Archive for the ‘Commercial & Corporate’ Category
The Personal Property Securities Act 2009 (Cth) (“PPSA”) will have a significant impact on the taking, registration and enforcement of security over almost all kinds of property, except land. The PPSA overturns fundamental property law concepts including the long held concept of legal title. A complex set of rules will now govern the enforceability of security interests. The commencement date for the PPSA is 30 January 2012. This guide briefly explains how the PPSA may affect your business (“you”, “your”) and what you need to be doing now, with our assistance, in order to protect your assets.
How the PPSA may affect you
- Fixed and floating charges – your existing charges (both as chargee and chargor) registered with ASIC will be “migrated” to the PPSA Register (“PPSR”) – a single national internet-based register available 24/7. The concept of fixed and floating charges will be replaced under the PPSA by “security interests over non-circulating assets” and “security interests over circulating assets” respectively.
- Retention of title (“ROT”) – any supply of goods by you under a contract/purchase order that contains a ROT clause will need to be reviewed and may require registration as a purchase money security interest (“PMSI”). Currently, a supplier of goods under ROT may retrieve its goods on the insolvency of the counterparty. Following the PPSA commencement date, unless the ROT supplier registers a PMSI as a security interest on the PPSR, the goods under ROT may become the property of the company in liquidation and amount to a windfall to its creditors.
- Equipment hire – any equipment lease of more than 12 months may require registration in order to protect the interest which you have in the equipment.
- Serial numbered goods – any lease of serial numbered goods (eg dump trucks and other motorised mining equipment with a speed of more than 10kph) of more than 90 days may require registration in order to protect the interest which you have in the goods.
- Inventory and temporary works – currently, as in ROT above, a contractor’s title to inventory and temporary works is assumed and is not under threat. Under the PPSA, your title in any inventory and temporary works located on a principal’s land/property may be at risk of being defeated by creditor’s claims unless registered on the PPSR.
- Joint venture agreements – interests arising under cross charges and some default clauses in joint venture agreements will fall within the PPSA regime and will need to be reviewed. In particular, new cross charges will require specific drafting changes to deal with the changes introduced by the PPSA.
- Other considerations – hire purchase agreements, conditional sale agreements, transfers of accounts receivables, confidentiality obligations (amongst others) will also be affected.
How can we assist?
The PPSA team can assist you by:
- identifying existing security interests and whether these will be the subject of automatic migration or whether new registrations should be made;
- reviewing the terms and conditions of your contracts including standard terms of trade particularly given that ROT interests, whilst currently not registrable, should soon be registered;
- amending your standard contracts to be PPSA compliant by taking into account the new terminology and rules relating to attachment, perfection and priority of security interests as well as the PPSA rules affecting issues such as confidentiality, assignment and negative pledges;
- advising on PPSA and other matters with regard to all new contracts/tenders;
assisting with the registration of security interests on, and searches of, the PPSR; and
- consulting with you as to the risk of not registering a security interest on the PPSR (this is dependent on the credit worthiness of your customers/suppliers and on the cost/benefit of registration).
For further information contact:
Louis van Aardt
Special Counsel
Tel: (08) 9420 7157
Email: lvanaardt@talbotolivier.com.au
The Personal Property Securities Act 2009 (Cth) (PPSA) is expected to come in to operation on 1 February 2012 and will have a significant impact on the taking, registration and enforcement of security interest over almost all kinds of property, except land.
The PPSA establishes a single national law governing security interests in personal property and replaces a number of existing registers, such as the Register of Encumbered Vehicles, to create one online register which allows the public to search for and register security interests in personal property. Existing registered security interests will be ‘migrated’ to the new register.
A security interest is an interest in relation to personal property arising from a transaction that secures payment or the performance of an obligation and without regard to the form of the transaction or the identity of the person who own the property. As the definition of security interest is without regard to the identity of the person who has the title to the property, it may allow for a person to grant a security interest over property even if they don’t own it!
