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The Canadian Approach

While Australia and a other common law countries such as Singapore22 have closely followed the English approach, others such as Canada and the United States have adopted significantly different laws concerning ROTs.

In Canada, sale of goods legislation falls within provincial jurisdiction. Each province has almost identical legislation modeled after the Sale of Goods Act 1973 (UK). For example, under the Ontario Sale of Goods Act R.S.O. 199023 a similar position to that of England is taken concerning the passage of title. Section 18(1) declares that property in goods passes at the moment the parties intend it to pass. This allows parties to contractually agree to retention of title provisions.

However, each province has also legislated a version of the Personal Property Security Act (PPSA)24 which significantly alters the English common law position concerning the registration of security interests created by way of a retention of title provision.

As explored above, under English common law, a well drafted ROT clause does not need to be registered, as it does not constitute a charge or other security interest pursuant English company law. However, under the Personal Property Security legislation in Canada, a retention of title clause is classified broadly as a ‘security interest’.25 All security interests must be registered in order to be effective against third parties.

Section 20(3) of the Ontario version of the PPSA expressly indicates that purchase money securities such as ROT clauses must be registered within ten days to be perfected.26 In effect, the PPSA reduces a seller's status from an owner of the goods to a mere secured party comparable to a creditor with a charge. As a secured party, the status of their security is subject to the rules of priority outlined in the Act.

22AG v Peter Chi Man Kwong [1988] 2 M.L.J. 69. In Ag v Peter Chi Man Kwong it was held that reservation of title clauses are recognised in Singapore and they do not need to be registered under s 131 of the Companies Act. As cited by Joyce Lee Suet Lin, ‘Company Charges Under Singapore Law: Legal and Practical Implications’ (2003) 14(1)

International Company and Commercial Law Review, 3.

23Sale of Goods Act R.S.O. 1990

24In Ontario see for example the Personal Property Security Act R.S.O. 1990.

25Personal Property Security Act R.S.O. 1990, 2(a) which states that the act applies to ‘every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest.’ See also the definitions section for ‘security interest’ where it includes purchase money securities as security interests.

26Personal Property Security Act R.S.O. 1990, 20(3).

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In contrast to the English approach, sellers relying on ROT clauses are no longer automatically ranked higher in priority against prior secured creditors.27 The sellers priority over the goods can only be established if the requirements for perfecting security interests applicable to purchase money security interests (ROT clause) under the PPSA are satisfied.

This approach is sometimes critised for its lack of business efficacy. That is, every time a retention of title clause is agreed to, it must be lodged in a similar fashion to that of a charge in order to be effective. For businesses that enter sales agreements on a daily basis, this process becomes tedious and expensive to administer.

Furthermore, a seller who provides goods under an ROT has limited remedies under the PPSA when compared to the English approach. For example, the seller does not have the right to simply repossess the goods or ‘dispose of them prior to the buyer’s insolvency through other trade channels without having to account to the debtor and third parties.’28 The remedy of repossessing the goods is not available because, in theory, despite a contract which purports to retain title, seller’s are in fact merely creating a charge under the PPSA. On this point, Michael G. Bridge states:

The only remedy is to allow the buyer to on-sell and reclaim [the] debt owed. This means that the buyer (who is now the owner of the goods subject to the security interest) has a full-fledge right of redemption and a corresponding right to any surplus on a forced resale of the collateral.29

Nevertheless, to ease the statutory burden on the seller, under s 81.1 of the Federal Bankruptcy and Insolvency Act,30 a supplier may repossess goods from a business which has gone into bankruptcy or receivership within thirty days of delivery. In other words, in some circumstances under the

PPSA a seller who sells on credit to a buyer can still rank higher in priority against prior secured creditors.

27Michael G. Bridge, Roderick A. Macdonald, Ralph L Simmonds and Catherine Walksh, ‘Formalism, Functionalism and Understanding the Law of Secured Transactions’ (1999) 44 MCGLJ 567, 593.

28Ibid, 592.

29Ibid, 592-593.

30Bankruptcy and Insolvency Act R.S.C. 1985.

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How does Canada apply this approach in international context?

The Ontario version of the PPSA specifies that in a conflict of laws situation, the law of the debtor’s (i.e. buyer’s) jurisdiction shall apply in resolving the dispute.31 Therefore, when faced with a claim over goods subject to an ROT clause, Canadian courts must settle the dispute by applying the

PPSA.

This occurs even where the law selected by the parties to govern a contract was not Canadian law. Therefor, under the conflict of laws rules in the PPSA, if a contract specified English law to govern, the English seller would be led to believe he did not need to register his interest (because as noted English does not require registration). Yet, because Canadian courts will still apply the PPSA in such a situation, they conclude that the English seller’s interest should have been registered in Ontario in order to be perfected and valid against other creditors. Indeed, this is a significant factor that all enterprises selling to Canadians on credit must carefully consider. As discussed below, it is a trap in which many international sellers have found themselves in, subsequently losing title to their goods.

