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Written in November 1998 for publication in the Pace website

Comment on

Roder Zelt- und Hallenkonstruktionen GmbH

v.

Rosedown Park Pty Ltd

[1]

by

Jacob S. Ziegel [*]

Roder Zelt- und Hallenkonstruktionen GmbH v. Rosedown Park Pty Ltd. [2] ("Roder"), a decision of Judge Van Doussa of the Federal Court of Australia, South Australian District, is apparently the first reported Australian decision to address CISG issues. This alone would justify a comment on the case, particularly given the paucity of CISG judgments in common law jurisdictions that have adopted the Convention.[3] There is however another and still stronger reason for this comment and this is that the Australian court's decision squarely raises the issue (for the first time so far as I am aware) whether CISG applies to the seller's remedies under an instalment sale [4] where the goods have been delivered and accepted by the buyer and where the seller has retained title pending payment by the buyer of the price by agreed instalments or otherwise.

My comment will focus primarily on this issue and deal summarily with several other CISG questions raised by the facts though not necessarily addressed by the judgment.

The Facts

Roder is a German manufacturer of tents and other prefabricated structures for public functions. Rosedown was in the business of renting out such equipment for large sports events in Australia. Roder agreed to supply Rosedown with its equipment needs and Rosedown agreed to pay the price by instalments with interest after the equipment had been delivered in Australia. The agreement contained a title retention clause in Roder's favour and also provided that until the payments had been completed Rosedown was deemed to be a fiduciary agent and bailee of the equipment. The agreement also contained the usual provisions in a conditional sale agreement requiring Rosedown to keep the equipment insured and in a proper condition, not to sell it, and requiring Rosedown to account for the proceeds of sale or otherwise (sic) and to keep the proceeds separate from other property.

Rosedown fell seriously in arrear with its payments to Roder and was generally in acute financial difficulties. While in this condition, Rosedown's directors adopted a resolution appointing an administrator of Rosedown's business pursuant to the Commonwealth Corporations Law. Rosedown's creditors subsequently approved a Deed of Arrangement for the restructuring of Rosedown's business and the payment of its debts.

Following the appointment of the administrator, Roder initiated action claiming the return of its equipment on the ground that Rosedown had repudiated its contract because of the failure to maintain its interest payments and for other breaches of contract. This meant that Van Doussa J. had to consider which law governed the interpretation of the parties' contract, including the title retention clause, and the rights and obligations of the parties under the contract. He also had to consider the effect of the administrator's appointment and the subsequent Deed of Arrangement on Roder's right to recover the equipment from the administrator, assuming there was a valid title retention clause to begin with.

The judge found that the contract of sale was governed by CISG since both Germany and Australia had ratified the Convention. This meant that the parties' rights were governed by the Convention, including Roder's right to avoid the contract under art. 61 and 64 because of a fundamental breach of contract by Rosedown. Van Doussa J. held that the parties' pleadings were wrongly framed in the common law language of repudiation and should have alleged instead that the seller was entitled to avoid the contract and had done so, and was therefore entitled to return of the equipment.

In the judge's opinion, Rosedown's failure to maintain its interest payments did not constitute a fundamental breach because Roder had not complained about the missing payments before the administrator's appointment and had not invoked its right under article 63 giving Rosedown an additional period of time before avoiding the contract. He found however that the appointment of the administrator and the directors' resolution making the appointment, with its acknowledgment that the company was insolvent, resulted in such detriment to Roder as substantially to deprive it of what it was entitled to expect under the contract.

So far as the title retention clause was concerned, in the court's opinion, its construction and meaning were governed by CISG [5] but the validity of the clause was governed either by German or Australian domestic law since the validity and property effects of a sale contract are expressly excluded from the Convention's scope.[6] He found that both German and Australian law recognized the validity of Romalpa clauses.[7] This also meant, once Roder exercised its right of avoidance, that it was entitled to recover its property because Rosedown no longer had any rights to the equipment under the contract. Conversely, Rosedown would be entitled to claim restitution for any payments made by it under the contract [8] although Roder would also have a claim against Rosedown for damages. The court also found that the administration and arrangement provisions in the Corporations Law did not change a creditor's property rights with respect to property in the administrator's hands, but that the creditor needed the court's permission to enforce its rights. Van Doussa J. gave that permission.

