You may not be aware of it, but a business which sells goods on ‘retention of title’ terms relies heavily on the Personal Property Securities Act 2009 (PPSA) for protection against its insolvent customers.
Best practice for businesses selling goods on this basis is to have a dated master agreement signed by the seller and buyer. The master agreement typically provides for an arrangement under which all future sales of goods is undertaken on the terms of the master agreement.
This practice is adopted by many sellers because it means that only one agreement is required and only one PPSA registration is required. Both parties know where they stand.
Such an arrangement is far preferable to the alternative which is that an agreement be entered into with every supply. This can add enormously to administration costs and legal costs and it is usually such an outrageous proposal that it is dismissed out of hand by most sellers as being a totally unviable operating alternative.
That’s the theory. The practice can unfortunately be very different.
Credit Applications – mistake #1
Consider what happened to HAG Import Corporation (Australia) Pty Ltd (HAG) in a recent Queensland District Court case:  QDC 107, for example.
HAG sold kitchenware. In 2011, it sent a credit application (for 30 days credit) to Lineville Pty Limited (Lineville).
The credit application stated “Lineville applies to HAG for 30 days credit. Lineville acknowledges receipt of HAG’s current standard terms of trade and acknowledges that the terms may be changed by HAG from time to time.”
Lineville had indeed read the current standard terms of trade. The terms granted HAG a security interest in the goods sold to Lineville from time to time until payment for them had been made.
Lineville signed the credit application and returned it to HAG. HAG then began supplying goods to Lineville and they were paid for by Lineville. HAG did not make any PPSA registration. All OK – so far.
New terms – mistake #2
In 2013 HAG sent an email to Lineville attaching new terms of trade and the email stated “These are the new terms upon which we will now be supplying you with our goods”. Those terms also granted a security interest in the goods to be supplied to Lineville.
This time, a PPSA security interest was registered and further goods were then supplied by HAG and paid for by Lineville.
The PPSA registration – mistake #3
The PPSA registration stated that it was the “2011 contract“ which gave rise to the security interest, not the 2013 contract. Was there a “2011 contract”? Did the credit application with the then terms of trade amount to a contract? Surely HAG meant the 2013 contract?
Then Lineville went into liquidation. The liquidator wanted to claw back the payments made by Lineville to HAG after the 2013 email was sent. But under the law of preferences, it could only claw them back if the various debts (which existed in respect to the supplies prior to their payment) were unsecured.
Because of how the transitional provisions of the PPSA operate, the debts would only be unsecured if there was no “2011 contract”.
HAG argued that the 2013 registration was not worded incorrectly. It argued that the words in the 2011 credit application “the terms may be changed from time to time” meant that the 2013 terms were just a variation of the 2011 terms: it was the same contract of supply, but with different terms. HAG argued that the one and only contract of supply consisted of the 2011 credit application and the terms to which it referred.
By contrast, the liquidator argued that there was no “2011 contract” and that the PPSA registration was therefore void and of no effect.
Was there a Master Agreement?
His Honour considered the issue and said that the 2011 terms did not amount to a contract. He said that the 2011 credit application was not a contract either. He concluded:
“[The 2011 credit application] was just a request for credit by Lineville and an admission that Lineville was familiar with HAG’s terms of trade. At that point, there was no obligation on either party to buy or selling anything.”
He then went on to review other parts of the 2011 terms and said that the wording of the 2011 terms made it clear that there was only to be an agreement for the sale and purchase of particular goods when each set of ordered goods was delivered to Lineville, and that the relevant clause in the 2011 terms – “the terms may be changed from time to time” – had the effect that if Lineville accepted goods from HAG, the version of the terms in force at that time applied to the exclusion of all other terms.
In other words, each supply in 2011 and thereafter was a separate contract of supply. Each supply in 2013 was also a separate contract of supply.
There was no master supply contract in 2011 nor in 2013. The PPSA registration had assumed that the interest it was securing was “transitional” – being the interest created by the “2011 contract”. But as there was no “2011 contract”, the registration did not secure anything.
If HAG had gone to the trouble of putting in place a master supply agreement in 2011, it would not have had to refund the amount claimed by the liquidator of Lineville. HAG had to repay $596,000.
Take home points
- Make sure you have a master sale agreement
- Do not assume that your credit application amounts to a contract of supply. It probably doesn’t.
- If you want to amend your terms, then amend the master sale or master lease agreement.
- Register a PPSA financing statement every time you enter into, or change your terms of trade.