Readers will be aware that section 20 of the PPSA provides for the enforceability of security interests against third parties. An issue that has arisen in practice is, what happens if your security agreement has not been signed by your Customer (i.e. the Grantor).
Section 20(2) provides that for written Security Agreements, collateral is covered if:
(a) The Security Agreement is evidenced by writing, that is:
(I) Signed by the Grantor; or
(II) “Adopted or accepted by the Grantor by an act or omission that reasonably appears to be done with the intention of adopting or accepting the writing…”.
Remember that the PPSA does not of itself create security interests, the PPSA is an Act that allows for the registration of security interests. That security interest is normally created by a provision in the Terms and Conditions of the Sale (usually a retention of title type provision). Often, a Customer when applying for credit will be asked to sign not only the Credit Application but also acknowledge the Terms and Conditions of Sale. What is the situation if the Credit Application is signed but not the Terms and Conditions.
The Act talks in terms of “an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing”. It is interesting to note that section 36 of the New Zealand legislation (upon which the Australian legislation is based) provides clearly that the Security Agreement must be signed or assented to by letter, telegram, cable, telex message, facsimile, electronic mail etc by the Grantor. That provision was to ensure that any fraud attempts would be minimised.
The Australia legislation has ameliorated that position as acts or omissions can now be considered to be means of adoption or acceptance by the Grantor. The usual acts or omissions would be, in our view, continual ordering of products and further referring to the Terms and Conditions on invoices and/or delivery dockets both of which could be used as evidence of acceptance of the Terms and Conditions.
In a recent matter in which we were involved our Client’s Customer had been advised in a general mail out of the new Terms and Conditions which incorporated PPSA provisions. The Liquidator, in attempting to defeat our PPSA claim, argued that the mere advising of the Terms was not sufficient to bind the Customer and accordingly, there was no valid security interest. The Liquidator claimed that the security interest now being granted was considerably more extensive than the client’s old ROT clause.
He argued that no Customer in that position could possibly be taken to have just blindly accepted such a condition without actually agreeing to it in writing. Unfortunately (from a legal perspective) the matter settled however, the lesson is simple and the takeaways are:
- Have your Customer sign off on the Terms and Conditions.
- If you are going to rely on a course of conduct make sure you bring those Terms and Conditions to the Customers attention at every possible opportunity. Consider as part of your “Welcome Aboard” procedure drawing the Customers attention to the provisions of the PPSA and advising them that your security interest will be registered.
For more information, contact Terry Ledlin, Special Counsel
Direct Line: 02-8488-3388