Discussion

1. Status of Instalment Sales under CISG

The Roder case is an instructive example of the dynamic interplay between CISG law and domestic rules governing the validity of title retention clauses and the impact of a buyer's insolvency and restructuring. The Australia court's decision is however open to question on the following critical issue. Van Doussa J. assumed, without discussion, that an instalment sale (conditional sale agreement in North American parlance) in which the buyer obtains possession and use of the goods,[9] but the seller retains title until payment of the price or fulfilment of other conditions, is fully subject to the remedial provisions of the Convention just like any other contract of sale.

This is an unsafe assumption. From the turn of this century onwards, for at least some purposes, many US courts treated conditional sale agreements in which the buyer obtained possession of the goods and enjoyed most of the benefits of ownership, other than the bare title, as a short form of mortgage. The American Uniform Conditional Sales Act of 1918 recognized many of the special characteristics of conditional sales. Article 9 of the American Uniform Commercial Code completed this assimilation with the adoption of the Code in the 1950s. Under Article 9 the seller in a title retaining contract merely retains a security interest in the goods and the buyer is treated as the beneficial owner of the goods.[10] If a buyer defaults in its payments the seller's remedies lie under Part V of Article 9 and not under Part 7 of Article 2 on Sales.

In Canada, conditional sale agreements have followed a similar evolution [11] although the earlier history was more clouded than it was in the US. All the common law jurisdictions in Canada have now adopted personal property security legislation (PPSAS) based on Article 9 of the Uniform Commercial Code.[12] In Canada, therefore, as in the US., the seller in a conditional sale agreement merely retains a security interest in the goods. Consequently, the personal property security Acts and not the provincial sale of goods Acts regulate the seller's rights if the buyer defaults in its payments or other terms of the agreement.

CISG does not define contract of sale and there is no provision expressly excluding conditional sale agreements from its scope. It must also be remembered that most other countries (including most other common law jurisdictions) do not subscribe to the North American characterization of conditional sale agreements.[13] In those countries such agreements are still treated as a special form of executory contract of sale. This is true even though the seller's remedies are often governed by statutory restrictions not essentially different from the consumer safeguards found in Article 9 and in the Canadian PPSAs.

These divergences in the national treatment of conditional sale agreements make it unclear how such agreements should be treated under CISG. In my view, notwithstanding the uncertainties I have alluded to, CISG's remedial regime is not appropriate once the buyer has obtained possession of the goods, and imposing the CISG rules willy nilly on conditional sale agreements will lead to fictions and distortions. Once the seller has performed its obligations under the agreement, I believe the security aspects should be treated as wholly outside CISG and as governed by domestic law under the relevant conflict of laws rules.

The inappropriateness of the CISG provisions may be seen by asking what happens when the buyer is in default with its payments and by contrasting the consequences with the remedial regimes provided in Article 9 and the Canadian PPSAs. Under the CISG, if the seller wants to repossess the goods it can apparently only do by avoiding the contract if the buyer's failure to make a payment or to meet other conditions of the contract amounts to a fundamental breach.[14] If the contract is avoided, the seller loses the right to sue for the price but is remitted to a claim in damages.[15] The seller is, however, entitled to retain the goods as its own and, once the contract is avoided, the buyer has no right to redeem the goods regardless, it would seem, of how much of the price has been paid. The same preclusion will apply to the buyer's trustee in bankruptcy or liquidator if the buyer has become insolvent. Following avoidance of the contract, CISG entitles the buyer to recover its payments [16] subject to the seller's right of set-off for the buyer's use of the goods while they were in the buyer's possession.[17]

All of this is terribly unreal. The seller's retention of title only serves a security function and by repossessing the goods and selling them the seller is only enforcing its security.[18] The contract is not meant to be avoided and the buyer should remain liable for the balance of the price. If there is a surplus after the resale, it should go to the buyer because this consequence too flows from the security function of the agreement. Given the true nature of the conditional sale agreement, Article 9 and the Canadian PPSAS also entitle the buyer to redeem the collateral prior to its sale by the seller unless after default the buyer has agreed to the seller retaining the goods in satisfaction of the seller's claims.

