Date: 28.03.2002
Country: USA
Number: No. 02 C 0540
Court: United States District Court, N.D., Illinois
Parties: Usinor Industeel v. Leeco Steel Products, Inc.
A French seller (Plaintiff) and an American buyer (Defendant) formed a contract for the supply of steel. The contract contained a retention of title clause stating that seller would remain the owner of the goods until buyer made complete and full payment. The buyer purchased the steel using a line of credit from a third party Bank. Under the loan agreement, the bank reserved a security interest in the goods and later perfected its security interest under U.S. domestic law. The buyer subsequently failed to make payments to the seller and allegedly faced bankruptcy as a result of default on its loan from the third party Bank. The seller seeks to recover possession of the goods fearing that the buyer will not be able to pay damages for breach of contract as a result of bankruptcy. According to the seller the retention of title clause in the sales contract provides a legal basis for such recovery of possession. Seller argues that CISG, which governed the sales contract, preempts domestic law granting the third party bank a security interest in the goods. The buyer objects that domestic law governs the transaction such that the seller has no right to recover possession of the goods in spite of the retention of title clause.

The Court held that CISG applies to the transaction between the buyer and the seller because they have their places of business in differing contracting States (Art. 1(a) CISG).

In rejecting seller's claim for recovery of possession, the Court held that pursuant to Art. 4(b) CISG is not concerned with the effect which the contract may have on the property in the goods sold. CISG has no application to disputes concerning the ownership of goods, but governs instead only the obligations of buyers and sellers. The Court held that it was necessary to look to domestic law in order to determine the validity of the retention of title provision.

The Court expressly referred to a precedent of an Australian Court (cf. 28.04.1995 Federal Court, South Australia District Adelaide, see UNILEX) to demonstrate that courts should look to domestic law to determine the effect of retention of title provisions. In doing so, the Court invoked Art. 7(1) CISG stating that due regard is to be made to the Convention's international character and the need to promote uniformity in its application.

Applying its conflicts of law doctrine, the Court found that U.S. law (law of the state of Illinois) should apply to the retention of title clause. Under the relevant U.S. domestic law the Court found that the retention of title clause merely reserves a security interest in the goods for the seller. This security interest was not perfected by the seller under domestic law and is thus subordinate to the interest of the Bank. As a result the Court held that the seller did not have the title necessary to recover possession of the goods.