Under the PPSA, retention of title clauses, and also known as Romalpa clauses (ROT) will give rise to a security interest. This is because of the definition of security interest under the PPSA and in particular the provisions of section 12(2)(d) of the PPSA. When a business sells goods to its customer, the seller will be regarded as the “secured party” and its customer as the “grantor”.
This has three implications for the seller:
1. The contract between the seller and its customer must comply with the provisions of the PPSA for the creation of security interests or it will find that the ROT no longer works.
2. The seller will on and from May 2011 (or thereabouts) no longer be able to simply take its goods back under the provisions of its ROT, it will have to comply with the enforcement procedures of Chapter 4 of the Act.
3. Even though the seller may remain the owner of the goods under the general law, its customer will be able to grant security interests over the goods to third parties and to transfer the goods to others in a way that extinguishes the ROT.
Do you have to change your T&Cs?
The PPSA does not oblige any seller of goods to change its terms and conditions of trade and it is likely that sellers will continue to use their current trading terms. As time passes, new provisions will emerge but at this stage we are of the opinion that your existing T&Cs are adequate.
Key things to note
(i) Section 20(2) of the PPSA suggests that a seller’s customer will need to either sign the document that contains the security interest language (i.e. the ROT), or adopt or accept by an act or omission that reasonably appears to be done with the intention of adopting or accepting the document that incorporates the ROT terms by reference. We are of the opinion that if you want to be safe, you will ask your customers to sign your terms of trade, but it would also be possible to satisfy the signing requirement if your customer confirmed its acceptance via fax or email of similar means [cl 20(2) & (3)].
(ii) The purchase order and/or invoice will need to describe the goods the subject of the ROT.
(iii) Finally, the security interest will need to be “perfected” and this will require registration of a financing statement on the PPS Register. This can be done via the internet provided you first register yourself as someone entitled to register financing statements (this will all be capable of being done on line and in due course pre-registration will be possible but only in the month or so prior to the Register going live). In some, but not all cases, it will be necessary that a separate financing statement be registered for each supply of goods to a customer. This need will arise if your T&Cs create a separate contract each time a quote/purchase order/invoice is raised. This is not always the case so if you have any doubts please contact us and seek our advice. In any event if the nature of a seller’s business is to do one off deals or deals that are unique to a particular type of good it will be necessary to register separate financing statements.
Why bother to register your security interests created by your ROTs?
If a seller disposes of goods on the strength of an ROT and it does not “perfect” its “security interest” in the goods, then a third party buyer or lessee for value will take the goods free of the seller’s ownership interest, unless that third party buyer or lessee was a party to the original transaction between the seller and its customer (s 43 PPSA). Importantly under the new laws mere knowledge or awareness of the existence of the security interest between the grantor and the secured party is not enough. Unless the third party was a party to the transaction that gave rise to the security interest, it will be capable of taking free of that security interest.