In all these respects, Article 9 and its Canadian counterparts are not only greatly superior to the CISG provisions but, in my view, they provide the only sound and workable conceptual structure. No doubt the same can be said of the many similar provisions in domestic systems specifically addressing the distinctive features of instalment sales even though they do not go as far as Article 9 in fully assimilating instalment sales with other security devices. So far as I have been able to ascertain, only Prof. Winship appears before me to have raised the status of instalment sales under CISG and then on a much more limited basis than what I have attempted to do.[19] In a footnote in an excellent chapter by him on the scope of the Convention, he notes that ULIS art. 5(2) subordinated the uniform law to mandatory national legislation protecting buyers who purchased by instalment. He goes on to report that at the 1980 conference the Norwegian delegate questioned whether the Vienna text dealt adequately with the consequences of the buyer's failure to pay all instalments and, upon being reassured that the settlement of accounts of parties to these contracts would be deemed excluded from the convention under article 6 (sic), the delegate withdrew an amendment to clarify the matter.

Obviously the delegate should have been more persistent.

Let me make myself clear. I am not suggesting that CISG has no application to instalment sales. What I am saying is that the Convention should only apply to the sales component and not to the security aspects of the agreement. If this distinction is observed, CISG will determine whether a sale agreement has been concluded, the terms of the agreement and the seller's obligations with respect to the description and quality of the goods and their delivery. Once conforming goods have been delivered to the buyer, the security part of the agreement will be triggered and will determine the seller's and buyer's rights and obligations from this point onwards. This dichotomy is accepted in Article 9 and the Canadian Acts and works well in practice. Thus UCC 9-206(2) provides that, "When a seller retains a purchase money security interest in goods the Article on Sales (Article 2) governs the sale and any disclaimer, limitation or modification of the seller's warranties." I see no difficulty in applying the reverse distinction to CISG.

2. Other Aspects of the Roder Decision

(a) Construction and meaning of the title retention clause.

As previously noted, Van Doussa J. held that CISG governed the construction and meaning of the title retention clause even though the validity of the clause was determined by German or Australian law. His approach is consistent with the structure of the Convention but it is also a little artificial. For example, the municipal law governing the validity of the title retention clause may require the contract to be evidenced in writing as a condition of the enforceability of the clause or the attachment of the seller's security interest.[20] If this is the case, I suggest the municipal rule must prevail regardless of any conclusion the court may reach with respect to the parties' intentions under art. 8 of the Convention. It may be argued that a distinction should be drawn between the validity of the clause inter partes and its validity with respect to third parties and that since art. 11 does not require CISG contracts to be in writing the clause is effective between the parties. This solution too is strained. Since we are concerned here with the property effects of the contract, the better view, I believe, is that the forum should defer entirely to the requirements of the municipal law governing the seller's retention of a security interest.

(b) Fundamental Breach and Avoidance of the Contract.

There are two aspects here of the court's judgment that warrant consideration. The first arises from the judge's finding that Rosedown's failure to maintain its interest payments did not constitute a fundamental breach because Roder had not complained about the missing payments before the administrator's appointment and had not invoked its right under art. 63 giving Rosedown an additional period of time before avoiding the contract. The difficulty about this reasoning is that art. 63(1) is a discretionary provision and does not oblige the seller to give the buyer an additional period of time if the seller is satisfied that the delay that has already occurred amounts to a fundamental breach.

