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 contact 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 (“BCPPSA”), 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.