Data

Date:: 13-05-2015
Country:: Canada
Number:: 2015 BCSC 787
Court:: Supreme Court of British Columbia
Parties:: Coutinho & Ferrostaal GmbH v. Tracomex Ltd

Keywords

RETENTION OF TITLE CLAUSE - NOT COVERED BY CISG (ART. 4 CISG)

Abstract

A German company, one of the largest steel trading companies in the world, concluded a back-to-back transaction with a Canadian seller for the purchase of steel rail. One the same day, the German company sold the same steel rail for a higher price to a Chilean company related to the Canadian company. The contract between the German company and the Chilean company contained a retention of title clause reading as follows: “[t]he Product shall remain the property of the Seller until full payment of the price has been received” (so-called “Romalpa clause”). The contract also contained a choice-of-law clause designating CISG as the applicable law. A dispute arose between the parties when the Chilean party failed to pay the German company the full purchase price resulting from the sale of the steel to a Uruguayan company.

Relying on the Romalpa clause, the German company contended that it had retained ownership to the steel. In so doing, it claimed that CISG does not protect potential rights of third-party purchasers, be they in good faith or not.

The Court confirmed the German company’s contention that CISG does not govern third-party rights or the validity of retention of title clauses (art. 4 CISG), while noting that Canadian law (namely the domestic Sale of Goods Act or the Personal Property Security Act) should apply to those matters. As a result, the Court observed, no conflict could arise between the CISG, on the one hand, and the pertinent domestic law, on the other hand, under Section 4 of the International Sale of Goods Act [ISGA] which provides that “[i]f there is a conflict between this Act and any other enactment this Act prevails”.

Fulltext

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2) An Understanding of the Parties

[3] C & F is a German company that was formed in 2008 as a result of the merger of three existing entities. It is one of the largest steel trading companies in the world. It trades approximately 2.2 million metric tonnes of steel annually. It generates revenues in excess of $1 billion annually, and it has more than 300 employees. Approximately $200 million to $300 million of its annual business is conducted in South America. It has offices in various locations throughout the world, but it has no offices in South America and, in particular, in Chile.

[4] Mr. Mitarakis and Ms. Namias were the shareholders of each of Trac Canada and Trac Chile. In the years leading into 2009, Mr. Mitarakis had been involved in the Latin American scrap-metal business. Trac Canada was apparently formed to access approximately 20,000 MT of used scrap rail that Canadian Pacific had put up for bid. Trac Canada was successful in its bid for that rail.

[5] Imbamar is a relatively small company that was incorporated in Uruguay. It had three employees in Uruguay and one in Chile. It was formed in 2007 to explore opportunities in various businesses, including businesses involved in steel plates and rails. It was incorporated in Uruguay to take advantage of various tax efficiencies. Its shareholders were Mr. Bezmalinovic and Mr. Solar, each of whom lives in Chile and each of whom was a witness at trial. Each is entrepreneurial by nature and each has a history of involvement in various businesses.

[6] Mr. Bezmalinovic had significantly more experience in the used rail business, and he had been involved in the sale and purchase of new and used rail, through a company called Excedindus, for almost 40 years. Mr. Solar had no involvement with scrap steel prior to the formation of Imbamar, and he had had only limited involvement with rails.

[7] 029 is a Manitoba company whose principal shareholder is Mr. Lazarus. Mr. Lazarus is a gentleman, likely in his 70s, who at one time owned and operated a scrapyard in Winnipeg, another in Montreal and two in Newfoundland. He and Mr. Mitarakis became friends. 029 made a series of loans to Trac Canada which are evidenced by various promissory notes and agreements that I will return to.

3) Background and History

[8] The history which follows develops a chronology that is largely uncontested. There are numerous facts, relevant to particular legal issues, which I intend to address more fully in the context of those issues.

[9] At some point in April 2009, Mr. Krause, who resides in Santiago, Chile, contacted a Mr. Schwarzhaupt, who worked within C & F, and advised him that Trac Chile was looking for financing to acquire approximately 20,000 MT of used rail from Canadian Pacific. Trac Canada had entered into a contract to acquire this rail from Canadian Pacific in April 2009.

[10] The matter was referred to Mr. Doelle. Mr. Doelle was one of two C & F representatives who gave evidence at trial. His 25-year work history has focused on international banking, credit facilities and import and export transactions. He had been employed by one of the entities that were merged into C & F when that company was formed in 2008 and, at that time, he became C & F’s Managing Director. He has since become its Chief Financial Officer.

