The important role of standard terms of sale

The standard terms of sale of a supplier can form part of a credit application by its customer, appear on sales invoices or order forms or on the supplier’s website and there are many other combinations of documentation and procedures that can be used to establish written evidence of the terms of the contract between the supplier and its customer. Just as important, there are many reasons why these combinations may come unstuck.

This article looks at two recent court decisions that have shone a spotlight on the effectiveness of standard terms of sale used by suppliers of goods to create effective security interests over those goods. The article also notes some other issues that can affect security interests of this type. 

Two recent cases

In the most recent decision, Central Cleaning Supplies (Aust) Pty Ltd v Elkerton,1 the supplier (Central) had not registered on the Personal Property Securities Register (PPSR) so it was necessary for it to show it had a ‘transitional security interest’ under a ‘transitional security agreement’ for the purposes of sections 307 and 308 of the Personal Property Securities Act 2009 (Cth) (PPSA), and therefore had the benefit of the temporary perfection afforded to transitional security interests prior to 30 January 2014. 

The Victorian Court of Appeal held that the agreement formed upon acceptance of a credit application constituted a transitional security agreement even though the retention of title term appeared on the individual invoices issued by Central subsequent to the credit application being signed by the customer (Swan) but not on the credit application itself. The credit application provided that the supply of goods would be governed by Central’s ‘standard terms and conditions as in force from time to time’. Significantly, the first invoice including the retention of title term was issued by Central the day after the credit application was signed by Swan. The court’s analysis of when and how Swan became contractually bound was critical to its finding that there was a transitional security interest. The court held:2

  • the signing and lodgment of the application was a unilateral act by Swan, a request to Central that any future supply of equipment be on terms that payment was not due for 30 days. Swan thereby signified its intention to create legal relations with Central on those terms but until Swan’s offer was accepted, no such relations came into existence;
  • the mere signing of the credit application did not create a contract, and its lodgment with Central did not impose on Central a contractual obligation to do anything;
  • Swan was offering to purchase equipment from Central on an ongoing basis, and to do so subject to Central’s ‘Standard Terms and Conditions as in force from time to time’, in return for Central agreeing to provide 30 day credit;
  • in the absence of any other communication by Central of its acceptance, the terms in the application did not become binding on either party unless and until Central supplied equipment to Swan and extended the 30 day credit which Swan had requested;
  • Swan did not become bound by the ‘Credit Application Terms’ until the first supply of equipment after the credit application was made;
  • Central’s acceptance of Swan’s application for credit was an acceptance by conduct. The relevant conduct was the delivery of the equipment which Swan had ordered, and the sending of the invoice confirming that the supply was on 30 day credit;
  • the first supply of equipment operated to establish a supply agreement between Central and Swan. In accordance with the express terms of the credit application, the agreement governed all future supplies of equipment;
  • that first supply of equipment was a supply on Central’s ‘Standard Terms and Conditions’, that is, the conditions set out in the invoice including the retention of title clause. The evidence showed that those wereCentral’s standard terms. They appeared in identical terms on every supply invoice before the court;
  • even though the credit application did not set out Central’s ‘Standard Terms and Conditions’, Swan’s signing of the credit application bound it to accept those terms and conditions for all future supplies of equipment.

This outcome was a reversal of fortunes for Central who had lost the decision at first instance.3

The other recent decision, Citadel Financial Corp Pty Ltd v Elite Highrise Services Pty Ltd (No. 3)4, concerned an invoice issued by Citadel to Elite on 9 August 2013. This invoice specified the particular collateral (scaffolding) supplied by Citadel and contained a retention of title clause and another clause purporting to grant a ‘security interest’. Citadel registered on the PPSR on or around the date of the invoice but it did not claim a purchase money security interest (PMSI) in its registration. The invoice was not signed by Elite but Citadel claimed its terms had been adopted by Elite for the purposes of s20(2)(a)(ii) of the PPSA pursuant to emails passing between Citadel and Elite in June 2013. 

Brereton J found that these emails could not evidence acceptance or adoption of the terms of the invoice because the emails pre‑dated the issuance of the invoice. The emails themselves did not sufficiently identify the collateral or the terms of any security interest. The court also rejected the proposition that Elite’s retention of the scaffolding after receipt of the invoice from Citadel constituted acceptance or adoption of the written terms of the invoice for the purposes of the PPSA, given that the invoice was created well after the sale and delivery of the scaffolding.

