Following changes brought into effect by the Personal Property Securities Act 1999 last year, you cannot rely solely on a retention of title clause to secure your interest in goods. Amanda Douglas, an associate with the Christchurch Lawlink firm of Wynn Williams & Co, outlines the reasons why you need to take additional steps to protect your interests. The Personal Property Securities Act 1999 (PPSA) has wide ranging implications and affects many transactions. This article will concentrate on the steps you must take to ensure that retention of title clauses can still protect you.
Retention of Title Clauses
Retention of title clauses (also known as Romalpa 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. Many businesses in the past have relied on their terms of trade printed on the back of invoices (even though, by themselves, the terms were not always enforceable).
Under the PPSA, in order to protect your rights you must take additional steps. In many instances, this will require a change to current practices and documentation. You cannot assume that you have protection just because your terms of trade and your contract with your purchaser contain a retention of title clause.
Title now Irrelevant
Under the previous law, if you reserved title to the goods, you continued to own and have rights in the goods until the buyer paid for them in full. Under the PPSA, it is irrelevant that you reserved title. If you do not take the proper steps, title to your goods can pass to a third party even if you have used a retention of title clause.
Many sellers are unaware that under the PPSA, retention of title clauses by themselves do not give protection. The rights under the clauses themselves have not changed, however additional steps are now required to be able to successfully rely on any form of security (whether it is a retention of title clause or another form of security), ahead of the customer’s other creditors.
Steps Necessary to Retain Interest
In order to rely on your retention of title clause, you must:
- ensure that you have a written agreement that has been:
- signed by the customer, or
- otherwise assented to by the customer, in some written form (including by facsimile or email);
- perfect’ your interest in the goods, usually by registration.
A retention of title clause creates a "security interest" in the goods being sold on credit. In order to maintain priority in the goods over third parties, you need to perfect this interest. The most common way of doing this is by registering the interest on the Personal Property Securities Register (PPSR).
The cost of registration on the PPSR is low. At the time that this article is written, the cost is $5.00 per registration. You can carry out your own registration, but training is recommended, as an incorrectly registered interest can be just as ineffective as an unregistered interest.
To be able to register the goods, you first need to have a written agreement signed or assented to by the customer in the manner described above. There are certain requirements to be met in these agreements. In most cases, terms of trade will need to be redrafted. You need to put steps in place to ensure that all of your customers (existing and new) sign or assent to your terms of trade. This does not necessarily have to be done each time that goods are sold provided that your terms of trade are drafted to cover all goods sold, either now or in the future.
If you do not register your retention of title clauses, you run the risk that some other party will register a security in respect of your goods. For example, your customer might put your goods up as security for a loan, or your customer’s bank may take a general form of security over all of your customer’s goods (which would include the item(s) you have sold to the customer). If someone else does register an interest in the same goods, and you have not registered your interest, the registered third party will have the right to take the goods to satisfy their debt ahead of you. This is the case even if there is a retention of title clause in your favour.
This would apply even where you do not intend to sell the goods to the customer. Examples of this are where goods are provided to the customer for display in their showroom, and leases. Despite the clear intention that the customer never obtains title or permanent ownership rights in the goods, the goods could still be lost to a third party if your interest is not registered.
In order to protect your rights to the goods, you should register your interest in the goods on the PPSR. Since the PPSA came into effect, many creditors have registered their interests on the PPSR. You may think that there is no point in registering now, if you have not already done so. If a security interest is registered now, it will have priority below any security interests that have already been registered on the PPSR, but it will ensure that your security interest ranks ahead of interests that are subsequently registered. For new goods sold on credit, it will provide priority to you from the outset, provided all requirements of the PPSA are met.
As stated above, in most cases, changes to documentation and practices will be required, but if the changes are made now, they can be used for all new arrangements that are put in place.
Decision Whether to Register
Registration is not always appropriate. Sometimes, the costs of registration in terms of time and money outweigh the benefits, and registration is not justified. For example, the PPSA allows certain goods up to a certain value to pass to a purchaser who is unaware of the security interest, despite your security interest. But this should not stop you from getting an agreement signed, as you then have the flexibility to decide whether to register at a later time. Later registration will affect your priority in the goods, but remains an option.
Generally, it is a weighing up exercise as to whether registration is appropriate to protect your interests. If you do not register a security interest, you need to make an informed and active decision not to do so. Do not presume that the retention of title clause alone will protect your interests.
You cannot rely simply on a retention of title clause without taking the additional measures, otherwise you run the high risk that someone else has taken, or will take, priority over your interest. That person may exercise their rights in the goods to satisfy the debt owed to them. This means that you would not have a right to enforce the retention of title clause yourself, and will then need to revert to other, perhaps less effective, methods to recover your loss.
In this article, reference has been made to the sale of goods on credit, which is the most common use of retention of title clauses, however the situation applies to all circumstances in which retention of title clauses are used.
To retain priority in the goods over which you have a retention of title clause, you need to:
- update your trade terms;
- get signed agreements with all customers or agreements assented to by one of the means described above; and
- register your interest on the PPSR.
If you don’t take these steps, you do so at your own risk. Some sellers have already found out the hard way that their systems are not sufficient. Don’t fall into the same trap. The time to act is now. If you have not taken any active steps towards securing your rights in goods in these circumstances, contact your local Lawlink firm.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.