[11] Mr. Doelle explained that under German law, German companies cannot lend money. Accordingly, Mr. Doelle advised Mr. Krause that C & F could not provide financing to Trac Chile. It was, however, prepared to enter into a “back-to-back” transaction if it could obtain “credit insurance” for that transaction. Each component of this evidence requires explanation.

[12] A “back-to-back” transaction is a set of two contracts that are concluded in tandem. C & F will, for example, acquire steel through one contract and then, almost simultaneously, enter into a second contract with a purchaser for that same steel. These contracts are concluded concurrently to avoid price risk. Approximately 90% of C & F’s business is conducted through “back-to-back” contracts. Approximately 70% of such “back-to-back” contracts involve an export component, meaning that the steel in question crosses an international border.

[13] The Federal Republic of Germany, in support of German businesses that are involved in international trade, provides export insurance through a legislated product. Thus, C & F, as is the case with many other German companies, has in place a general insurance policy for transactions that involve an export component. The mandated broker for this government programme is an entity called Euler Hermes. Such export insurance covers a variety of risks such as war, conversion of the insured product, or the insolvency or non-payment by a customer. It is an essential pre-condition of such insurance, as “export insurance”, that the goods in question cross an international border. It is C & F’s policy to endeavour to obtain export insurance for all transactions where such insurance is available.

[14] Thus, in this case, C & F eventually entered into “back-to-back” contracts with the following components and requirements:

i. On July 22, 2009, Trac Canada and C & F entered into a contract for the purchase of the Steel Rail. C & F purchased the Steel Rail for $1,134,856.80 CA. This equates to $318.78 CA per MT. Importantly, this contract also required that certain documents, including bills of lading and a certificate of origin, would have to be provided to C & F before payment was made to Trac Canada.

ii. On that same day, C & F sold the Steel Rail to Trac Chile for $1,252,586 CA as per the Trac Chile Contract. Trac Chile was provided 90 days to make payment. Under the terms of the Trac Chile Contract, though Trac Chile had possession of the Steel Rail, title to the Steel Rail remained with C & F until the Steel Rail was paid for.

iii. It was a term of these contracts that the Steel Rail be transported to Tacoma, Washington. The reality is that the Steel Rail was never shipped to Tacoma, Washington and it had, instead, remained in storage yards in Abbotsford, British Columbia.

iv. As part of the transaction with Trac Chile, C & F required the company to sign a “pagare”. The precise nature and legal effect of a pagare is an issue I will return to. The position of C & F is that it is a promissory note that merely evidences a debt. The position of Imbamar is that it is a negotiable instrument provided in substitution for a primary obligation. Thus, for example, Imbamar says that, in this case, when Trac Chile provided the signed pagare to C & F, C & F’s ownership interest in the Steel Rail came to an end, and its ability to sue Trac Chile for its outstanding obligations was limited to the pagare and did not extend to any obligation contained in the Trac Chile Contract.

v. C & F obtained credit insurance for €800,000, or between $1.1 - $1.2 million US for the Trac Chile Contract.

[15] It should be noted that in this “back-to-back” transaction both the seller of the Steel Rail to C & F, and the purchaser of the Steel Rail from C & F, were related companies. Mr. Doelle accepted that this was unusual. He had only been involved in a handful of such transactions in the past. Mr. Doelle said, however, and I accept, that this aspect of the transaction was expressly brought to the attention of Euler Hermes and did not cause the insurer any concern.

[16] Throughout early August 2009, C & F received, through Mr. Krause, various shipping documents such as a master bill of lading and packing lists. It understood and believed, based on these documents, that the Steel Rail had been shipped to Tacoma. Nevertheless, Ms. Jansen, a C & F trading manager, who was charged with overseeing this transaction and who gave evidence at trial, required that C & F be provided individual bills of lading. Until then, all of Ms. Jansen’s interactions with Trac Canada and Trac Chile had been through Mr. Krause. Ms. Jansen was then supplied with 155 individual bills of lading from Mr. Mitarakis and Mr. Ocampo.

[17] Mr. Ocampo is a Chilean financier, associated with an entity named South World Kapital, who had endeavoured to assist Mr. Mitarakis to obtain financing. It appears that it was Mr. Ocampo who introduced Mr. Mitarakis to Mr. Krause. The master bill of lading, the 155 individual bills of lading, a ”packing list”, a document known as a certificate of origin, as well as other materials, were all consistent with the Steel Rail having been shipped to Tacoma, Washington. At that point, C & F paid Trac Canada for the Steel Rail under the first half of the “back-to-back” transaction.