Personal property is any form of property other than land or buildings, or fixtures which form part of the land. It can include tangible property such as cars, boats, machinery, and crops as well as intangible property such as shares, intellectually property (such as a licence) and contract rights. Under the PPSA a security interest must be properly established (often by registration) to be enforceable. If a dispute arises as to the priority of security interests (that is, who ranks ahead of who) registered securities have priority over unregistered securities and registered securities rank in order of time of registration.
A crucial aspect of the PPSA is the effect of retention of title (ROT) clauses. ROT clauses are frequently used in contracts to retain title to goods that are being sold on credit or are otherwise handed over to someone who has not paid for them in full. Prior to the PPSA, ROT clauses were effective and enforceable without registration. Under the PPSA they will need to be registered. If someone provides goods to someone else without receiving full payment, and does not register the ROT as a security interest, they will run the risk that some other party will register a security in respect of those goods. The registered third party could then potentially have the right to take the goods to satisfy their debt first. This may be the case even if there is a written contract with the person who holds the goods and even if there is an ROT clause.
Apart from the far reaching effect on businesses, the PPSA will also impact buyers of valuable goods who will soon be able to check one single register rather than any of the existing registers. When purchasing items such as cars, boats or machinery a search of the register should be done using a serial number, such as a vehicle identification number or a hull identification number. Consumers will also need to be vigilant when purchasing other valuable items such as artwork from private individuals and in these instances should conduct a search by the name of the vendor/grantor and their date of birth as it appears on an official document, such as a driver’s license.
From 1 January 2012, suppliers and manufacturers, in addition to complying with the laws under the Australian Consumer Law, will be required to comply with additional requirements for a warranty against defects.
The warranty must, among other things:
(a) contain the warrantor’s name; business address, phone number and email address (if any);
(b) set out relevant claim procedures;
(c) state when the period within which a defect in the goods must appear in order for the consumer to claim the warranty;
(d) state who will bear the expense of claiming the warranty, and if the expense is to be borne by the Manufacturer, how the consumer can claim those expenses; and
(e) include the following statement: “Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and for compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure.”
Failing to comply with these requirements may lead to a penalty of up to $50,000 and a criminal conviction.
Suppliers and manufacturers should take steps to ensure that their terms and conditions and warranties are compliant now ready for 1 January 2012.
In this case, the Western Australian Supreme Court of Appeal considered an express term in a memorandum of understanding which placed an obligation on the parties to a deal with each other in good faith. Despite the parties acting honestly, the Court had to consider whether an unreasonable proposal put forward by the respondent was evidence of a lack of good faith.
1. Facts
Strzelecki Holdings Pty Ltd (Strzelecki) wished to purchase land owned by Cable Sands Pty Ltd (Cable Sands) near Capel. The land had been mined for mineral sands and at different locations on the land there were collections of radioactive tailings. The parties did not enter into a conventional contract of sale in relation to the land because there was a concern about how tailings were to be dealt with in view of Strzelecki’s wish to develop the land for housing. Instead the parties entered into a memorandum of understanding (MOU) in October 2004 which focused on the remediation process designed to deal with the radioactive tailings.
Clause 12 of the MOU provided that “The parties are, while this Memorandum of Understanding remains in effect, to at all times deal with each other in good faith.”
During the negotiation period in 2006, Cable Sands prepared proposed special conditions to the contract for the sale of land. The special conditions included provisions that Strzelecki would be responsible for the remediation work and would provide indemnity to Cable Sands together with a $25 million, 20 year bank guarantee.
Strzelecki contended that Cable Sands acted unreasonably and failed to act in good faith having regard to the circumstances in which Cable Sands sought the guarantee and indemnity, in that:
(a) the guarantee and indemnity were proposed in connection with a requirement by Cable Sands that Strzelecki undertake the remediation despite Cable Sands’ ability to do so; and
(b) the demand for a guarantee and indemnity was made two weeks into a 30 day negotiation period in 2006 without it ever having previously been raised during the currency of the MOU.
