Q: Our borrower was supposed to provide a general security agreement to secure its loan, and our back office made an Ontario PPSA1 registration against the borrower in anticipation of that. The CFO sent us an email that purported to attach a signed security agreement, but I see now upon viewing the attachment that the agreement was never actually signed for some reason. Can we rely upon the email and its unsigned attachment? The CFO recently left the borrower so I am reluctant to go back and ask his replacement for this to be done.

A: Pursuant to the Ontario PPSA, a security interest is not enforceable against a third party unless it has “attached” to the collateral being charged.
Subsection 11(2) outlines the formal requirements for attachment, which include the following:

  • a signed security agreement exists;
  • the security agreement contains a description of the collateral sufficient to identify it;
  • value has been given by the secured party to the debtor; and
  • the debtor has rights or the power to transfer rights in the collateral.

In certain limited circumstances, the courts in Ontario and in other provinces have held that a legally binding agreement can exist between parties despite the absence of a signed agreement. In some cases, email communications have been sufficient evidence of an agreement.

In Beck2, for example, the court found that a settlement agreement existed between two parties notwithstanding the fact that the defendant did not sign the agreement or a release. By email correspondence, the parties discussed the terms of settlement and the defendant explicitly stated that she accepted the terms of the settlement. Consequently, the court was willing to find and enforce a binding agreement.

In SR Télécom3, the court considered whether an enforceable security interest existed. It was argued that a security interest was created through a series of discussions and email communications. However, a formal security agreement was not prepared or signed. The case was ultimately decided on other grounds. The court noted that it was open to doubt whether the communications were sufficient to establish a security interest. However, the court did not rule it out considering the “low threshold” required to be met.4 It is important to note, however, that SR Télécom was a decision of the British Columbia Supreme Court and there are some variations between the Ontario PPSA and the British Columbia PPSA.5

In considering whether certain alleged oral security agreements were enforceable, the Ontario courts have strictly construed the Ontario PPSA and held that the lenders in those cases did not have “signed” security agreements.6 Although having an email with a clear intention from the debtor to deliver an attached unsigned agreement represents a step up from the “oral agreement” position, it is not clear whether the courts would see it as enough to override the express statutory requirement for a “signed” document.

In the case at hand, the email sent by the former CFO may be sufficient evidence of an agreement, as between the borrower and the bank, to grant a security interest. However, it is unlikely to be considered as enforceable against third parties. In the absence of clear judicial authority, a duly executed general security agreement is the only way to establish the requirement for attachment and the bank’s ability to enforce its interest. Even if we assume that the former CFO had the authority to execute and deliver the general security agreement at the time, it would be best to pursue a replacement fully executed and delivered general security agreement to complete the bank’s security package.