[18] Trac Chile did not make the November 2009, payment for the Steel Rail that was required of it under the Trac Chile Contract. C & F provided Trac Chile with a new payment proposal that would have had Trac Chile pay the amount it owed C & F in three installments by mid-February 2010.

[19] The reality is that the financial circumstances of Mr. Mitarakis and of the Tracomex companies were extremely strained. Unbeknownst to C & F or Imbamar, 029 had made a series of loans to Trac Canada over the period from December 2008 to March 2009. Thereafter, Trac Canada and/or Trac Chile had provided 029 with various general security agreements purporting to charge all or part of the Steel Rail located in Abbotsford, British Columbia.

[20] Furthermore, C & F was unaware that, in the latter part of November 2009, Mr. Ocampo, on behalf of Mr. Mitarakis and the Tracomex companies, had discussions with Mr. Solar about obtaining financing to assist those companies with their businesses and to repay money, which Mr. Solar was told that a German company had either provided to facilitate the purchase of the Steel Rail or had lent to the Tracomex companies. Mr. Solar was also told that Mr. Mitarakis and/or Trac Canada had the exclusive right to purchase further significant quantities of used steel rail from Canadian Pacific.

[21] The detailed discussions that Mr. Solar had with Messrs. Mitarakis, Ocampo, Krause and others about the Steel Rail, and about Imbamar financing or purchasing those rails, are central to several of the legal issues that I identified earlier.

[22] What is important, for present purposes, is that very early on Mr. Solar, and the individuals he had retained to assist him with the transaction, identified various serious difficulties and concerns with both the documentation that underlay the C & F transaction with Trac Canada and Trac Chile as well as with the shipping, customs and other materials that were thereafter produced by the Tracomex companies. Mr. Mitarakis and Mr. Ocampo confirmed to Mr. Solar that these documents pertained to a “fictitious transaction” – that they were fraudulent. They said, however, that the “fictitious transaction” or the “fictitious documents” had been created not only with the accedence of C & F but at its instance.

[23] Mr. Solar, before being prepared to move forward with any transaction with Trac Chile, wanted confirmation of these facts. He was directed by Messrs. Ocampo and Mitarakis to Mr. Krause who, he was told, was C & F’s agent in Chile. In subsequent meetings and conversations with Mr. Krause, Mr. Solar and others were told by Mr. Krause that:

i.) C & F had initially orchestrated a fraudulent transaction in order to obtain export insurance for the Steel Rail. They were told C & F knew that the Steel Rail had never gone to Tacoma, and was aware of, or had been involved in, the creation of the fraudulent bills of lading and other documents; and

ii.) C & F had never had title to the Steel Rail and that it’s transaction with the Tracomex companies was, instead, in the nature of a loan and that, in any event, Trac Chile had paid off the loan with a pagare.

[24] Following these discussions and various further investigations, Imbamar and Trac Chile entered into a contract in mid-January 2010, though the execution of that document was only completed on March 3, 2010, (the “Imbamar Contract”). The Imbamar Contract provided, inter alia, that Imbamar:

a) purchased 3,496.29 MT of steel rail from Trac Chile, that was then warehoused at the facilities of Super H. Holdings (“Super H”), in Abbotsford, for the price of $462,494.40 US; and

b) Trac Chile could repurchase that same steel rail within 185 days for a purchase price of $554,993.18 US.

[25] In February 2010, Track Chile made a single payment of $100,000 US to C & F. In June 2010, C & F “protested” or sued on the pagare. In early 2011, C & F began to make a claim on its export insurance with Euler Hermes. Euler Hermes required additional confirmation that the Steel Rail had moved over the U.S. border. On June 8, 2011, Ms. Jansen made further inquiries with Whizdom International Freight Services Inc. (“Whizdom”), the shipper named on the bills of lading that Ms. Jansen had earlier received, and asked for additional confirmation that the Steel Rail had “crossed the U.S. border”.

[26] Ms. Carberry, who founded Whizdom with her husband, and who gave evidence at trial, advised Ms. Jansen that the goods described in the bills of lading had never been shipped, and that the bills of lading were improperly dated and signed. At trial, Ms. Carberry confirmed that in May or June 2009, Mr. Mitarakis had come to her office asking about shipping steel to the United States. She had given him a sample bill of lading, and she confirmed that she had never signed the document or included much of the information on it. She confirmed that there were numerous errors in the bills of lading that had been sent to C & F. She said that the documents were “fraudulently completed,” that Whizdom had never shipped any steel for Trac Canada or Trac Chile, and that she never saw Mr. Mitarakis again after that first meeting.

