Does a Canadian lender have to worry about unregistered
interests retained in goods sold under a contract governed by the
United Nations Convention on Contracts for the International
Sale of Goods1 (the "Convention")?
Based on the analysis in a recent Supreme Court of British Columbia
case,2 the likely answer is "no".
The goods in question in that case were scrap steel rails
located in British Columbia. In somewhat complicated facts
involving a "back-to-back" transaction, a German company
bought the steel from a Canadian company and then immediately sold
the steel to a Chilean company which was related to the Canadian
company. The German seller was not paid in full by the Chilean
company, and in the contract of sale it expressly retained title to
the steel. The Chilean purchaser then purportedly sold the scrap
steel, which it still had not paid for, to a Uruguayan company.
Throughout all of the transactions the steel remained in British
Columbia. Given the number of nationalities involved it would seem
that a United Nations convention should apply. And while the court
found that the Convention did apply, it did not prevail.
The contract of sale by the German company to the Chilean
purchaser was made subject to the Convention, which has been
adopted as law in British Columbia under the International Sale
of Goods Act.3 Under the Convention, the
reservation of title by the German purchaser would have prevailed
against third parties, such as the purported Uruguayan purchaser.
Unlike under Canadian law, bona fide third parties with an interest
in the goods are generally not protected under the Convention,
which favours the rights of sellers over third parties. However, in
what appears to be the first time the issue has been considered in
Canada, the court found that domestic laws, such as the Sale of
Goods Act4 ("SGA") or Personal
Property Security Act5 ("BC PPSA"),
which give certain rights to third parties, apply to contracts
subject to the Convention, and could defeat the rights of a seller
under the Convention. In its analysis, the court determined
that the German seller's reservation of title, which would
otherwise have been effective against the Uruguayan purchaser,
could be subject to the rights of purchasers under the SGA or
secured parties under the BC PPSA. As a result, although the German
seller was ultimately successful in its claim to the steel for
other reasons, it was not successful under the Convention simply
because it retained title. Title reserved by a seller under a
contract governed by the Convention could be subject to claims of
third parties under Canadian domestic law.
Although a priority dispute between the seller's claim to
title and the claim of a secured party under the BC PPSA did not
arise on the facts of the case, lenders in Canada can take comfort
from the analysis of the court. That is because, if the analysis
were applied to security interests, the seller's unregistered
reservation of title would have been ineffective against a
perfected security interest in the steel given by the Chilean
purchaser of it. So in round one of this scrap between
international sellers with rights under the Convention and Canadian
buyers or secured parties claiming an interest in the goods sold,
it was determined that, on the right facts, domestic law would
prevail. And to Canadian lenders that comfort should be a lot more
valuable than any pile of scrap.
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