Take home points

1.     If your business involves the sale of goods on credit, consider including a retention of title clause to allow you the ability to retake possession of goods provided on credit if the goods remain unpaid and a purchasing company goes into liquidation. The retention clause should be properly drafted in order to be effective.

2.     The retention of title clause must be in writing and provided to the purchaser of the goods when supplying the credit application.

3.     Once the credit agreement, incorporating the retention of title clause, has been entered into it will need to be ‘perfected’ (in the ways specified in the Personal Properties Securities Act 2009) to be enforceable. The “transitional period” for retention of title agreements created prior to the enactment of the PPSA has now expired, and no longer applies.

4.     Businesses signing up for trading accounts should carefully review all the terms and conditions which form part of the application (and ask for them before signing any application) to ensure that they are aware of any security interests, such as a retention of title clause, which may affect them.

Many businesses which supply goods on standard contracts often include a term purporting to retain the title to the goods sold until they had been paid for in full. Prior to the enactment of the Personal Properties Securities Act 2009 (Cth) (PPSA) a supplier could rely on a retention of title clause to retake possession of goods when the purchasing company had been placed into liquidation or receivership.

Under the current regime, a business seeking to rely on a retention of clause must ensure that it complies with the provisions of the PPSA. Now, a supplier is only entitled to retain goods if the supplier’s interest is a “security interest”. The security interest should be recorded in writing. That security interest will need to be “perfected” in order to be enforceable if the purchasing company goes into liquidation and against third parties.

Under the PPSA, there are also transitional provisions (which have now expired) which were put in place to cover certain security arrangements which were in place before the commencement of the PPSA.

The enforceability of retention of title clauses (also sometimes called “Romalpa clauses”) in the context of the PPSA were recently examined in the Victorian Court of Appeal case of Central Cleaning Supplies (Aust) Pty Ltd v Elkerton (in His Capacity as Joint and Several Liquidator of Swan Services Pty Ltd) (in Liq) [2015] VSCA 92.

Relevant Facts

The appellant, Central Cleaning Supplies (Central), supplied cleaning equipment to Swan Services (Swan) between September 2009 and March 2013. In September 2009, Swan completed Central’s standard form credit application.

The application provided that “the supply of goods between Central Cleaning and Swan Services would be governed by Central Cleaning’s “Standard Terms and Conditions”. The standard terms were not included with the credit application nor was there acknowledgement that Swan had received them prior to signing the credit application.

Central subsequently supplied cleaning equipment to Swan and issued an invoice which included the following terms:

1.     Swan had 30 days with which to pay the tax invoices; and

2.     “Goods the subject of this sale remain the property of Central … until the whole of purchase price has been paid by the Purchaser to Central in full.” (the ROT clause)

In May 2013 Swan went into external administration and subsequently liquidation. Central sought to reclaim the unpaid cleaning equipment and relied on the ROT clause in each of its invoices which covered unpaid supplies between November 2012 and May 2013. The liquidator rejected Central’s claim saying that it had not been perfected under the PPSA and therefore unenforceable.

At trial, Central argued that it was entitled to rely on the transitional provision of the PPSA. It argued that the ROT clause in the credit application was a transitional security agreement and therefore enforceable against the liquidator.

The trial judge rejected that argument and held that the ROT clause was not incorporated as a term of the credit application – it was incorporated as a separate term of each contract for the sale of cleaning supplies. Each individual contract were create after 30 January 2012 and therefore the transitional provisions did not apply. Central appealed the decision arguing that it was a transitional agreement.

The Court of Appeal decision

Central’s appeal was successful and in a joint judgment the Court found that the terms of which Central agreed to provide credit to Swan included the ROT clause and gave rise to a transitional security interest in relation to future supplies.

The Court analysed how the contract came into existence between Central and Swan. It found that:

1.     Swan’s completion of the credit application was an offer to purchase equipment on an ongoing basis and subject to Central’s Standard Terms and Conditions. the mere signing of the credit application did not create a contract, and its lodgement with Central did not impose on Central a contractual obligation to do anything;

2.     Central’s acceptance of Swan’s credit application (and the creation of the contract) occurred when it supplied equipment to Swan and extended the 30 days credit in the invoice. The supply of the equipment was supplied on Central’s Standard Terms and Conditions which contained the ROT clause;

3.     the fact that the credit application did not set out all the Standard Terms and Conditions was immaterial. “On ordinary principles, Swan’s signing of the credit application bound it to accept those terms and conditions for all future supplies of equipment.” The Court cited the proposition that:

“It is 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.”

4.     As such, the credit agreement entered into by the parties was a transitional security agreement which incorporated the ROT clause. Central was entitled to claim the benefit of automatic temporary perfection and enforce its ROT and reclaim the goods.

Analysis

Suppliers offering to supply goods on credit should review their terms and conditions to ensure that their agreements provide adequate protection in the event that a purchaser fails to pay the invoices. To avoid potential disagreements about whether or not a retention of title clause (and other clauses a supplier may wish to rely on) applies, suppliers should also include their standard terms with credit applications though purchasers who sign credit agreements without requesting them may still be considered bound.

It is important to note that Central had managed to succeed as it was able to show that its credit application fell within the transitional provisions of the PPSA. While the temporary perfection for transitional securities no longer apply (as they apply to interests created before 30 January, suppliers should carefully review the commercial relationship which give rise to the security interest and retention of title clause.

The Court of Appeal’s decision also provides clarity to what may be considered a transitional registration. It 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 those terms and conditions may be treated as a transitional security interest.

The position now with agreements entered into after 30 January 2012 is if a supplier wishes to rely on the benefit of a retention of title clause, it must ensure that it is perfected under the PPSA in order to be enforceable. This may be done by registering the security interest in which the retention of title clause will be contained in, on the Personal Properties Securities Register.

A supplier that fails to perfect its security interest may find that it will not be able to reclaim the unpaid goods it has supplied to a purchasing company. This is especially the case with companies which subsequently enter into liquidation. The fact that the supplier has title to those goods will not protect it.