[27] Ms. Jansen advised her superiors of what she learned. C & F retained Vancouver counsel, and on July 6, 2011, counsel wrote to the Tracomex companies and others, putting them on notice of C & F’s ownership of the Steel Rail. C & F commenced its action on September 12, 2011.

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5) The United Nations Convention on Contracts for the International Sale of Goods

[46] Counsel for C & F argues that, under the Trac Chile Contract, C & F retained title to the Steel Rail at all times. He further argues that because the Trac Chile contract was made subject to the Convention, and because the Convention does not protect the rights of third-party purchasers, even if such purchasers acted in good faith and without notice of any defect in title, it does not matter whether Mr. Krause was C & F’s agent or what representations he may have made to Imbamar. Counsel argues that the reservation of title clause in the Trac Chile Contract, under the Convention, supersedes all such concerns. Counsel accepts that the interaction between reservation of title clauses and the Convention with domestic Sale of Goods or Personal Property Security legislation has not previously been expressly addressed by a Canadian court.

[47] The Trac Chile Contract contains several relevant terms. Clauses 5.1 and 5.2 under the heading “Retention of Title” state:

5.1 The Product shall remain the property of the Seller until full payment of the price has been received by Seller to his unrestricted disposal. Until title passes the Buyer shall hold the Product in trust for Seller.

5.2 In case the above reservation of title is not effective according to the law of the country wherein the Product is located, a security corresponding to the reservation of title shall be deemed agreed upon. ... During the period of the retention of title the Buyer shall on his own maintain the Product and insure the Product for the benefit of the Seller against theft, breakage, fire, water and other risks. Buyer shall further take all measures to ensure, that Seller’s title is in no way prejudiced or impaired.

[Emphasis added.]

[48] Clause 12.1 provides:

This Contract shall be governed by and construed in accordance with the United Nations Convention on Contracts for the International Sales of Good [sic]…

[49] Canada, Chile and Germany are all “Contracting States” under art. 1 of the Convention. Section 3 of the International Sale of Goods Act, R.S.B.C. 1996, c. 236, [ISGA], states that the “Convention applies in British Columbia” and appends the Convention to the ISGA as a schedule.

i) Romalpa Clauses

[50] Clause 5.2 of the Trac Chile Contract, which speaks of a “reservation of title”, requires some further description. Such clauses, within international commerce, are known as Romalpa clauses.

[51] A succinct summary of the legal nature on attributes of Romalpa clauses is found in M. Bridge et al, eds, Benjamin’s Sale of Goods, 8th ed. (London, UK: Sweet & Maxwell, 2010):

5-141 Romalpa clauses. Reservation of the right of disposal of the goods greatly increased in importance as the result of the decision of the Court of Appeal in Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd. … The Court of Appeal held that, by virtue of the relationship of bailor and bailee, and as expressly contemplated in the claimants’ conditions, a fiduciary relationship arose and the claimants were entitled to trace and claim the proceeds of the sub-sales in priority to the general body of the defendants’ creditors and in priority to the defendant’s bankers under their debenture. As a result of this decision, it has become extremely common for sellers to insert in their standard conditions of sale a Romalpa clause which, as a minimum, stipulates that the seller is to retain ownership of the goods until payment of the price, but which may contain more extensive provisions.

5-142 Since Romalpa clauses may take many forms, and since the case-law on their validity and interpretation has become progressively complex and refined, this area of the law is, in the words of Staughton J., “presently a maze if not a minefield”. It will therefore be necessary to consider separately the various provisions that may be inserted in such clauses.

[Footnotes omitted.]

[52] In Canada, no such priority is given to Romalpa clauses. Instead, security interests are broadly addressed within the framework of the various pieces of provincial Personal Property Security legislation. This is confirmed in G.H.L. Fridman, Sale of Goods in Canada, 6th ed. (Toronto: Thomson Reuters Canada Ltd., 2013) at 291 [Fridman, Sale of Goods]:

In England an attempt was made, in Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd., to create another way of protecting an unpaid seller in the event of the buyer’s insolvency. This turned upon the inclusion in the contract of a “reservation of title” or similar clause. The approach that was adopted in that decision has not been followed in Canada.

Provincial legislation has dealt with the problem of providing unpaid sellers with protection in the event that a buyer becomes insolvent, or disposes of the goods to a third party … in all provinces and territories by a Personal Property Security Act …

[Footnotes omitted.]

ii) The Focus of the Convention

[53] Counsel for C & F argued that because C & F and Trac Chile agreed that their relations should be governed by the Convention, the retention of title clause in the Trac Chile Contract operates regardless of the existence of any potential third-party purchaser rights whether bona fide or not. Counsel argues that the Convention is notable because it does not codify the doctrine of nemo dat quod non habet or any of its exceptions. As such, it is argued that there is no means for a third party to obtain title to goods under the Convention.