2. Decision at first instance
The trial judge’s conclusion about the contractual nature of the MOU was that it was a contract that bound the parties immediately in terms which they agreed. The parties were not prepared to enter into a binding contract for the sale of land until the due diligence process was carried out. The trial judge found that the parties expected to make a further contract to operate in substitution for the first agreement containing, by consent, additional terms and the parties bound themselves by agreement to a process which they describe as due diligence investigation and to negotiation in good faith towards the making of a contract for the sale of land.
The trial judge found that the respondent did not breach its contractual obligation to act in good faith. The investigation which had to be done by Cable Sands was effectively derailed when it received advice that the solution envisaged in the MOU was not possible. The trial judge found that Cable Sands was acting honestly seeking to protect itself against liability it feared might arise out of its activities interfering with the radioactive content of the soil and although no specific contractual terms were advised until the special conditions were formulated, Cable Sands expressed the hope that the negotiations would progress.
3. Decision on appeal
The grounds of appeal alleged that the demand by Cable Sands for an indemnity and a $25 million, 20 year bank guarantee was conduct which established a breach of the obligation on Cable Sands to deal with the Strzelecki in good faith.
Pullin JA stated that “the MOU only required that the parties ‘deal’ with each other honestly… it did not require the parties to act in the interests of the other party.” Pullin JA went on to state that “The MOU clearly contemplates that they ‘deal’ with each other by negotiating. This does not suggest that the content of an offer made in negotiations where the parties must deal with each other in good faith must pass some objective test of reasonableness to be assessed by the courts.”
It was found that the parties should ‘deal’ with each other in good faith by:
(a) subjecting themselves to the process of negotiation; and
(b) keeping an open mind in the sense of being willing to consider such proposals as may be propounded by the other party and put forward options for the resolution of any differences which may develop in the negotiations.
It was found by the Court of Appeal that there was no evidence of conduct from which it may be inferred that Cable Sands was not acting honestly and did not subject itself to the process of negotiation and Strzelecki did not contend otherwise. It was also found that there was no evidence that the $25 million guarantee was unreasonable in the circumstances.
The appeal was dismissed by all three judges.
4. Practical Implications
This case highlights the obligations placed on all parties subject to an express term to ‘deal’ with each other in good faith. When it comes to the content of a proposal made during negotiations, the mere content of a proposal which relates to the subject matter of the negotiations may not amount to a breach of good faith. Parties subject to a good faith clause need to show a willingness to negotiate and to continue to negotiate in good faith.
The Australian Government will be conducting an overhaul of the current business name application system. Currently, business names in Australia must be registered separately in every state or territory where the business operates. The new system will be a national registration framework and will be administered and maintained by ASIC.
What is the new national system?
The national system is expected to come into operation in April 2011 and the process for registering a business name will be via an online application system. New businesses will be required to obtain an ABN in order to apply for a business name. If a business registers for an ABN and a business name, the business name will be listed as ‘pending’ until an ABN has been issued.
Registration of a business name will require a single application which will then be valid in all states and territories. There will be a set fee for registrations, being $30.00 for one year and $70.00 for three years. This represents a significant reduction in fees, particularly for businesses wishing to trade in more than one state or territory.
What will happen with existing business names?
Existing business names will not be required to apply for an ABN, nor will renewals of existing businesses require an ABN. All existing names on all state and territory business name databases will be transferred onto the national register automatically.
What will happen with Identical names?
Under the current registration systems, identical business names can be registered by different entities trading in different states and territories. Under the new system an application for an identical name will not be able to be registered. Businesses should ensure their business name registrations do not lapse before the introduction of the national register, because they may be unable to re-register the business name due to identical names being transferred from state systems onto the national register.
