Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92

WORDS AND PHRASES - 'security interest', 'security agreement', 'transitional security agreement', 'transitional security interest'.

1 The appellant ('Central') is a supplier of cleaning equipment. One of its customers was Swan Services Pty Ltd ('Swan'). Over the period September 2009 - May 2013, Central supplied cleaning equipment to Swan.

2 For each supply of equipment, Central invoiced Swan. Each invoice included a retention of title ('ROT') clause in the following terms:

CONDITION OF SALE:

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.

3 In May 2013, Swan went into liquidation. The respondent, Mr Elkerton, was the liquidator. At that time, there were unpaid invoices for equipment supplied between November 2012 and May 2013. Central has sought to enforce the ROT clause in each of those invoices and reclaim the equipment. The liquidator has resisted that claim, so far successfully.

4 The difficulty for Central is that, on 30 January 2012, major legislative changes came into force affecting the enforceability of security interests. The changes were effected by the Personal Property Securities Act 2009 (Cth) (the 'PPSA'). The effect of that Act was that, after 30 January 2012 (the 'commencement date'), a security interest - such as that conferred by an ROT clause - is enforceable only if the interest has been 'perfected'. Ordinarily, perfection of a security interest requires its registration on the register established by the PPSA.[1]

5 Central did not register a security interest in respect of any of the equipment supplied under the unpaid invoices. Its claim to recover the equipment can only succeed if its interest in the relevant equipment is covered by the transitional provisions of the PPSA, which were designed to protect security interests which had been created, or provided for, before 30 January 2012.

6 The issue in this appeal is whether Central's security interest in the equipment supplied after 30 January 2012 was 'provided for' by an arrangement entered into between Central and Swan in September 2009 for the supply of equipment on 30 day credit. In the language of the transitional provisions, Central can only succeed if it shows that this credit arrangement was a 'security agreement [which] provided for the granting of' a security interest in equipment supplied in the future.

7 The judge at first instance rejected Central's claim, holding that the credit arrangement did not 'provide for' the granting of the security interests in the future. For reasons which follow, we respectfully disagree. In our opinion, the terms on which Central agreed to provide credit to Swan included provision for the ROT clause as a standard term of each future supply of equipment. Accordingly, we would allow the appeal.

The terms of the commercial arrangement[2]

8 On 3 September 2009, Swan applied to Central for a 30 day commercial credit facility. For that purpose, the financial controller of Swan completed and signed Central's standard form credit application. The opening words of the application were as follows:

WE HEREBY APPLY FOR 30 DAY ACCOUNT AND SUBMIT THE ENCLOSED CONFIDENTIAL INFORMATION FOR THIS PURPOSE.

9 On the back of the application form was a list of 'Credit Application Terms', which included the following relevant provisions:

1. The supply of goods by the seller is governed by the Seller's Standard Terms and Conditions as in force from time to time. The Standard Terms and Conditions override any terms and conditions of purchase used by the Customer.

1. The Seller may require the Customer to provide security to secure any credit facilities provided to the Customer. The Seller in its sole discretion may require that the Customer charge real or personal property (or both) owned by the Customer for an amount equal to any amount that the Customer owes the Seller from time to time under the credit facilities or otherwise. The Customer shall execute any documents necessary for this purpose.

10 As already mentioned, Central subsequently supplied cleaning equipment to Swan, each transaction being covered by a specific invoice. Each of the invoices included the same ROT clause. The first invoice before the Court was dated 4 September 2009, the day after the credit application was signed. According to the statement of agreed facts before the Court, the procedure for purchasing equipment was as follows:

• Swan ordered equipment by sending a purchase order to Central, specifying the equipment required;
• Central delivered the equipment within approximately four weeks of receiving the purchase order; and
• after delivery, Central would render an invoice to Swan.

11 As noted earlier, Central will only be able to enforce the ROT clause with respect to an item of equipment supplied after the commencement date if Swan's credit application was (or gave rise to) a 'transitional security agreement', that is, an agreement made before the commencement date which 'provided for the granting of' the security interest in that equipment when it was later supplied.