The US Approach

The Canadian approach appears to be modeled after the Uniform Commercial Code (UCC) in the United States. Specifically, under Article 9 (Secured Transactions) a seller can include a retention of title provision over goods supplied to a buyer and receive special priority over previously secured creditors.32 However, as in Canada, if the seller wishes to make its security interest effective against third parties, it must perfect the security interest by filing a ‘financial statement’ (i.e. register the security interest).33

The security interest created under a financial statement is effective for five years from the date of filing. After the five year period, the perfection of the security interest ceases unless a continuation statement is filed by the secured party within six months of its expiration.

31Personal Property Security Act R.S.O. 1990, s 7(1)(a)-(b).

32UCC § 9-102(2) states: ‘This Article applies to security interests created by contract including...conditional sale...or title retention.’

33UCC § 9. As cited by Philip R. Wood, ‘Comparative Law of Security Interests and Title Finance’ 2nd Ed (2007), [33-030].

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Again, in theory the seller is not so much retaining title as they are creating a charge over the goods supplied. This is because a retention of title clause cannot prevent the ownership of the goods passing to the buyer as soon as they are delivered. As such, just as under the PPSA there is no specific right for the seller to repossess the goods unless repossession is expressly dealt with in the contract and that right does not affect another creditor’s prior interest over the goods.

Remedies under the UCC are very similar to the remedies provided for under the PPSA in Canada. The UCC also deals with situations where the buyer enters insolvency and has not paid for the goods. In such instances, Article 9 s 324(b) allows for a party to trace proceeds from on-selling the goods, but only where the proceeds are identifiable (for example in a separate bank account) and received by the buyer on or before the date of delivery of the inventory from the original seller.

How does the US apply this approach in international context?

The most potent illustration of the problem sellers face with regards to the use of ROT clauses in international trade comes from the American case of Usinor Industeel v. Leeco Steel Products, Inc.34

In Unisor, a contract for the sale of steel from a French company (Usinor) to an American buyer (Leeco) in Chicago stated that French law was to govern the contract. Leeco even agreed that any dispute regarding the steel shipments would be resolved by a French court. However, as explored below, in retention of title cases, the asset or goods in question will usually be in the buyers jurisdiction. A seller has little option but to commence proceedings in the buyers courts as a foreign judgement would likely be of little use in obtaining good title.

When the case was brought to the Illinois District Court, Lindberg J was faced with determining the appropriate law to govern the contract and its retention of title provision. Rightfully so, His Honour noted that the dispute was governed by the CISG as France and the United States were both signatories. However, relying on the Australian case of Roder, His Honour concluded that the CISG did not govern the validity of the retention of title provision.35

This led to a consideration, as in Roder, of which domestic law applied to govern the validity of the retention of title clause. Lindberg J makes it clear that his decision in selecting the appropriate law was swayed by the fact that a Chicago based bank (LaSalle), which had financed Leeco’s purchase

34209 F.Supp.2d 880 N.D.Ill.,2002. March 28, 2002. Hereinafter Usinor.

35Ibid, 886.

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through a line of credit, and whom had a registered floating charge over Leeco’s inventory (including the steel), would be affected by the applicable law.

That is, if French law applied, Usinor’s interest in the steel did not need to be registered under the

UCC. Usinor would retain title over the steel, meaning that LaSalle (the American bank) would have no security interest because as a charge holder it cannot take an interest in a debtor’s inventory which the debtor has not yet acquired title over himself.

Conversely, applying Illinois’ law would mean that the retention of title clause, classified as a ‘security interest’, should have been registered in order to gain priority over LaSalle’s floating charge. Of course, the French enterprise, Usinor, had not registered its ROT clause under the UCC as it was unaware it was required to do so.

Despite the contract stating French law was to govern the dispute, Lindberg J applied the law of Illinois in order to protect LaSalle’s (the American bank’s) floating charge. On this point, Lindberg J looked to the similar U.S. case of Gordon v Clifford Metal Sales Co. Inc.36 where it was held that the law of the state of the situs of the steel at the time of insolvency was the most appropriate law to govern the contract.37 He declared that the State where the steel is located will have a ‘natural interest’ in the transaction.38 As such, its laws should govern the outcome. While it is far from a strict legalist approach to interpreting a contract and its choice of law provision, it is hardly surprising that American courts will apply American law in such circumstances.