Are there any restrictions on business names?
An online and automated test will be used to determine whether a particular name can be registered. Generally business names will be registered unless the name:
(i) contains foreign language characters;
(ii) contains restricted words that require consent, such as ANZAC;
(iii) likely to be offensive; or
(iv) is identical or almost identical to a registered company name.
What about trademarks?
Most businesses are unaware that simply registering a business name does not grant them any intellectual property rights over the use of the name. To protect trading names, businesses need to register trademarks. For more information please see our article “Trademarks vs Business Names – Do we really need trademarks?”
Are franchises affected by the national scheme?
Under the current system, franchisees when registering their business name provided a letter of consent to the Department of Commerce from the franchisor. Under the national system, the franchisee will not be required to provide written permission from the franchisor to the ASIC. Importantly for franchising, the test for identical names will allow the registration of a business name that differs only by a location regardless of whether or not there is a relationship between the businesses. For example, Ovenu and Ovenu Balcatta.
Therefore, Franchisors will need to regularly check the ASIC register to ensure that only authorised franchisees have registered a business name in the name of the franchise and ideally should protect their name by the use of trademarks. Under the new system, trademarks will become even more important to franchisors given that the registration of franchise names will no longer require written permission from franchisors in order to register the name.
The Personal Properties Security Act 2009 (Cth) (PPSA) received Royal Assent on 14 December 2009 and is expected to commence in May 2011. Its importance to Australian businesses is potentially as great if not greater than the changes brought about in 2001 by the Corporations Act 2001 (Cth). The PPSA will overhaul all areas of personal property securities and will deem certain terms in standard terms and conditions security interests.
What is a security interest?
The PPSA defines a security interest as an interest in relation to personal property provided for by a transaction that in substance secures payment or the performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property). Under the PPSA a security interest must be perfected (often by registration) to be enforceable.
What is personal property?
Personal property is any form of property other than land or buildings and fixtures which form part of that land. It can include tangibles such cars, boats, machinery, crops; as well as intangibles such as shares, intellectual property (such as a licence) and contract rights.
How will the PPSA affect my standard terms and conditions?
As a result of the PPSA, security arrangements including retention of title provisions contained in standard terms and conditions of an Australian business will need to be updated prior to May 2011 so that a security interest is not lost or otherwise defeated by a third party. Confidentiality, assignment, notice and enforcement provisions in standard terms will also need to be addressed. Some of these issues are examined below.
A. Retention of title (ROT): ROT clauses are frequently used in contracts to retain title to goods that are being sold on credit or otherwise are handed over to someone who has not paid for them in full. Prior to the PPSA, ROT clauses were effective and enforceable without registration. Under the PPSA they will need to be registered. If you do not register your ROT as a security interest, you run the risk that some other party will register a security in respect of your goods. If someone else does register an interest in the same goods, and you have not registered your interest, the registered third party may have the right to take the goods to satisfy their debt ahead of you. This may be the case even if there is a ROT clause in your favour.
B. Confidentiality: Ordinarily a confidentiality clause provides that information is confidential unless the law provides otherwise. Under the PPSA, certain persons may be able to request a copy of your security agreement unless there is an obligation of confidence preventing such disclosure. Therefore standard confidentiality provisions will need review to ensure the disclosure provisions of the PPSA are appropriately contracted out of.
Other changes
- Terminology such as “fixed charge” and “floating charge” will no longer be used.
- Phrases such as “attachment”, “perfection”, “enforcement” “purchase money security interests” and “super priority” will become commonplace as well as the rules governing them.
- The company charge registration system under the Corporations Act will be replaced with the electronic registration of security interests on the Personal Properties Security Register (PPSR), by way of a financing statement.
- The PPSR will be a single national register which will replace more than 40 other registers operated by or on behalf of the Commonwealth, States and Territories.