[54] This is only partly correct. It is true that the Convention does not address third-party rights. Its focus is on the “formation of the contract of sale and the rights and obligations of the seller and buyer arising from such a contract”; see Castel & Walker: Canadian Conflict of Laws, loose-leaf, 6th ed. (Markham, Ont.: LexisNexis, 2005) vol. 2 at 31-30; see also Convention, art. 4. This does not, however, necessarily mean that a vendor who has “retained” title is immune from competing third-party claims. Fridman, Sale of Goods at 398-399, states:

In light of the paucity of the case-law on this subject, it is difficult to do more than put forward tentative views. For this purpose, it may be necessary to differentiate claims to goods as between seller and buyer from claims to goods as between either of the parties to the original contract of sale of goods and some stranger, for example, a bona fide purchaser for value without notice of the prior contract, or the rights of the unpaid seller.

iii) The Interaction of Romalpa Clauses, The Convention and Domestic Law

[55] Fridman, Sale of Goods at 400, further states:

Where a third party is introduced, for example, where goods sold by S to B are then sold by S to X while S is in possession of them, despite the passing of property to B under the contract of sale, or where title is reserved in S but B has possession and purports to dispose of the goods to X, the question arises whether such third party acquires title as against B or S respectively, on the assumption that he would under one system of law, such as lex situs of the goods, but not under another, for example, the proper law of the original sale to B, the proper law of the contract between S and X or B and X, or the law of the original situs of the goods, where they have been moved between the time of the first transaction and the time of the subsequent sale by S or B to X. One view was that a title acquired by the lex situs (or the proper law if the situs is casual or unknown) will be good until displaced by a new title “acquired in accordance with the law of the country to which [the goods] are removed.” The cases seem to suggest that, where divesting of title is concerned, for example, by seizure by creditors, stoppage in transitu, resale by the seller, and, where appropriate, by a sale in market overt, the lex situs governs, whatever the proper law of the original or any subsequent transaction may have been. If the seller in one country has reserved title in himself, a sale by the buyer in another country under the local law which does not recognize the reservation in the other jurisdiction, or has an overriding effect, thereby creating a title in the innocent third party, may effectively destroy the original seller’s title. To determine the result, much may depend upon whether the court of the forum gives extra-territorial effect to the law of the original situs of the goods, in regard to the reservation of the seller’s title, or gives paramount effect to its own law.

[Footnotes omitted.]

[56] In Clemens W. Pauly, “Is Avoidance Under CISG Article 64 A Powerful Remedy? Comparison of The CISG Remedy With Third-Party Rights” (2004) [unpublished, archived at Pace Law School: CISG Database], online: , the author addresses the interaction between retention of title clauses and third-party rights directly. The author also advances the following conclusions:

i) The Convention likely does not govern the rights of third parties who are not parties to the contract at issue (at 11);

ii) The effectiveness of title retention clauses “must be measured against the laws of the jurisdiction to which the goods have been delivered” (at 12); and

iii) The validity of title retention or Romalpa clauses are not governed by the Convention. Instead, domestic law governs the validity of such clauses (at 13).

[57] The author thereafter addresses such clauses, and their efficacy, in each of the United States, Germany and France. Based on the case law reviewed, the author concludes that in Germany and France title retention clauses supersede the interests of third parties, in the United States they do not; at 15, 18.

[58] The efficacy of cls. 5.1 and 5.2, and of title retention clauses generally, as against intervening third-party rights, appear to be governed by the location of the Steel Rail or, in this case, the laws of British Columbia. This is consistent with the conclusions of the Pauly paper and with the “tentative views” of Professor Fridman in Sale of Goods. In addition, the opening words of cl. 5.2 are “[i]n case the above reservation of title is not effective according to the law of the country wherein the Product is located”, thereby again directing or focusing the inquiry to the laws of this jurisdiction.

[59] Section 4 of the ISGA provides, “[i]f there is a conflict between this Act and any other enactment this Act prevails”. The Convention does not, as I have said, expressly address either third-party rights or the efficacy of title retention clauses. Accordingly, to the extent that either the SGA or the PPSA address the rights of third-party purchasers in various circumstances, no “conflict” arises as between these enactments and the ISGA or the Convention.}}

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