Nevertheless, Usinor forwarded an argument which this paper attempts to bring to light. Usinor argued that on a practical level,‘[international sellers] would not be able to conduct an evaluation of determining the applicable law to security interests in the hundreds of jurisdictions to which [they] ship and sell [goods] because the cost would be unreasonable.’39

Usinor highlighted that the current international framework forces sellers to understand the securities laws of each country it trades with in order to understand if, or how its ROT can be made

36602 A.2d 535 (1992).

37Usinor, 887

38Ibid, 886.

39Ibid, 887 (at Foot note 1).

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valid. Aside from just Canada and the United States, other countries such as Spain40 and Israel (in some cases)41 require the registration of the interest created by way of an ROT clause.

Furthermore, similar to the position in Canada and the United States, countries such as Spain42 and China43 will also apply their own domestic property and security laws regardless of the choice of law provision in the contract.

The Swiss Approach

The Swiss civil law approach to ROT clauses in international trade is unique in comparison to its common law counterparts in England, Australia, Canada and the United States. As a civil law country that relies more on its civil code than its case law, Switzerland is the only country with laws that expressly deal with how retention of title clauses will be governed both domestically and internationally (i.e. for Swiss importers and exporters). For this reason, the Swiss approach is perhaps the most advanced because, as discussed below, it forces Swiss enterprises to understand their obligations in terms of registering their security interests abroad.

Article 104 of Switzerland's Federal Code on Private International Law44 states that the parties to an international sales contract are entitled to choose the law governing not just the contract, but also the transfer of ownership. This is a sharp contrast to the Australian approach in Roder, the Canadian position under the PPSA and American position outlined in Usinor which contend that it is the domestic law of either the debtor (PPSA), or the situs of the goods (Usinor) that applies to the transfer of ownership regardless of the choice of law.

Therefore, in Switzerland, parties under an international sales contract may elect to apply the laws of Australia to the transfer of ownership. In such an instance, the ROT clause would not need to be registered with any public register in either Australia or Switzerland. Even more significantly, a seller wishing to enforce its ROT clause in a Swiss court could have the Swiss courts apply Australian law.

40Uria Menendez, ‘Spain: Retention of Title Arrangements as Security Interest in Spanish Related Financings’ (2002) Mondaq, 3.2. Available online at <http://www.mondaq.com/article.asp?articleid=15949>.

41Amir Seraya and Mark Phillips, ‘Israel: Sale of Goods - Retention of Title Clauses’ (2003) International Company and Commercial Law Review.

42Above n 40, 3.2.

43Alexander von Ziegler, ‘Transfer of Ownership in International Trade’ (1999), 291.

44Switzerland's Federal Code on Private International Law. Private translation of the official text by UMBRICHT Attorneys, Switzerland, © by Dr. Robert P. Umbricht, LL.M.

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By contrast, if the applicable law required the ROT clause to be registered (for example in Canada or the United States), according to Swiss Law the ROT is only valid and operative when it has been entered in the appropriate public register. Otherwise such a clause is null and void.45 This provides Swiss exporters with greater clarity as to what the current law concerning ROT clauses in international trade actually is, and when they need to register their interests.

In fact, Swiss law expressly warns sellers that retention of title for goods destined for export shall be subject to the law of the state of destination.46 This means that even where Swiss law is applied to govern the contract, it is the domestic laws of the buyer that will likely apply to the transfer of title in the goods.

For Swiss enterprises importing goods subject to an ROT clause, Article 102 (2)-(3) of Switzerland's Federal Code on Private International Law47 requires the registration of ROTs where Swiss law is selected to govern the passing of title. However, the foreign seller’s retention of title clause remains effective in Switzerland for three months regardless of whether it was registered or not. Failing to register the interest during this time may result in the seller loosing its priority over the goods in relation to other secured creditors.48

The Swiss approach recognises the fact that countries around the world with which Switzerland trades have different approaches to determining the validity of ROTs. It encourages its enterprises to register their ROTs and comply with the laws and registration requirements imposed by its trading partners. As a result, Swiss enterprises are far less likely to end up in the unfortunate situation that the French company Usinor found itself in, in the United States.

The French Approach

French law permits a seller of goods which are subject to a retention of title clause to recover them where the buyer is bankrupt, but only subject to certain conditions. For example, the retention of title clause must be in writing and executed no later than the date of delivery of the goods to the

45Switzerland's Federal Code on Private International Law, Art. 715(1). As cited by Thomas Laemmli, ‘Transfer of Ownership in International Sales of Goods’ (2007), 36.

46Ibid, Art. 103.

47Above n 44.

48Above n 45.

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buyer.49 The goods covered must also be tangible personal property and identifiable. That is, they cannot be incorporated into other goods via manufacturing. This is a far more stringent requirement to the position in the UK and Australia, where ROT clauses can provide for the equitable remedy of tracing proceeds where goods subject to an ROT clause are used to manufacturing a new good.