If you would like advice on how your standard terms and conditions and other commercial contracts can be PPSA compliant and the implications of the PPSA for your business please contact Louis van Aardt by email on lvanaardt@talbotolivier.com.au or Russell Morley on rmorley@talbotolivier.com.au for further information.
In our experience many companies continue to execute commercial documents incorrectly or not at all. This potentially has implications if a party wishes to rely upon the terms of a contract for example for payment, enforcement, confidentiality, breach and termination.
The commonly accepted methods of executing a document, including a deed at common law, involve the use of the common seal and signature by the directors and secretary, or by the method which is prescribed by the company’s constitution.
Execution of deeds
The prime law governing the execution of deeds by companies is section 127 of the Corporations Act 2001 (2001 Act) and section 10 of the Property Law Act 1969 (1969 Act). The rules are that a deed may be validly executed:
- by a company under seal with a signature of a director and a secretary (section 10 of the 1969 Act and section 127(2) of the 2001 Act); or
- by two directors of the company, or a director and a company secretary (section 127(1) of the 2001 Act); or
- in the case of a sole director company then that director or director/company secretary alone can sign the deed, and the document must be expressed to be a deed (section 127(1) of the 2001 Act).
Execution of other agreements
Section 127 of the 2001 Act also applies to the execution of documents other than deeds. Accordingly an agreement may be validly executed:
- by a company under seal with a signature of a director and a secretary (section 127(2) of the 2001 Act); or
- by two directors of the company, or a director and a company secretary (section 127(1) of the 2001 Act); or
- in the case of a sole director company then that director or director/company secretary alone can sign the agreement, and the document must be expressed to be a deed (section 127(1) of the 2001 Act).
What are the consequences of failing to execute a deed or agreement properly?
An outsider dealing with the company may assume that a deed or agreement has been duly executed by the company if it meets the requirements set out above, as applicable.
However, where a company fails to comply with these requirements, the legal effect is, technically speaking, that there is no contract. Statute law is silent on whether the defaulting party or parties may be allowed to escape from being bound by the contract. It would appear that this would be a decision for a court to determine, based on the facts. Section 127(4) of the 2001 Act, however, makes it clear that section 127 does not limit the ways in which a company may execute a document.
Parties dealing with a company which has, for some reason, failed to properly execute a deed, may find themselves taking comfort from section 127(4). This is because case law suggests that the section may cover the situation where, by virtue of some act, the contract is binding on the company. Hence, a contract not properly executed may nevertheless be treated as a valid and binding contract because the company had represented to an outsider that the contract had been validly executed. In that event the rules of estoppel would operate so that the company would be prevented from denying that the document was binding: Prime Constructions v Westbridge Investments (2004) 22 ACLC 1390 ([2004] NSWSC 861).
For further information or advice on whether your company contracts are validly executed and on associated risks or enforceability, please contact Paul Kordic, Principal, by email at pkordic@talbotolivier.com.au or Louis van Aardt, Senior Associate, by email at Lvanaardt@talbotolivier.com.au
In this case, the Victorian Court of Appeal considered a mortgagee’s statutory duty[1] to act in good faith and have regard to the interests of the mortgagor in exercising its power of sale. The statutory principles regulating a mortgagee’s power of sale are broadly consistent with the common law, and the case provides general guidance to mortgagees when exercising its power on a mortgagor’s default.
Facts
The mortgagee sold the property to an employee of the mortgagee’s solicitors for $360,000 in April 2006. The property had been valued in March 2006 at $350,000. The mortgagee advertised the property in newspapers and on the internet. But instead of sale by auction as recommended by the valuer and agents, the property was disposed of by private sale to the employee.
The mortgagor brought an action against the mortgagee and the purchaser seeking to set aside the sale and claiming damages from the mortgagee for breach of its duty to take reasonable care in selling the property at the best price which was reasonably to be obtained. The mortgagor provided evidence from two valuers, fixing the market value of the property at $415,000 and $420,000.