12 Sections 307 and 308 of the PPSA provide as follows:

transitional security agreement means a security agreement that is in force immediately before the registration commencement time, and that continues in force at and after that time.

transitional security interest means a security interest provided for by a transitional security agreement, if:

(a) in the case of a security interest arising before the registration commencement time ― this Act would have applied in relation to the security interest immediately before the registration commencement time, but for section 310; or

(b) in the case of a security interest arising at or after the registration commencement time:

(i) the transitional security agreement as in force immediately before the registration commencement time provides for the granting of the security interest; and

(ii) this Act applies in relation to the security interest.

Note: Section 310 provides that this Act only starts to apply to security interests at the registration commencement time.[3]

13 As can be seen, the construction of these provisions requires reference to the respective definitions of 'security agreement' and 'security interest'. Section 12 of the PPSA defines 'security interest' as follows:

(1) A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).

Note: For the application of this Act to interests, see section 8.

(2) For example, a security interest includes an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payment or performance of an obligation:

(a) a fixed charge;

(b) a floating charge;

(c) a chattel mortgage;

(d) a conditional sale agreement (including an agreement to sell subject to retention of title);

(e) a hire purchase agreement;

(f) a pledge;

(g) a trust receipt;

(h) a consignment (whether or not a commercial consignment);

(i) a lease of goods (whether or not a PPS lease);

(j) an assignment;

(k) a transfer of title; and

(l) a flawed asset arrangement.[4]

14 Section 10 defines 'security agreement' to mean:

(a) an agreement or act by which a security interest is created, arises or is provided for.[5]

The same section also defines the word 'provides' in these terms:

a security agreement provides for a security interest if the interest arises under the agreement.[6]

15 A 'security interest' is thus an interest 'provided for by' a transaction of a particular kind. It must be a transaction which 'in substance, secures payment or performance of an obligation'. Under s 12(2), the legislature has given a non-exhaustive list of types of transactions which may give rise to a security interest, provided always that the transaction is of the relevant character, that is, it 'secures payment or performance of an obligation'.[7]

16 One of the examples given in s 12(2) - by sub-paragraph (d) - is 'a conditional sale agreement (including an agreement to sell subject to retention of title)'. Plainly enough, each contract between Central and Swan for the sale and supply of particular equipment was 'an agreement to sell subject to retention to title'. It was, moreover, a transaction of the requisite character, because in substance the retention of title by Central secured payment of the purchase price by Swan. Thus, the interest in the goods 'provided by' that transaction was a 'security interest' within the meaning of s 12(1).

17 Although 'security interest' is defined by reference to transactions, 'security agreement' is not. Instead, the latter definition speaks of 'an agreement' or 'an act' by which a security interest 'is created, arises or is provided for'. On ordinary principles of interpretation, the legislature must have intended that each of these alternatives - 'is created', 'arises' and 'is provided for' - has its own work to do.

18 The legislature has thus specified three types of relationships between the 'agreement or act', on the one hand, and the security interest, on the other. The existence of any one of those relationships will qualify the agreement or act as a 'security agreement'. The three alternatives would seem to connote differing degrees of directness of that relationship. To take the two extremes (and converting the passive voice of the statutory language into the active voice), there is an obvious difference between an agreement or act 'which creates' a security interest and an agreement or act 'which provides for' a security interest.

19 In the first of these, the genesis of the security interest is to be found in the agreement or act itself. The entering of the agreement, or the doing of the act, 'creates' the security interest. An example of this would be a contract for the sale of the goods which itself includes a retention of title clause. That is an agreement which creates the security interest in the vendor of the goods. By contrast, an agreement or act will 'provide for' a security interest if it makes provision for the creation of a security interest in the future and/or by some other agreement or act. This would seem to be confirmed by the definition of 'transitional security interest'. As noted earlier, s 308 provides:

transitional security interest means a security interest provided for by a transitional security agreement, if:

...

(b) in the case of a security interest arising at or after the registration commencement time:

(i) the transitional security agreement as in force immediately before the registration commencement time provides for the granting of the security interest; and

(ii) this Act applies in relation to the security interest.

Note: Section 310 provides that this Act only starts to apply to security interests at the registration commencement time.

20 Plainly enough, what this provision contemplates is:

• a security agreement in force before the commencement time (although continuing thereafter);
• a security interest arising after the commencement time; and
• the qualifying relationship between the agreement and the interest being that the agreement 'provides for the granting of the security interest'.

Thus understood, a security agreement - in this case, a transitional security agreement - will 'provide for' a security interest if it 'provides for the granting of' the security interest at some time in the future.