As a result, under the French approach it is easy to see why the French company Usinor believed it had properly retained title to the unmanufactured steel provided on credit to their American trading partner (Leeco).

Summary of Current Approach: A Caution to International Sellers

The above analysis highlights the significantly different approaches taken by domestic courts around the world for determining the validity of ROT clauses. The differing approaches requires that prudent international sellers consider two main factors. First, the law chosen to govern the contract must permit the use of ROT clauses. Perhaps more importantly, even where the law permits ROT’s, the seller must then also ensure that no further steps are required to make the clause effective against both prior and post transaction secured creditors.

Second, sellers must inquire whether the conflict of laws rules in the buyer’s country will allow for the use of the law chosen to govern the contract. For example, if the contract specifies Australian law to govern, but the buyer’s insolvency court refused to apply Australian law to govern the passing of title (as under the PPSA) the seller must still register their interest.

As a side note, the seller may want to also consider how arbitrators as opposed to courts will interpret the current law of ROTs in international trade. The trend away from solving international commercial disputes in courts and towards arbitration adds another variable to the equation, making the law even more unclear and decentralised. Arbitrators may be more willing to apply a choice of law provision in a contract to the passing of title, despite a buyer’s laws (such as Canada) purporting to apply. Nonetheless, the enforceability of such an award under the New York Convention50 will still face the public policy test in any domestic court.51

49The Law Reform Commission (Ireland), ‘Report on Debt Collection: Retention of Title, 14-15. Available online at <http://www.lawreform.ie/publications/data/volume7/lrc_51.html>.

50The New York Convention On The Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 1958, 330 UNTS 3, (entered into force 7 June 1959).

51Ibid, Art V(b)(2) .

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Furthermore, because many arbitration awards are made behind closed doors and the doctrine of precedent is not as closely followed in international commercial arbitration, predicting how an arbitrator will deal with ROT disputes is not an exact science.

Part II

Part I has outlined how retention of title clauses operate in private international law. By analysing the different approaches domestic courts have taken around the world for enforcing retention clauses this paper has argued that the current law concerning ROTs is decentralised and often unclear for sellers.

As a result, sellers who provide goods on credit to their buyers have to spend significant time and money to understand what the personal property and securities legislation of each trading partner are, and where appropriate, spend further resources registering each particular interest to ensure their goods are protected in the event of a buyer’s insolvency. Having to do this each time goods are sold creates an excessive administrative burden on trading companies and manufacturers.

For smaller enterprises, the added legal expenses and administrative burdens required to protect their interests are likely enough to demote the use of ROTs in international trade and require buyers to have upfront capital. As such, reducing the administrative and legal burdens is important for promoting international trade and providing confidence to international sellers. More importantly, easing the legal and administrative burdens reduces the sellers risk of losing title to their goods, as in the case of Usinor.

Reform

In a seller’s ideal world they could provide goods on credit, retain title and be able to repossess those goods at the buyer’s expense should there be a default on the credit agreement. But just how far will countries be willing to go in achieving harmonisation? Having countries such as Canada and the United States remove their legislative requirements to register ROT clauses is not a likely outcome of any attempt at reforming the current legal framework.

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Accordingly, the question is, without having counties change their requirements to register ROT clauses as security interests, how can the international legal framework be reformed to protect sellers from losing title to their goods, and reduce the associated legal and administrative costs for international sellers?

UNCITRAL Model Law on Cross Border Insolvency

The most logical starting point is UNCITRAL’s Cross Border Model Law on Insolvency. This is because, as noted, the majority of disputes concerning international ROT clauses will occur where the buyer enters insolvency.

In the short term, to make strides towards a more harmonised legal framework we can turn to the initial steps the EU has implemented in their Insolvency Regulations. That is, the Model Law should be amended to guarantee the same treatment to international sellers that a domestic legal system provides to enterprises within its borders with respect to recognising simple ROT clauses.

Similarly, just as in Switzerland's Federal Code on Private International Law, the Model Law should expressly highlight that a seller may be required to register their ROT in the buyer’s jurisdiction.

At a minimum, these two provision will bring the risk associated with ROTs in international trade to the forefront for sellers. They will act as a warning mechanism to parties such as Usinor to take action to ensure they do not lose title to goods.

A Proposition for Long Term Reform

However, to fully protect international sellers from the present risk posed by ROTs more ambitious long term reforms should be sought. When considering more substantial reforms, the current legal framework can be neatly divided into countries that require the registration of ROT clauses to perfect the newly created security interest and those that do not. If we accept that countries such as the Untied States and Canada will not alter their registration requirements, The Model Law will be most effective by dealing with these two categories separately in two protocols or optional articles that countries can adopt.

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