankrupt. At common law, a license is not treated as creating a proprietary interest but only as granting permission to the license holder to do what otherwise would be unlawful.
Taken literally, this minimalist view means, for example, that a lender cannot acquire a valid security interest in a license unless legislation provides otherwise. Consequently, a prudent lender will not lend on the security of the license because the borrower, or the borrower's trustee if the license holder goes bankrupt, would always be free to argue that the security agreement was ineffectual.
In Saulnier, Justice Binnie, writing for a unanimous Supreme Court, recognized the commercial importance of licenses, but nevertheless decided the issues before the court on very narrow grounds. He held that an Atlantic fishing license creates a property interest in favour of the fisher since the license entitles the fisher to fish and to become the owner of fish when they are caught.
He supported his conclusion by noting the broad definitions of security interest in the provincial personal property security acts and of property in the federal Bankruptcy and Insolvency Act for the purpose of determining what rights of the borrower were transferable to a lender in the first case, and what rights of the debtor vested in a trustee in the second where the debtor became bankrupt.
Regrettably, Justice Binnie gave no guidance about how lower Canadian courts were to characterize other types of licenses. He maintained this silence even though he was fully aware of the litigation that had swirled around the issue for the past 25 years, and knew that the courts were split on the issue. To complicate matters more, Justice Binnie also made it clear that he disapproved of the reasons adopted by those courts that had upheld the validity of security interests given by license-holders to lenders. Regrettably, he did not indicate what alternative tests the lower courts should apply in the absence of statutory guidance. Nor did he explain why fishing licenses should be treated more favourably than other types of licenses, when held as security or claimed by the license's trustee in bankruptcy, just because of the fisher's contingent interest in fish that had not yet been caught and might never be caught.
It may be that Justice Binnie, or other members of the Supreme Court concurring in the decision, were unwilling to commit themselves about the status of licenses other than fishing licenses. If so, the reluctance was surely bought at too high a price and another 25 years of litigation may ensue before the controversy is finally put to rest by the court.
Another aspect of the court's judgment is also controversial. Though he recognized the commercial importance of licenses, Justice Binnie echoed Justice Fichaud's criticism in the Nova Scotia Court of Appeal that "commercial realities" cannot legitimate wishful thinking about the notion of property in provincial legislation.
In my view, Justice Binnie took too narrow a view about the influence of commercial practices in shaping the common law. Canadian common law, like its parent the English common law, has always prided itself on its pragmatism and many branches of Canadian private law have changed and adapted themselves over the years in response to commercial needs and practices and the parties' expectations. There is no obvious reason why our conception of licenses shouldn't likewise respond to well established and soundly based commercial expectations.