21 This reading of the definition is consistent with what was said in the Replacement Explanatory Memorandum (for the Bill which became the PPSA), as follows:

A security agreement would be able to expressly provide for ongoing supplies and therefore result in a series of security interests. Provided the security agreement is in force prior to the registration commencement time and allows for future security interests to be granted, each security interest granted under that security agreement, regardless of whether it is granted before or after the registration commencement time, would be a transitional security interest. The secured party to such an ongoing transaction would only need to register one financing statement to cover the ongoing transitional security interests.

Where there is no formal agreement providing for ongoing supplies, generally each supply would be considered to be a separate contract or security agreement. Supplies made after the registration commencement time in this type of situation would each be made under a new security agreement. Security interests made after the registration commencement time would not benefit from the protection provided in the transitional provisions.[8]

22 As the trial judge pointed out, the Memorandum provided the following example by way of explanation:

Each Friday, Supplier A supplies Vendor A, a newsagent, with greeting cards. Supplier A and Vendor A signed a contract on 1 February 2007, prior to the first supply, which noted that Mary does not own the cards until she pays for them. The contract provided for the ongoing supply of cards. Three weeks after the Bill commences, a liquidator is appointed to Vendor A's business. Supplier A has not registered the collateral on the PPS Register.

The contract between Supplier A and Vendor A is a security agreement that provides for future security interests in the cards supplied. The supply each week represents a new security interest under the security agreement. Supplier A will have priority over the liquidator's interest for all supplies made to Mary as the ongoing supplies are transitional security interests provided for by the original transitional security agreement. The transitional security interests therefore receive temporary perfection for 24 months following the registration commencement time.[9]

23 On this analysis, the relevant definitions will be satisfied if the agreement or act said to constitute the transitional security agreement makes provision for the grant of future security interests in goods supplied. It is of critical importance, therefore, to determine when and how the agreement between Swan and Central was made, in order to determine whether or not it made such provision.[10]

24 The argument before the trial judge seems to have proceeded on the basis that a binding agreement came into force between Central and Swan on 3 September 2009, being the date on which Swan signed and lodged the credit application. The contention for Central was that the ROT clause, although not mentioned specifically in the credit application, was nevertheless incorporated into the contract made that day.

25 As her Honour recorded in her reasons, Central advanced three alternative bases for the incorporation of the ROT clause into the 3 September agreement: incorporation by reference; incorporation by signature; and incorporation by notice or course of dealing. Her Honour rejected each of these arguments, and concluded as follows:

I do not accept that the ROT clause which appears on the invoices is incorporated as a term into the Credit Application agreement between the parties.[11]

Clause 2 of the Credit Application refers to Central Cleaning's 'Standard Terms and Conditions', but the ROT Clause is a 'Condition of Sale' which refers to the retention of title in 'Goods the subject of this sale' (emphasis added). The Credit Application must be construed using an objective approach to ascertain the intention of the parties as they have expressed it (not their subjective intention). Using that principle to construe clause 2, it seems to me that the parties must be taken to have intended that the terms to be incorporated were recorded in a separate document existing at the date of the agreement. There is no evidence of what those terms were (if they did exist). Rather, Central Cleaning wishes to rely on a clause on invoices that came after the Credit Application and that clearly treats each sale as a separate contract. In my view, once a sufficient time had passed, the ROT Clause formed part of each separate and individual contract of sale (by dint of the consistent course of conduct). But it was too late for it to be incorporated as a term of the Credit Application agreement by this method, coming as it did, after that contract had been entered into by the parties.

Whilst the retention of title condition was incorporated into the separate contracts that are the subject of this proceeding, that does not assist Central Cleaning because those contracts came after 30 January 2012. It was only those separate and distinct contracts that provided for the security interests, and the transitional provisions did not serve to perfect them.[12]

27 The appeal submissions of both parties appeared to proceed on the same assumption, namely, that a contract had come into existence on 3 September, upon and by virtue of Swan signing and lodging its credit application on that day. In the course of the Court's consideration of the appeal, however, it became apparent that the correctness of this assumption needed to be examined.

28 To that end, the Court invited supplementary submissions from the parties in response to the following questions:

When and how did Swan become contractually bound by the 'Credit Application Terms' set out on the reverse of the Application dated 3 September 2009?