There may be circumstances -- the facts in this case may be among them -- where the breaching party can argue that it has been lulled into a false sense of security by the seller's failure to complain and that there was an implicit understanding between the parties, supported perhaps by prior usage and practice between them or by usages in the trade, that the seller will give notice before declaring the contract to be avoided. Unfortunately, given his initial holding, Van Doussa J. did not explore these alternative avenues.

The second aspect of his judgment deserving further analysis is his finding that the appointment of the administrator and Rosedown's directors' acknowledgment that the company was insolvent amounted to a fundamental breach of Rosedown's contractual obligations. Article 25 of the Convention is strikingly silent in telling us anything about the type of conduct that may lead to a fundamental breach. Must it be volitional or may it be triggered by a condition, such as insolvency, totally unsought for by the allegedly breaching party? It seems safe to assume from art. 71(1) that the latter construction is the correct one. This is because art. 71(1) entitles a contracting party to seek assurance of performance if it appears that the other party will not be able to perform a substantial part of its obligations because of a "serious deficiency in his ability to perform or in his creditworthiness". If the buyer's insolvency is sufficient to trigger art. 71(1) if must surely also be sufficient to provide the basis for a fundamental breach claim.

Even conceding this, it is debatable whether the Australian judge invoked the right article. Since he had already held that there was no fundamental breach prior to Rosedown's declaration of insolvency, arguably art. 72 on anticipatory repudiation and not art. 25 was the right article to invoke. It makes a difference because art. 72(2) requires the party intending to avoid the contract to give notice of its intention if time allows. In Roder there appears to have been no urgency although notice to the administrator would probably have made no difference since the administrator was taking the position that the parties had not agreed on a title retaining clause.

A cognate issue also deserving of some consideration is the court's decision that the notice of avoidance required by art. 26 as the condition for an effective avoidance was satisfied by Roder's initiation of proceedings for the recovery of its property. Art. 26 does not stipulate any particular type of notice. Still, as CISG observers have noted, reasonableness is a pervasive behavioral norm throughout the Convention and one can visualise circumstances where issuing a writ is too blunt an instrument.[21]

(c) Insolvency Stay of Proceedings and Seller's Rights under CISG.

This is another feature of Roder that merits some attention. A standard provision in modern insolvency legislation is the imposition of a stay of proceedings and other action by creditors and other parties against the debtor. The stay may be exceedingly broad in its scope [22] and may include a stay on a seller's right to avoid a contract under an instalment sale. So, for example, the Australian Corporations Law prohibited the initiation of proceedings against an administrator without the court's permission.

Van Doussa J. did not consider whether these provisions created a conflict with the seller's right of avoidance under CISG and the right to return of its property. Since the issue does not appear to have been raised, one can only speculate what his answer would have been. One possible answer is that CISG is not concerned with the mechanics for the enforcement of the parties' rights but leaves this to be determined by the forum's law. The other, and in my view more persuasive, answer is that issues of insolvency law lie wholly outside CISG's realm. This is because insolvency law involves the totality of a debtor's relationship with its creditors and not just one creditor (the seller), whereas CISG only speaks to the rights and obligations of the parties to the particular contract.[23]

Conclusion

My discussion of the legal issues arising from Roder is far from exhaustive but should provide much grist for other CISG commentators. Hopefully too other tribunals will have an opportunity to explore and refine the issues that were left untouched in the Australian judgment or were not adequately disposed of.


FOOTNOTES

* Professor of Law Emeritus, University of Toronto

1. 28 April 1995, [1995] 57 Fed Court Rep 216-240; UNILEX database 1996; PACE CISG Caselaw "http://cisgw3.law.pace.edu/cases/950428a2.html."

2. Supra, n.1.

3. By way of contrast, although Canada adopted the Convention in 1991, effective 1 May 1992, there is still no reported decision involving the Convention.

