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© Lionel Wirth

Whilst every effort is made to ensure that the content of this blog is accurate, it should not be taken as legal advice. Liability limited by a scheme approved under Professional Standards Legislation

Romalpa clauses and the PPSA

February 18, 2016

It is not uncommon to see Romalpa clauses in commercial transactions involving the sale of goods. A Romalpa clause is a contractual term by which the parties agree that title in the relevant goods remains with the vendor until the purchase price is paid in full, even though the goods may be delivered to the purchaser before the purchase price is paid: Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676; [1976] 2 All ER 552.

 

The law in relation to this type of property interest has been taken over by the Personal Property Securities Act 2009 (Cth) (PPSA). This is a complex piece of legislation and it behoves all commercial lawyers to have at least some basic familiarity with its operation. This post will focus on how Romalpa – or retention-of-title – clauses fit within the scheme, although much of what is said is of general application.

 

The structure of the PPSA requires the following enquiries:

  1. Is there a security interest?

  2. Is the security interest in personal property (collateral) to which the PPSA applies?

  3. Has the security interest attached to the collateral?

  4. Has the security interest been perfected?

  5. Is the security interest enforceable against the grantor or third parties?

  6. What are the available remedies/methods of enforcement?

 

Other issues that may arise in the application of the PPSA include the priority of competing security interests, whether a person is a “buyer” for the purposes of section 43(1) of the PPSA (pursuant to which unperfected security interests may be extinguished) and whether “after-acquired property” (goods delivered after the entry into the security agreement) is the subject of the alleged security interest.

 

1. Is there a security interest?

 

In the PPSA, there is only one kind of security interest, and it is called, blandly, a “security interest”. The concept of “security interest” is regarded by the PPSA according to the substantive function of the interest held by the secured party. It includes “an interest in personal property provided by … a conditional sale agreement (including an agreement to sell subject to retention of title)” (PPSA, section 12(2)(d)) if the transaction, in substance, secures payment or performance of an obligation (PPSA, section 12(1)). The granting clause need only say that the grantor gives a security interest in the collateral to the secured party. No special form of words is required, but a classic Romalpa clause will be caught by the definition of “security interest”.

 

2. Is the security interest in personal property (collateral) to which the PPSA applies?

 

One issue that sometimes comes up in enforcement by suppliers of their Romalpa clauses (particularly in the building and construction industry) is whether the goods have become fixtures on land. If so, they cease to have a separate existence and the PPSA no longer applies: PPSA, section 8(1)(j) and the definition of “fixtures” in section 10. Whether goods are fixtures is a manner of analysis taking into account the degree of annexation to the land and the purpose of the annexation at the time the goods became affixed to the land: National Australia Bank Ltd v Blacker (2000) 104 FCR 288. At [10], Conti J said:

 

There is a variety of general principles which should be considered in assessing whether an item of personal property has become attached to land in a manner designed to achieve a specific objective or a variety of objectives, such as to become a part of the realty and[,] therefore, a fixture. Whether an item has become a fixture depends essentially upon the objective intention with which the item was put in place. The two considerations which are commonly regarded as relevant to determining the intention with which an item has been fixed to the land are first, the degree of annexation, and secondly, the object of annexation.

 

This passage was quoted with apparent approval by French CJ, Gummow, Heydon, Crennan and Kiefel JJ in TEC Desert Pty Ltd v Commissioner of State Revenue (2010) 241 CLR 576, [24].

 

3. Has the security interest attached to the collateral?

 

There are two elements to attachment:

  1. there must be collateral (ie secured property);

  2. the collateral must secure payment or the performance of obligations.

 

“A security interest attaches to collateral [ie a security interest in the collateral comes into existence] when (a) the grantor has rights in the collateral … and (b) … (i) value is given for the security interest”: PPSA, section 19. The word “value” is also defined in section 10 of the PPSA, and is broader than common-law notions of “consideration”.

 

In terms of timing of attachment of a Romalpa-type security interest, “a grantor has rights in goods that are … sold to the grantor under a conditional sale agreement (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods”: PPSA, section 19(5).

 

4. Has the security interest been perfected?

 

One of the main reasons for perfecting security interests is to avoid extinguishment of unperfected security interests upon disposals of collateral. Section 43(1) of the PPSA provides as follows:

A buyer or lessee of personal property, for value, takes the personal property free of an unperfected security interest in the property.

