Terms of trade – is your business protected?

7 May 2014

Failure to regularly review your terms of trade can adversely effect your bottom line if Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2014] is anything to go by.

Your terms of trade are the lifeline of your business. They establish and govern your relationship with your customers, they ensure you get paid and they protect you from harm. For those reasons, it is critical that you regularly review your terms of trade and that you carefully consider whether you act in accordance with those terms of trade.

You must also ensure that all documents used to contract with your customers are linked back to the central terms and conditions which contain your security clauses.

The owners of Central Cleaning Supplies (Aust) Pty Ltd (“Central”) failed to take the appropriate care and lost a substantial amount of cleaning equipment it had supplied to Swan Services Pty Ltd (“Swan Services”) on a retention of title basis when Swan Services went into liquidation.

Central supplied cleaning equipment to Swan Services in the following way:

  1. Swan Services signed a credit application at the very beginning of their relationship which provided for 30 days credit to be given to Swan Services by Central. That credit application made reference to Central’s ‘Standard Terms and Conditions’ but those terms and conditions were not attached to the credit application and were not provided to Swan Services.
  2. Swan Services would place an order for cleaning equipment which Central would then supply together with an invoice which contained the retention of title clause. In practice this meant that Central issued a new invoice for each order. The invoice did not state that it was subject to the Standard Terms and Conditions.

The problem that Central had, when attempting to assert ownership in the cleaning equipment over the liquidator, was that it was unable to tie the retention of title clause back to the credit application, which would give Central rights pursuant to the Personal Properties Security Act 2009 Cth (“PPSA”).

The Court held that each new invoice issued by Central to Swan Services constituted a new and distinct contract of sale between the parties rather than an ongoing sales agreement pursuant to the credit application and standard terms and conditions. Therefore, in order to be protected under the PPSA against the liquidator, Central would have had to register each invoice separately on the Personal Properties Security Register or alternatively, (which would have been the better option) linked their standard terms and conditions to each invoice.

What to do next

It may be time to do a full review of your terms of trade.

As part of your review you must consider whether:

  1. your overarching terms of trade contain every term of your agreement with your customer;

  2. If you use separate documents, ensure that they link back to the overarching terms of trade;

  3. your security interest, recorded on the Personal Properties Security Register, is connected to the overarching terms of trade and covers every invoice and every time you supply your goods on a retention of title arrangement; and

  4. you are actually following your terms and conditions.

It is time to act now. Financial pressures on businesses have never been higher and you need to make sure you are protected when a liquidator comes knocking on your customers door.