4. Usually referred to in North America as a "conditional sale" or "conditional sale agreement".

5. Citing CISG arts. 8, 11, 15, 18 and 29.

6. CISG art. 4(a) and (b).

7. Romalpa clauses is the name given in England and Australia to title retention clauses in commercial instalment contracts where the purchased goods consist of inventory to be resold or leased out by the buyer in the ordinary course of its business. The name Romalpa is derived from the English Court of Appeal decision affirming the validity of the clause in this context as well as in the more common context of goods used by the buyer as equipment. See Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 1 Lloyd's Rep. 443 (Eng. C.A.).

8. Citing CISG arts. 81, 84.

9. Including, in the case of goods characterized as inventory, the right to sell or lease the goods in the ordinary course of the buyer's business.

10. See UCC 9-102 (scope of application), 1-201(37) (definition of security interest), and 9-107 (definition of purchase money security interest). All citations are to the 1991 edition of the UCC. In the spring and summer of 1998 the Code's sponsors approved a revised Article 9 but this is not expected to come into force in any state until January 1, 2001. The revised version of Article 9 retains all the basic features of existing Article 9.

11. R.M. Goode & J.S. Ziegel, Hire-Purchase and Conditional Sale: A Comparative Survey of Commonwealth and American Law, 13-16 (Brit. Institute of Internat. & Comparative Law, 1965).

12. Cf. J.S. Ziegel, The New Provincial Chattel Security Regimes (1991) 70 Can. Bar Rev. 681. Quebec also adopted some important features of Article 9 in the new Québec Civil Code of 1994, including the general recognition of non-possessory security interests in moveables and the requirement of perfection of such interests in a newly established and computerized registry system. However, the new chattel security regime does not apparently include conditional sales. See further M. Boodman & R. Macdonald, "How Far is Article 9 of the Uniform Commercial Code Exportable? A Return to Sources? (1996) 27 Can. Bus. L.J. 249.

13. However, following an earlier strongly supportive report, the New Zealand government has announced its intention to adopt a Personal Property Securities (sic) Act along Canadian lines. A draft bill was circulated for discussion in October 1998.

14. Arts. 64, 25. The contract could authorize the seller to repossess the goods and resell them, whether or not the buyer's breach amounts to a fundamental breach, and hold the buyer liable for any deficiency. Such provisions commonly appear in conditional sale agreements. However, at common law (and I assume in the civil law as well) such provisions raise troubling conceptual questions since it is difficult to explain in sales terms why the buyer should continue to be liable to pay the balance of the price if the seller has sold the goods and is no longer in a position to transfer title to the buyer.

15. Arts. 62, 74, 81(1).

16. Art. 81(2).

17. Art. 84(2).

18. Cf. Article 9, Part V, ss.9-501 et seq., and Ontario Personal Property Security Act, Rev.Stat.Ont.1990. c.P-10 as am., Part V, ss.58-66.

19. Peter Winship in Nina M. Galston & Hans Smit (eds.), International Sales: The United Nations Convention on Contracts for the International Sale of Goods (Matthew Bender, N.Y., 1984), 1-24, n.48.

20. Cf. UCC 9-203(1)(a) (security interest does not attach and security agreement is not enforceable against debtor or third parties unless collateral is in secured party's possession or there is an agreement in writing).

21. A possible example that comes to mind is where a buyer initiates proceedings to avoid a contract because of defective goods. Prof. Honnold and other CISG scholars take the position that there is no fundamental breach where the seller makes a timely and credible offer to cure the nonconformity. Will the beginning of court proceedings deprive the seller of a right to cure? One hopes not, and that the seller should be able to argue that had the buyer adopted a more appropriate form of notice the court proceedings would have been unnecessary.

22. As for example under § 362 of the US Bankruptcy Code. In Canada, the courts have also given a very elastic meaning to the scope of a stay order issued under § 11 of the Canadian Companies' Creditors Arrangement Act, Rev. Stat. Can. 1985.

23. Art. 4, opening sentence.


Pace Law School Institute of International Commercial Law - Last updated December 4, 1998
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