Central Cleaning appeal decision clarifies law relating to trading terms.

The Court of Appeal has overturned the 2014 case of Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2014] VSC 61. The Court of Appeal adopted an approach that took account of the commercial purpose of the relationship and adopted a common sense, non-technical approach to the construction of contracts for the supply of goods between businessmen.

Background facts

Central Cleaning Supplies (Aust) Pty Ltd (“Central Cleaning”) is a national supplier of cleaning products and equipment. Swan Services Pty Ltd (In Liquidation) (“Swan Services”) was a customer of Central Cleaning. Swan Services were placed into liquidation in May 2013.

Central Cleaning supplied cleaning equipment and consumables to Swan Services. Prior to this supply commencing, on around 3 September 2009, Swan Services completed and signed an “Application for Commercial Credit Facilities” in the standard form required by the appellant prior to supplying goods to customers on 30 day terms (“the Credit Application”).

Clause 2 of the Credit Application included the following:

“The supply of goods by the seller is governed by the Seller’s Standard Terms and Conditions as in force from time to time.”

At the time of Swan Services signing the Credit Application, the appellant’s terms and conditions of supply were printed on the invoices issued by the appellant. Each such invoice included the following:

“CONDITION OF SALE: Goods the subject of this sale remain the property of Central Cleaning Supplies (Aust) Pty Ltd. (notwithstanding that may have been put in transit or actually delivered to the Purchaser) until the whole of purchase price has been paid by the Purchaser to Central Cleaning Supplies (Aust) Pty Ltd. in full” (“the ROT Clause”)

The ROT Clause appeared on all invoices issued by the appellant to Swan Services in the period from Swan Services’ signing of the Credit Application (the earliest of the invoices in evidence was dated 4 September 2009, the day after the date of the Credit Application) until the appointment of administrators to Swan Services on 22 May 2013 (3108 invoices in total). Operation of the Personal Property Securities Act 2009 (Cth) (“PPSA”) and the Judgment of Justice Ferguson dated 7 March 2014

The commencement of the PPSA, from 30 January 2012, has altered the manner in which “retention of title” claims are determined in formal insolvency administrations. The relevant provisions of the PPSA were considered in. The case at first instance was heard by Her Honour Justice Ferguson in the Supreme Court of Victoria [2014] VSC 61 (“the Primary Judgment”).

Her Honour accepted that the provisions of the PPSA operated in the manner contended by Central Cleaning but held that the ROT Clause was not part of the agreement governing supplies by the appellant to Swan Services (“the Supply Agreement”). Her Honour held that the ROT Clause was not incorporated into the Supply Agreement.

Her Honour noted that Central Cleaning sought to rely upon terms in invoices that were created after the Credit Application and that the invoices treated each sale as a separate contract. Her Honour therefore held that each invoice was, on balance, intended to be a separate contract. Her Honour found that, using an objective approach to construe the meaning of the Credit Application, “the parties must be taken to have intended that the terms to be incorporated were recorded in a separate document existing at the date of the agreement”.

Central Cleaning therefore failed at first instance because the relevant contracts came into effect after 30 January 2012 and the transitional provisions of the PPSA did not serve to perfect them.

The court of appeal

Her Honour’s finding that the ROT Clause was not part of the Supply Agreement was the subject of the appeal.

The “separate document” was the appellant’s standard form invoice, which included the ROT Clause (along with other conditions relating to “Claims” and “Returns”). Swan Services submitted that not only did this document exist at the date of the agreement, it was readily identifiable and in the possession of the parties immediately following the signing of the Credit Application (having been issued by the appellant to Swan Services on 4 September 2009, the day after Swan Services signed the Credit Application).

The Court of Appeal (Maxwell P, Tate and Beach JJA) stated that the “judge at first instance rejected Central’s claim, holding that the credit arrangement did not ‘provide for’ the granting of the security interests in the future. For reasons which follow, we respectfully disagree. In our opinion, the terms on which Central agreed to provide credit to Swan included provision for the ROT clause as a standard term of each future supply of equipment. Accordingly, we would allow the appeal”1. Credit Applications, Invoices and Intention to enter into contractual relations.