It would seem on the evidence that the lodging of the credit application was a unilateral act by Swan Services, in the nature of an offer or request. If so, by what act did Central Cleaning accept that offer, or grant that request, so as to make the Credit Application Terms binding on Swan Services?

On one view, no contract containing those terms came into existence until the first supply of goods on 30 day credit, that being the first occasion on which Central Cleaning agreed to Swan's request for credit. On that view, the credit terms were incorporated as terms of the first contract of supply and applied both to that supply and to future supplies. Is that the correct analysis?

29 In its supplementary submission, Central accepted that this was one possible analysis of the contractual arrangements but advanced an alternative analysis, to the effect that Swan's lodging of the completed credit application constituted an acceptance of an offer made when Central supplied it with a blank application to complete. Swan, for its part, maintained that a contract had come into existence on 3 September, by virtue of Swan's lodgment of the credit application.

30 In our view, Swan's credit application was simply that - an application. 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 would come into existence. On ordinary principles, therefore, 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.

31 Swan had simply made an offer to acquire equipment from Central on the terms set out in the application. More particularly, 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. The credit application 'was in substance an application [by Swan] to become an account customer, and it was to cover all future dealings' with Central.[13]

32 In the absence of any other communication by Central of its acceptance, the terms in the application would not become binding on either party unless and until Central supplied equipment to Swan and extended the 30 day credit which Swan had requested. As a matter of contract, therefore, Swan did not become bound by the 'Credit Application Terms' until the first supply of equipment after the credit application was made. (That was the supply in respect of which Central issued the invoice dated 4 September.)

33 Central's acceptance of Swan's application for credit was an acceptance by conduct.[14] 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. By that conduct, Central signified its acceptance of Swan as an account customer. The sending of the invoice was the critical step, of course, as it was the first communication confirming that credit was being provided.

34 On this analysis, 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.[15]

35 Importantly for present purposes, 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 ROT clause. The evidence showed, incontrovertibly, that those were Central's standard terms. They appeared in identical terms on every supply invoice before the Court.

36 It is immaterial that the credit application form did not set out Central's 'Standard Terms and Conditions'. On ordinary principles, Swan's signing of the credit application bound it to accept those terms and conditions for all future supplies of equipment. Clause 2 of the 'Credit Application Terms' (set out above) could not have been clearer in that regard.

37 As Callaway JA said in Maxitherm:[16]

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.

38 The supplementary submission for Swan contended that, because the ROT clause in the 4 September invoice was expressed to apply only to the particular goods 'the subject of this sale', it was not capable of being incorporated into the credit agreement 'as a term of general application'. With respect, this contention misses the point.

39 It is clear that, in its terms, each ROT clause had application only to the invoiced goods the subject of the particular supply. The result of the contractual analysis, however, is that:

• Swan's application for credit included an undertaking to be bound, in respect of every supply of equipment, by Central's standard terms of supply;
• the ROT clause was in existence, as a standard term of supply, at the date on which the credit agreement became binding on Swan, being the date on which Swan received the first invoice for equipment supplied; and
• under that agreement, Swan accepted that all future supplies of equipment would be governed by that standard term (which would be expressed in each case to relate to the particular equipment supplied).

40 On this view, an agreement came into force - at the time of the first supply of equipment - which did 'provide for the grant of' a security interest in relation to all future supplies of equipment. That agreement was a 'transitional security agreement', and each of the security interests granted in respect of equipment supplied subsequently was a 'transitional security interest'. Central is therefore able to enforce the ROT clauses notwithstanding the absence of registration.

[1] PPSA s 21.

[2] The content of paras 8-10 is taken from a Statement of Agreed Facts filed by the parties on 13 September 2013.

[7] There is an unexplained inconsistency of language in these provisions. Whereas s 12(1) speaks of an interest 'provided for by a transaction', s 12(2) speaks of an interest 'provided by' a transaction. As a matter of ordinary language, the two are not interchangeable.

[8] Replacement Explanatory Memorandum, Personal Property Securities Bill 2009 (Cth) 125.

[9] Replacement Explanatory Memorandum, Personal Property Securities Bill 2009 (Cth) 126. Emphasis added.

[10] Cf Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559, 560 ('Maxitherm').

[11] Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2014] VSC 61 (7 March 2014) [27].

[12] Ibid [33]-[34] (emphasis added).

[13] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 188 [64].

[16] [1998] 4 VR 559, 562.