Retention of Title Clauses in Supply Contracts

Retention of Title Clauses in Supply Contracts

By Allan McDougall

March 12, 2012

A possible short-term consequence of the Commonwealth government’s new Personal Property Securities Act (PPSA) will be to cause small business suppliers relying on retention-of-title (ROT) clauses as security for payment to lose out to big banks in any contest for money left over by a customer in financial distress. This is potentially the effect of the new law which commenced on 30th January 2012.

A seller of goods under an ROT clause remains the owner of the goods. However, under the PPSA, ownership of the goods becomes largely irrelevant. The PPSA will treat the arrangement as if it were the same as a secured loan. This means that under the PPSA the purchaser will be regarded as an owner of goods who has granted security over them back to the seller.

What should suppliers who rely on ROT clauses do? Firstly they should review their sale documents and procedures to comply with the PPSA. For all new customers and sales relationships inaugurated after 30 January the ROT clause should be checked firstly for general enforceability. Secondly the clause needs to be amended to permit the seller to register it on the PPS Register as a security interest.

Thirdly, sellers need to realise two things: (1) under the PPSA they can no longer enforce their ROT clauses by reclaiming their goods from a late or non-paying customer; and (2) the PPSA even permits an ROT purchaser to grant security over, lease or on-sell the seller’s goods to a third party in the normal course. So, sellers may need to have their sales contracts amended to exclude the PPSA’s prescribed enforcement rules, and also limit the so-called extinguishment rules which otherwise give a purchaser this kind of latitude.

As regards registering the ROT supply contract, a single registration at the outset of the relationship should be sufficient, so long as the goods are largely homogenous and their description in the PPS Register’s “financing statement” is broad enough. For relationships already in place as at 30January the ROT contracts remain valid without registration for a temporary period of two years. However, suppliers should be moving to have existing contracts registered during this period, if only for the fact that sales proceeds outstanding beyond the two years will not be properly protected.

Once an ROT clause is on the PPS Register it is given a “super priority” over other “normal “ security interests, such as the former fixed and floating charges often taken by the customer’s bank. This is an incentive for ROT suppliers to get their contracts – both new and existing – onto the PPS Register at the earliest opportunity. Another incentive is that a registered ROT clause allows the supplier to retain ownership of goods even if they are co-mingled with, or attached to, other goods. This has been an uncertain area under the existing law.

As perhaps to be expected, there is a sting in the tail with ROT registrations. It concerns their timing. If the goods supplied comprise inventory, the relevant supply contract needs to be registered prior to the next succeeding delivery (if the goods are not inventory, within fifteen business days of delivery). If a delivery of inventory precedes PPS registration it will not attract super priority, and the supplier risks conceding prior security over the goods to another of the customer’s creditors, such as its bank.

For more information contact partners@pigott.com.au.

This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in particular matters.