 

There are three methods of perfection of a security interest, namely registration, possession and control: PPSA, section 21. A security interest may be registered in respect of any collateral. The Personal Property Securities Register is exclusively electronic and online, and is operated by the Australian Financial Security Authority (formerly known as the Insolvency and Trustee Service Australia, whose primary responsibilities are to be found in the Bankruptcy Act 1966 (Cth)).

 

5. Is the security interest enforceable against the grantor or third parties?

 

“A security interest is enforceable against a grantor in respect of particular collateral only if the security interest has attached to the collateral”: PPSA, section 19(1). However, security interests are proprietary interests. Rights in personam, like contractual rights, are enforceable only against the people who owe corresponding duties (eg in contract or in tort). Rights in rem (proprietary rights) are generally enforceable against the world. Accordingly, a security interest that is not enforceable against the world is not a very good proprietary interest. To enable a secured party to be able to enforce its interest against the world, certain requirements in the PPSA must be met.

 

A security agreement need not be in writing, but to be enforceable against third parties, it must be in writing that is signed, adopted or accepted by the grantor and it must contain a description of the collateral: PPSA, section 20(2)(b). Common-law rules of contract formation and the incorporation of terms are otherwise not disturbed. This means that a quote supplied by the vendor (containing the relevant security clause) and accepted by the purchaser may be sufficient for the PPSA’s purposes, and that terms of the security agreement may be partly written, partly oral and partly to be implied. A security agreement is effective according to its terms: PPSA, section 18(1).

 

Certain criteria must be satisfied before a security agreement is enforceable against third parties: PPSA, section 20. The general rule (PPSA, section 20(1)) requires the security interest to be attached to the collateral and one of the following three to apply:

  1. the secured party possesses the collateral;

  2. the secured party has perfected the security interest by control; or

  3. a written security agreement covers the collateral in accordance with section 20(2) of the PPSA.

 

The term “security agreement” is defined in section 10 of the PPSA to mean:

  1. an agreement or act by which a security interest is created, arises or is provided for; or

  2. writing evidencing such an agreement or act.

 

This definition generally relies on the common-law concept of agreement or contract. (The words “or act” seem to take “security agreements” beyond common-law contract.) However, one should not read too much into “written security agreement”. As the definition of “security agreement” and the requriements of section 20(2) suggest, the writing need only provide evidence of the agreement containing the term giving rise to the security interest. The writing need not necessarily be itself a contractual document.

 

To comply with section 20(2), the written security agreement must be evidenced in writing that is signed by the grantor. It must also contain “a description of the particular collateral”: PPSA, section 20(2)(b)(i). By its own terms, “writing evidencing such an agreement” (from the definition of “security agreement” in section 10) is not necessarily a contractual document. It may be, for example, a tax invoice produced following both formation and performance of the contract (with the purchaser’s signature perhaps doubling in function to acknowledge delivery as well as to comply with section 20(2)), which would typically be post-contractual written evidence of the security agreement. By the same token, however, post-contractual evidence of the security agreement does not vary pre-contractual conduct so as to incorporate a security-interest clause that was not already part of the contract.

 

6. What are the available remedies/methods of enforcement?

 

Chapter 4 of the PPSA sets out rules of enforcement. Parties can contract out of many of the provisions. Some notable provisions for the enforcement of Romalpa clauses are the following:

  1. section 110: the PPSA does not diminish general law rights and remedies of debtors, grantors (note the definition of that term in section 10 of the PPSA) and secured parties;

  2. section 111: all Chapter 4 rights, duties and obligations must be discharged honestly and in a commercially reasonable manner;

  3. Part 4.3 deals with “seizure and disposal or retention of collateral”;

  4. section 123(1): a secured party may seize collateral, by any method permitted by law, if the debtor is in default under the security agreement;

  5. section 125: a secured party who seizes collateral has certain obligations (and rights) with respect to disposal (see Division 3 of Part 4) and retention (see Division 4 of Part 4);

  6. Part 4.4 deals with “rules applying after enforcement”, which cover distribution of proceeds received by the secured party (PPSA, section 140), the transferring of title (PPSA, section 141), redemption of collateral (PPSA, section 142), reinstatement of the security agreement (PPSA, section 143) and when certain enforcement notices are not required (PPSA, section 144).

 

The particular enforcement strategy, and the need for any litigation, should be carefully considered based on the facts of each individual case.

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