Terms of Trade Retention of Title and PPSR

Suppliers ensure your business is protected – Trading Terms, Retention of Title Clauses and the PPSA

In the last 24 months we have witnessed the collapse of many well-known staple Australian retail brands that, for a multitude of reasons, could not remain competitive and profitable. The effect of these collapses has been far reaching, the most obvious and most frequently discussed impact is on employees of the organization. Little attention is given to the small to medium businesses that supply goods and services to these businesses and how they deal with the fallout.

If you are a supplier of goods or products to any company having the right Terms of Trade and understanding the Personal Property Securities Register (PPSR) is critical.

If your customer enters liquidation or administration you may not be able to retrieve your goods and the liquidator or administrator is able to reject your claim over the goods if the proper processes have not been followed. This article deals specifically with retention of title of goods different aspects of trading terms can cover your business in many other aspects.

What are Terms of Trade and why are they important?

Terms of Trade are the terms and conditions on which a business sells goods and services to customers and also on which they buy goods and services from suppliers. These terms form the basis of the business and trading relationships between all businesses.

A lot of small to medium businesses don’t take the opportunity to set the terms on which they do business. In instances involving non-payment or the insolvency or collapse of a major client, this means that they are left at both a commercial and legal disadvantage.

Properly drafted terms of trade should establish the foundation for the relationship between a business and its supplier or customer. Properly drafted Terms of Trade will address and clearly identify the following:

  • Goods and Services – The goods and services that are to be provided should be clearly identified and described;
  • Price – The price (and factors which may impact the price such as GST and any applicable delivery fees) should clearly be defined;
  • Payment Terms – When and how is payment due. Are goods and services provided on credit;
  • Warranty – What sort of warrant is being provided? Is there a limitation of warranty?

The above items are staple items to properly prepared Terms of Trade. The list is a non-exhaustive list. Each businesses Terms of Trade will be more involved and customised to your industry to fully protect your business when there is a downturn or other issues that arise.

Retention of Title Clauses

Many businesses which supply their goods and services generally include a clause which asserts that title to the goods sold or provided does not pass until they have been paid for in full.

Prior to the enactment of the Personal Properties Securities Act 2009 (Cth) (the PPSA) a supplier could rely on a retention of title clause to retake possession of goods when the purchasing company had been placed into administration, liquidation or receivership.

Following the enactment of the PPSA, businesses seeking to rely on a retention of title clause must ensure that it complies with the relevant provisions of the PPSA.

Under the current regime, a supplier will only be entitled to retain goods if the supplier’s interest is a “security interest” within the definition of the PPSA.

This means that the suppliers’ security interest needs to be recorded in writing and needs to be “perfected” in order to be enforceable and to provide protection if the customer suffers from an insolvency event.

When the PPSA came into effect transitional provisions were applicable. This allowed a period of time where previous security arrangements where still in effect, whilst the new PPSA was adopted by businesses. The transitional provisions have now lapsed and anyone who has not adopted the new system is exposed and may not be able to claim their goods back if business is placed into administration or liquidation.

Are Retention of Titles Clauses Enforceable?

Retention of Title Clauses have been superseded by the PPSA and any new agreements entered into after 30 January 2012 must have the correct registration and agreements so that a supplier can claim their goods back.

Post PPSA the enforceability of Retention of Title clauses has been a fiercely contested issue. This issue has been addressed in a 2015 decision of the Victorian Court of Appeal in the case of Central Cleaning Supplies (Aust) Pty Ltd –v- Elkerton (in his capacity as joint and several liquidator of Swan Services Pty Ltd (in liquidation)). 

READ THE FULL CASE SUMMARY HERE

Recovery of Goods

The only reason that Central was able to succeed was that it was able to show that its credit application fell within the transitional provisions of the PPSA. The transitional provisions of the PPSA have now expired.

The Court’s decision in this case provided clarity on what is considered a transitional registration. The decision suggests that if before 30 January 2012 the parties agree that all future supplies of goods will be governed by a supplier’s standard terms and conditions, then security interests (such as a Retention of Title Clause) under the terms may be treated as a transitional security interest.

The above does not apply to agreements that have been entered into after 30 January 2012 (Subsequent Agreements).

Which means that any supplier of business wishing to rely on a retention of title clause must ensure that it is perfected under the PPSA in order to be enforceable.

Perfection can be done by registering the security interest in which the Retention of Title clause will be contained in, on the Personal Properties Securities Register.

If a business fails to perfect its security interest its likelihood of recovering unpaid goods it has supplied to a debtor are diminished. This is more so evident in instances involving insolvency events as we have witnessed in recent times.

If your customer enters liquidation or administration you may not be able to retrieve your goods and the liquidator or administrator is able to reject your claim over the goods if the proper processes have not been followed.  

