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How to draft terms and conditions for sale or leasePrint This Post

How to draft ‘terms and conditions for sale or lease’ and comply with the Personal Property Securities Act

 

Terms and Conditions of Sale

 

It will be only a matter of time before accountants and even financial planners begin to face negligence claims for failing to inform their clients of the risks they run if they do not update their terms and conditions of sale or lease to comply with the Personal Property Securities Act (PPSA).

 

Terms and conditions of sale, properly prepared by Leigh Adams Business and Commercial Lawyers North Sydney, will alleviate clients’ PPSA compliance concerns when selling their goods. The PPSA also affects hiring and leasing arrangements, which this article addresses later on.

 

The Background

Many businesses begin with supplying their would-be customers with a credit application form, typically affording them 30 days credit. The credit application often states “The supply of goods is governed by our Standard Terms and Conditions”.

 

Once the customer’s application for credit is accepted, a purchase order is completed and served on the supplier. We’ll call the supplier ‘Acme’. Some goods are then supplied by Acme to the customer.

 

An invoice is then delivered by Acme to the customer. Printed at the bottom of Acme’s invoices is a retention of title (ROT) clause called “Condition of Sale”. It states: “The goods the subject of this sale remain the property of Acme until the whole purchase price for those goods has been paid”.

 

The Issue

But what if the customer goes into liquidation after the goods are supplied? Under the PPSA, the liquidator can sell the goods and apply their proceeds of sale to the customer’s own creditors (and the liquidator’s fees) depending on when the contract for the supply of the goods was entered into.

 

When was the contract for the supply of the goods entered into? When the credit application was accepted? When the purchase order was delivered to Acme? When the goods were delivered to the customer? When the invoice was supplied? Or maybe another date?

 

If you can establish the date of the contract, then you can establish the date by which the registration on the PPSA Register (the PPSR) ought to be made. Get that wrong, and the customer’s liquidator will love you forever, because he will be able to sell such of Acme’s goods which are in the possession of the customer, and keep the proceeds and apply those proceeds for the benefit of the customer’s creditors (and the fees of the liquidator).

 

The reasoning behind this conclusion is that if Acme gets the date of the contract wrong, then it will more than likely get the timing for its PPSA registration wrong too. And if that is too late, then s588FL of the Corporations Act 2001 can mean that registration on the PPSR is meaningless and the goods can still be used by the customer’s liquidator to pay the customer’s creditors.

 

What is the date of the Contract?

Consider the above scenario, which is that:

1.      Acme accepts the credit application.

2.      Acme’s customer then completes and sends to Acme a purchase order.

3.      The goods are delivered about 4 weeks later.

4.      After the goods are delivered, Acme’s invoice (with the ROT clause on it) is rendered.

5.      This process is followed for a number of years.

 

Acme assumes that the date of the credit application form is the date of the agreement and Acme makes a PPSR registration based on this assumption.

 

But the liquidator argues that the credit application has nothing to do with it and that each invoice gives rise to a new agreement, and therefore Acme’s registration on the PPSR is worthless, because the registration only protects the supply made under the very first delivery. The liquidator then argues that s 588FL dictates that all other supplies are not protected. The liquidator’s argument is that there should have been multiple registrations on the PPSR, one corresponding with each supply.

 

Some Courts – e.g. [2014] VSC 61

Some Courts have agreed with the liquidator and they have concluded that the parties must have intended that the terms referred to in the credit application form (i.e. ‘our Standard Terms and Conditions’) must have been recorded in a separate document existing at the date of the credit application form. By this analysis the credit application form could not be taken to have included the ROT terms appearing in a subsequent invoice.

 

These Courts have concluded that each invoice, by using words like “the title to the goods supplied under this sale, remain with Acme until they have been fully paid for”, amounts to a new contract every time goods are supplied.

 

Other Courts – e.g. [2015] VSCA 92

Other Courts state that the credit application form (once accepted by Acme) is the security agreement because it ‘provides for the granting of the security interest’ as required by the PPSA, even though the security interest only arises in the future (for example, when each invoice with the ROT provisions on it, is subsequently rendered).

 

Upshot

Who wants this mess? This uncertainty? The legal costs to argue the point? The loss of inventory if you get it wrong?

 

Way Forward

PPSA cases are making and breaking the SME sector. If you do not want to be the next casualty, then call Leigh Adams Commercial Lawyers for more information.

 

 

What about Terms and Conditions of Hire

Many clients are relying on their own understanding of the Personal Property Securities Register (PPSR) to make registrations in an effort to protect themselves and the goods they have hired out to others.

 

The Issue

The issue is that the PPSR is complex and there is a lot that can go wrong – just ask John.

John’s business (JJ) leased out earth moving equipment. JJ recently leased a front-end loader to Bob’s business (BB) for 6 months.

 

PPS Leases

That’s less than one year – so no PPSR registration is required. JJ knew about s13 of the PPSA and ‘PPS Leases’.

 

At the 5 month mark, one of BB’s foremen said to JJ’s driver, “The job’s taking longer than we thought. Can we have the front end loader for another month?” JJ’s driver responds “No problem – you can have it as long as you like.”

 

A lease for an indefinite term

What JJ did not know is that this comment meant that the six month lease instantly became a lease for “an indefinite term” (see s13(1)(b) PPSA) and therefore gave rise to security interest which required registration on the PPSR. If there was no registration, then if BB went into liquidation,  BB’s liquidator could keep the front end loader, sell it and apply the proceeds to BB’s creditors. This is exactly what happened.

 

What is ‘inventory’?

Sometime later, JJ (who only just managed to get back on his feet financially) tried again. This time he hired out another front end loader to Charlie’s company (CC) whom he had asked to dig a ditch for some pipes to be laid on a rural property owned by JJ. But JJ had changed his business model and he now only sold front end leaders and never leased them out.

 

He was told by someone that these changed circumstances meant that the front end loader could not possibly be “inventory” because they were held for sale not lease. JJ therefore figured that under s62 of the PPSA, he had 15 business days after supplying the front end loader to CC, to register his security interest.

 

Unfortunately for JJ, “inventory” is defined under the PPSA to include “goods provided under a contract for services”.  That means that JJ should have registered JJ’s security interest by the time of supply, not 15 days thereafter.

 

Priority dispute

JJ finds that CC’s bank had a registered security interest over all CC’s present and after-acquired property and that it prevails over JJ’s registered security interest in the front end loader when CC became insolvent.

 

After JJ lost his second front end loader he gave up. He is now an employed caravan park manager in Queensland, and wonders why he did not see Leigh Adams Business and Commercial Lawyers at North Sydney to get the advice he needed at the time.

 

Way forward

For further information, contact Leigh Adams at Leigh Adams Lawyers on 99640022 or leigh@lalawyers.com.au

 

 

June 2015

Leigh Adams Lawyers