These cases illustrate the importance of written evidence of the terms of a security interest. The Citadel decision reinforces that mere registration on the PPSR without evidence in writing of the terms of the security agreement between the supplier and its customer will not be sufficient to constitute a perfected security interest. The Citadel decision also highlights that formation of the security agreement must precede delivery of the goods.

Section 588FL and the vesting of a security interest on the customer’s insolvency

When a security agreement ‘comes into force’ is critical to the potential application of section 588FL of the Corporations Act. That section requires a security interest that is perfected by registration, and no other means, to be perfected within 20 business days after the security agreement that gives rise to the relevant security interest came into force. Failure to do this may result in the security interest vesting in the customer if it comes insolvent within 6 months of the actual registration time. 

Although the Central Cleaning case concerned a transitional security agreement and s588FL was not relevant, it is not difficult to anticipate how s588FL could be applied to certain security agreements evidenced by standard terms of sale if the supplier misses the 20 business day registration window.

Contract formation

Agreements based on standard terms of sale are often formed through an offer and acceptance process. The resulting agreement may apply to all future sales, or the terms may provide that a new contract is formed each time goods are supplied pursuant to those terms.  In some instances there could be a combination of an up‑front ‘umbrella’ agreement and separate agreements being formed each time goods are supplied.

In the Central Cleaning decision, the court found that the credit application was an offer by Swan to Central which was accepted by Central when it first supplied goods to Swan. However, this might not always be the case. In Industrial Progress Corporation Pty Ltd v Wilson5, another case concerning transitional security agreements, Beech J observed in relation to a similar scenario:

“… in my view, it is arguable that the provision of these documents [the supplier’s standard form credit application document which included its standard supply terms and a guarantee] by the [supplier] to the Customer … was an offer accepted by the return of the signed documents, giving rise to a contract.  The terms of the contract were, in substance, that the [supplier] would supply to the Customer goods on credit when requested to do so on the standard terms and conditions that formed part of the credit account application.”6

Suffice it to say, documents relied upon to form a contract based on offer and acceptance can vary greatly and need to be carefully analysed to ascertain the intention of the parties as to the timing of the formation of the contract. The intention of the parties must be ascertained objectively, having regard to what a reasonable person would understand by the language the parties have used.7 This is often easier said than done.

It is not uncommon for standard terms of sale in a credit application or similar document to include a number of provisions which are arguably inconsistent with the signing or acceptance of those terms being an offer by the customer to the supplier which does not form a binding contract until accepted by the supplier. Some examples include:

  • a term stating that the customer is immediately bound upon signing;
  • a term stating that the customer hereby charges all of its assets to secure any present and future obligations of the customer to the supplier – the words ‘herby charge’ may be inconsistent with an offer by the customer to the supplier and may indicate the document is intended to have immediate effect (at least in respect of the charging provisions);
  • a guarantee by directors or related parties of the prospective customer that is included in a credit application. Such guarantees are often expressed to cover both existing and future indebtedness and in terms that indicate an intention that they should take immediate effect;
  • terms that expressly provide they are to apply ‘before credit is approved’ by the supplier – this suggests an intention that the document will immediately bind the customer rather than being contingent upon credit being approved or some further action on the part of the supplier.

A ‘battle of the forms’ between the supplier’s standard terms of sale and competing terms proposed by the customer can also result in uncertainty as to both the terms and timing of the formation of the contract.

The ongoing relevance of retention of title

In the context of the supply of goods which will most likely be ‘inventory’ and therefore a ‘circulating asset’ in the hands of the customer8, it is critical that the supplier retain title to the goods supplied rather than take some other form of security interest.  While the PPSA does not generally distinguish between different forms of security interest, this has not been carried over to the Corporations Act which distinguishes property that is the subject of a ‘circulating security interest’.9 A security interest in which the secured party retains title to goods cannot be a circulating security interest and therefore cannot be exposed to the statutory priority for certain preferred creditors such as employee entitlements on the insolvency of the customer.

Conclusion

The Central Cleaning and Citadel decisions are timely reminders of some of the pitfalls that await unwary suppliers but they are not the only ones. Other potential pitfalls include:

  • supplier security interests will typically be PMSIs so the timing and registration requirements for PMSIs under the PPSA must be satisfied;10
  • even if the supplier has properly documented and perfected its security interest as a PMSI, the issue of identifying the original goods and/or their proceeds if the customer becomes insolvent can often be very difficult.

In short, the supplier’s position is not without its challenges.