The question is, did the mortgagee act reasonably in relying on its valuation in March 2006 ($360,000) by selling the property to an associated party?
Decision
The trial judge held that, although evidence on the valuation carried out by the mortgagee was unsatisfactory, and the mortgagee did not provide the best opportunity to obtain the highest sale price, the mortgagor failed to discharge the onus of establishing a breach of the mortgagee’s obligation.
On appeal by the mortgagor, it was held that
- the mortgagee breached its statutory duty;
- the mortgagee was required to “fully test the market”, which it failed to do by abandoning the auction and accepting an offer from an “insider” at the lower end of the range of estimated sale prices; his Honour noted that the mortgagee’s reaction to the employee’s offer “was not to ascertain what further steps might be taken to increase the price, but rather to discover whether the offer could be accepted without incurring liability to the mortgagor”;
- the trial judge was required to determine the value of the property at the time it was sold and, in light of the trial judge’s criticisms of aspects of the valuations, should have preferred the evidence of the valuer that fixed the market value at $420,000 (i.e. damages were $60,000);
- the identity of the purchaser was relevant to both the onus of proof and the sufficiency of the steps taken to protect the mortgagor’s interests and obtain the best price;
- the fact that the sale price was within the range of possible sale prices was not sufficient to discharge the burden that a mortgagee must assume when the sale is to an “insider”. The mortgagee in such circumstances is under a duty to obtain the best price available.
Practical Implications
This case highlighted the strictness of a mortgagees’ duty of good faith, especially when there is a potential conflict, such as in a private sale to an associated party, between a mortgagee’s duty to obtain the best price available in the market and its desire to obtain the best bargain for the purchaser.
In summary, the duty of mortgagees when exercising a power of sale is a duty to exercise reasonable care to ensure the property is sold at market value. It is noted that a statutory duty is imposed on mortgagees, under the Property Law Amendment Bill[2] which is currently before the WA Parliament, to take reasonable care to ensure that land is sold for not less than its market value.
To meet this legal requirement, mortgagees should take care to:
- take the property to market through use of appropriate advertising and to seek the advice of agents to attract the largest number of potential buyers;
- sell the property at an auction when possible; and
- obtain a written valuation before sale especially where there is movement in the property market.
[1] s 77 of the Transfer of Land Act 1958
[2] Property Law (Mortgagees’ Power of Sale) Amendment Bill 2009 (WA)
Caveat is a Latin word meaning “let him beware”. While the legal profession uses the word in a range of situations, the one with which most people are familiar is when a caveat is said to be placed on somebody’s title to land.
What is a caveat
A caveat is a tool you can use to protect your interests against a person who owns real property; that is, who owns land. Under the Transfer of Land Act 1893 (WA) you can lodge a caveat with the Registrar of Titles. This means your interest will be noted on the title. If the owner of that land tries to transfer it to someone else such as by selling it, you will be notified of the event and it will not be possible for the transfer to be registered until your interest has been dealt with.
For example, if you and a land owner enter into a contract for renovations of a house on that land and your contract acknowledges your right to do so, you might lodge a caveat for unpaid money. If the owner tries to sell the house, the title can’t be transferred until your disputed payment is settled and the caveat is withdrawn. Otherwise, it might remain against the title
When else might I use a caveat?
A caveat might also be used if you have a contract with someone for the provision of goods and your contract includes a Romalpa or retention of title clause. This clause allows you to enter someone’s property and retrieve the unpaid goods. However, if these goods are affixed to the land (such as when you supply and fit plumbing fixtures) this isn’t practicable so a caveat may be lodged to record your interest in the land until the payment dispute is settled.
Is lodging a caveat that simple?
No. A land owner’s title is protected from people lodging caveats that can’t be justified.
So what should I do?
You need to make sure that the land owner and the person who owes you money are the same person. If this is not the case then you may encounter problems with your lodgement.