Legal Practitioners and business people will be particularly interested with how the Court of Appeal chose to characterise when and how the parties became legally bound to one another. 1 [2015] VSCA 92 at [7] The completion of the Credit Application by the customer, Swan Services, did not, of itself, give rise to legal relations. It was an application to become a customer of Central Cleaning and to be subject to Central Cleaning’s terms of supply.

The Court of Appeal held that “In our view, Swan’s credit application was simply that — an application. The signing and lodgment of the application was a unilateral act by Swan, a request to Central that any future supply of equipment be on terms that payment was not due for 30 days. Swan thereby signified its intention to create legal relations with Central on those terms but until Swan’s offer was accepted, no such relations would come into existence. On ordinary principles, therefore, the mere signing of the credit application did not create a contract, and its lodgment with Central did not impose on Central a contractual obligation to do anything”2.

In those circumstances, the Court then identified the precise moment that the contract was formed – when the supply took place. The Court of Appeal held “In the absence of any other communication by Central of its acceptance, the terms in the application would not become binding on either party unless and until Central supplied equipment to Swan and extended the 30 day credit which Swan had requested. As a matter of contract, therefore, Swan did not become bound by the ‘Credit Application Terms’ until the first supply of equipment after the credit application was made”3.

The Court of Appeal found that Central Cleaning’s supply of goods was acceptance of Swan Services’ application for credit by conduct. The delivery of the equipment which Swan had ordered and the sending of the invoice confirming that the supply was on 30 day credit was the conduct through which “Central signified its acceptance of Swan as an account customer. The sending of the invoice was the critical step, of course, as it was the first communication confirming that credit was being provided”4.

On the above analysis, the very first supply of goods established a supply agreement between Central Cleaning and Swan Services. “Importantly for present purposes, that first supply of equipment was a supply on Central’s ‘Standard Terms and Conditions’, that is, the conditions set out in the invoice including the ROT clause. The evidence showed, incontrovertibly, that those were Central’s standard terms. They appeared in identical terms on every supply invoice before the Court”5.

This decision gives comfort to businesses like Central Cleaning whose credit application did not adequately set out the Company’s standard terms. The Court of Appeal held “It is immaterial that the credit application form did not set out Central’s ‘Standard Terms and Conditions’. On ordinary principles, Swan’s signing of the credit application bound it to accept those terms and conditions for all future supplies of equipment. Clause 2 of the ‘Credit Application Terms’ (set out above) could not have been clearer in that regard.6”

The Court of Appeal cited with approval the decision of Callaway JA in Maxitherm that “It is not uncommon to enter into a transaction on another party’s standard terms and conditions without enquiring what they are. It is often not worth doing so and a sensible commercial risk to run. The law reflects commercial reality by holding the party who does not enquire to such of the other party’s standard terms and conditions as may fairly be regarded as within the risk the first party took”7.

Conclusion

Central Cleaning therefore won the case because:

1. Swan’s application for credit included an undertaking to be bound, in respect of every supply of equipment, by Central’s standard terms of supply;
2. the ROT clause was in existence, as a standard term of supply, at the date on which the credit agreement became binding on Swan, being the date on which Swan received the first invoice for equipment supplied; and
3. under that agreement, Swan accepted that all future supplies of equipment would be governed by that standard term (which would be expressed in each case to relate to the particular equipment supplied).

The Court of Appeal held that the agreement came into force at the time of the first supply of equipment and that agreement was a ‘transitional security agreement’. This made each of the security interests granted in respect of equipment supplied subsequently a ‘transitional security interest’. Central was therefore able to enforce the ROT clauses notwithstanding the absence of registration.

This approach took account of the commercial purpose of the relationship and adopted a common sense, non-technical approach to the construction of contracts for the supply of goods between businessmen.

Tisher Liner FC Law acted for the Appellant, Central Cleaning Supplies in this matter.

For more information please contact Simon Abraham or a member of our Litigation Team.