Recommendations

As a supplier it is important that you to review your terms and conditions to avoid such disputes and losses. Getting the appropriate legal advice will ensure that your credit application and terms and conditions documentation provides you with adequate protection in the event of non-payment or insolvency of a client/debtor. This is particularly important for any business relationships which commenced on or before 30 January 2012 the commencement of the PPSA.

From a practical perspective we strongly recommend that you regularly provide your customers with a copy of your standard terms and conditions. This may potentially avoid disputes in relation to any retention of title clauses you may wish to rely on.

In addition to the above we strongly encourage all small to medium business owners to frequently review their credit applications and terms and conditions and to only utilise credit applications and terms and conditions which are relevant to your business and client base. A properly drafted credit application with accompanying terms and conditions is, in our view, a sensible investment in any modern business operation.

If your trading terms and conditions allow for the registration of a security interest, we recommend that those interests are perfected under the PPSA. We are able to advise and assist you on perfection of security interests.

This article is intended to be general commentary on the subject matter. It should not be taken as legal advice or substituted for legal advice.

To discuss your Credit Application and Trading Terms and Conditions or recovery of goods please contact our office on 1300 907 335 or complete an online enquiry form and we will be back to you shortly.

CASE SUMMARY of Central Cleaning Supplies (Aust) Pty Ltd –v- Elkerton

(in his capacity as joint and several liquidator of Swan Services Pty Ltd (in liquidation)).

Facts

Central Cleaning Supplies (Central), the appellant, had previously supplied cleaning related goods and equipment to Swan Services (Swan). This relationship lasted for approximately 4 years (between September 2009 and March 2013).

At the commencement of the relationship Swan completed Central’s trading terms and credit application.

Amongst other things, the application provided that the supply of goods between Central and Swan would be governed by Central’s Standard Terms and Conditions.

One of the issues was that the standard terms and conditions were not included in the credit application, and there was no acknowledgement by Swan that it had received or reviewed the terms and conditions prior to signing the credit application.

Central subsequently supplied Swan with cleaning related goods and issued an invoice which amongst other things provided:

  • Swan had 30 days to make payment of the amount claimed on the tax invoice; and
  • Goods the subject of that invoice remained the property of Central until the whole of the purchase price has been paid by the purchaser (Swan) to Central in full –The Retention of Title Clause

Swan went into external administration in or around May 2013 and was subsequently placed into liquidation.

Central had made attempts to reclaim and recover the unpaid cleaning equipment and in doing so attempted to rely on the Retention of Title Clause that was contained on each of its invoices covering supplies which had been not been paid for between November 2012 and May 2013.

Central’s claims where rejected by the liquidator on the basis that Central’s interest had not been perfected under the PPSA and could therefore not be enforced against the liquidator. This meant that the liquidator was not allowing Central to collect the goods which Swan had ordered, had in its possession but had not paid for. The matter was subsequently litigated.

Trial

At trial Central asserted that it was entitled to rely on the transitional provisions of the PPSA. Central argued that the retention of title clause was a transitional security agreement and therefore enforceable against the liquidator.

The Court ultimately ruled against Central and held that the retention of title clause was not incorporated as a term of the credit application. The Court held that the retention of title clause was incorporated as a separate term of each contract of sale of cleaning supplies. Each individual contract was created after 30January 2012 and therefore the transitional provisions did not apply.

Central appealed the decision.

The Appeal

Central succeeded in its appeal. The Court found that the terms on which Central agreed to provide credit to Swan included the Retention of Title clause and gave rise to a transitional security interest relating to future supplies. In coming to this decision, the Court carefully analysed the contract between Central and Swan and how the contract came into existence. The Court found the following:

  • Swan’s completion of the credit application was Swan’s offer to purchase equipment on an ongoing basis and subject to Central’s Standard Terms and Conditions. The signing of the credit application did not create a contract, and its lodgment with Central did not impose a contractual obligation on Central to do anything;
  • Central’s acceptance of Swan’s credit application (and the creation of the contract) occurred when Central Supplied Swan with the equipment on 30 days credit. The equipment was supplied in accordance with Central’s Standard Terms and Conditions which contained the Retention of Title Clause;
  • The fact that Central’s credit application did not set out all of Central’s Standard Terms and Conditions was immaterial. The Court noted “it was not uncommon to enter into a transaction on another party’s standard terms and conditions without enquiring what they are. It is often not worth doing so and a sensible commercial risk to run. The law reflects commercial reality by holding the party who does not enquire to such of the other party’s standard terms and conditions as may fairly be regarded as within the risk the first party took”

Review on Decision

Central ultimately succeeded. However, it did so as its agreement with Swan was found to be a transitional security agreement which incorporated Central’s Retention of Title Clause. This meant that Central was entitled to claim on automatic temporary perfection under the PPSA and was entitled to enforce its Retention of Title Clause and reclaim the goods.

 

Please note: The above is not intended to be legal advice. Every circumstance is different. Always seek legal advice in relation to your individual situation.

© PCL Lawyers 2020

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