In a recent case[1], a landscaper was owed money on a contract he had made with a contractor who had since gone into liquidation before paying for most of the work. The landscaper’s terms and conditions gave him the right to enter the premises and retrieve the goods supplied. However, as some of the goods supplied had become a part of the land, the landscaper lodged a caveat over the land on which he had done the work. Unfortunately, the owner was a third party and not the contractor. Neither the owner, nor the owner’s agent, knew of the Romalpa clause in the contract – this was one of the factors two of the judges commented on when they decided the caveat should not be extended.
If you want to lodge a caveat, or if you’re not sure about your contract or the identity of the owner, it is always best to obtain legal advice. A correctly lodged caveat by a legal professional will ensure the caveat achieves its purpose.
How do I do it properly
You need to complete a caveat lodgement form which is available from Landgate. You may also need to make a statutory declaration setting out the nature of the interest you are claiming – if you don’t lodge a statutory declaration when required, the caveat will have no effect. After the caveat is registered with the Registrar of Titles, the Registrar will contact the landowner to give notice of the caveat
The landowner can then summons you, the caveator, to appear before a judge of the Supreme Court where you will have to explain why the caveat should not be removed. This is where getting legal advice will start to pay off. The process can move quickly and if you are prepared ahead of time, this will help to make the process less stressful.
In the case mentioned above, the landscaper was able to convince the Master of the Court, who heard the first application, that the caveat should be extended. The Master gave a series of orders to ensure that the issue in dispute was brought to trial but the landscaper didn’t follow these steps. The landowner then asked the Court of Appeal to reconsider the extension. Two of the three judges agreed that the caveats should not be extended. This meant, the caveats would cease to have any effect.
The lesson to learn from this is: don’t assume the caveat alone will solve the issue; you still need to take the necessary steps you need to settle the original dispute.
What if someone lodges a caveat on my land?
The Registrar will advise you about the caveat when it is received. It is advisable to obtain legal advice to make sure you are able to take the right steps to have the caveat removed. Alternatively, that legal advice may help you solve the dispute that lead to the caveat being lodged in the first place.
A caveat can be a useful tool in protecting your interest; however, it is not a resolution to your dispute with the landowner about payment for work done or goods received. This dispute still needs to be resolved. What a caveat will do is to give you some peace of mind that your interest in the land will be protected if the landowner tries to sell the land before the dispute is resolved.
A final word
Although it may appear to be relatively simple to lodge a caveat in the first instance, a party who subsequently has a caveat removed may find itself liable to the landowner for any loss suffered as a result of a wrongly lodged caveat. Make sure you take advice as to whether your claimed interest is truly caveatable. If it isn’t, you may be paying damages to the owner for any loss caused by the caveat.
[1] Perron Investments Pty Ltd v Tim Davies Landscaping Pty Ltd [2009] WASCA 171
If you are in the business of selling goods to another party before receiving payment, you probably already have a clause in your standard terms and conditions stating when ownership of the goods transfer from yourself to the other party. It is therefore useful to know what your rights are and how you can enforce these rights under this sort of clause which is known as a Romalpa or “retention of title” clause.
A little history
The Romalpa clause is named after the defendant in an English case from 1976, Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd[1]. The scenario in that case is one that’s probably familiar to many business people. The vendor, a Dutch company, had supplied aluminium foil to the purchaser, an English company. In their contract there was a clause saying that ownership of the foil didn’t transfer to the purchaser until the purchaser had paid all payments owing to the vendor and, that until the date of payment, the purchasers had to store the foil in such a way that it was clearly still the property of the vendor. If the foil was mixed with other materials to create new objects then the vendor would have ownership of those new objects until full payment had been received. The purchaser had a duty to look after the goods in such a way as to protect the interests of the vendor. If the purchaser sold the objects to a third party but still owed the vendor money then the vendor would get the benefit of any sub-claim against the third party.
When the purchaser got into financial trouble and a receiver was appointed, the vendor asserted its rights under this clause in the contract and claimed that, because of the clause, it had priority over secured and unsecured creditors. The Queen’s Bench and Court of Appeal agreed with the vendor and so the Romalpa clause became a way to protect a vendor’s ownership of goods which had been delivered to the purchaser and used but had not yet been paid for.
A recent example[2]
A landscaping business supplied a quotation to a contractor who was overseeing construction of a tavern in Perth’s southern suburbs. The contractor accepted the quotation which included the following term:
“The ownership of the goods supplied by the contractor to the customer shall remain with the contractor until payment in full has been received by the contractor. If such payment is overdue in whole or in part the contractor shall have every right (without prejudice to any other rights) and is hereby authorised by the client to enter into and upon the premises (between 8am and 5pm) where the goods may be stored or in use (with or without others) to retake possession and remove the same. The customer hereby indemnifies the contractor against any claim, action or damages arising out of any such action against the cost of the same.”
Unfortunately for the landscaper, the contractor went into liquidation leaving a large portion of the goods and services unpaid for. In addition, many of the goods supplied were attached to the land which belonged to a third party, the owner of the site. Because of this, the landscaper could not assert his right to retake possession of the goods he had supplied and instead placed caveats on the owner’s land.
In conventional building arrangements, any contract the contractor enters into with a sub-contractor, binds the contractor but not the owner unless the wording of the contract is such that the owner is also bound.
In this case, the owner was bound so the landscaper had permission to enter the owner’s property and remove the goods that had been supplied as part of the subcontract and for which payment had not been received in full. Because some of the goods had been attached to the land, they had changed in status from personal property to real property which meant that the landscaper could no longer use the Romalpa clause to retake possession in order to retain his title in the goods.
The landscaper lodged two caveats with the Registrar of Titles claiming an interest in the owner’s land. He said that the Romalpa clause meant that he had an interest in the land, and that he had a right to protect his interest which amounted to the price of the unpaid invoices. The landscaper was not able to persuade two of the three judges that the owner of the land was aware of the contact, let alone the Romalpa clause. This meant that the owner was not a party to the contract and could not be bound by the clause.
Lessons to learn
A Romalpa clause is a useful tool for vendors to use to protect their interests when supplying goods to purchasers who will be paying for the goods some time after delivery. It is especially useful when the goods supplied are likely to be used to make different objects or are going to become fixed to the land and are no longer retrievable by the vendor if the purchaser does not pay.
Following this recent case, it is evident that a vendor could still use a caveat to enforce an interest in the land to which goods have been affixed. However, this will only be effective if the original contract under which the payment fell due was made with the owner or the owner’s agent. Because the landscaper’s contract was with the contractor, he couldn’t assert his right under the Romalpa clause by lodging a caveat on the owner’s land.
If you use a Romalpa clause in your standard terms and conditions, you should:
- Make sure you know who you want to be bound by the clause; and
- Check with a lawyer skilled in contract law that your clause is as effective as possible.
If you have a Romalpa clause you want to enforce, it is worthwhile getting expert legal advice just to make sure you comply with your own terms and conditions. If the purchaser challenges your right to enforce the clause it will be useful if you can demonstrate that you have complied exactly with what the contract says.
There may be times when you supply goods that become attached to the land and are therefore not removable if the purchaser doesn’t pay. One way to protect your interests is to lodge a caveat over the purchaser’s land to which you have attached your goods. But a word of caution – this is not the end of the process. If you are going to take this step, it is recommended that you seek legal advice to ensure that you can really achieve what it is that you want to achieve.
A Romalpa clause is a useful tool in contract with purchasers but, as with any tool, it will only be effective if it is used properly.
[1] [1976] 2 All ER 552
[2] Perron Investments Pty Ltd v Tim Davies Landscaping Pty Ltd [2009] WASCA 171
