Too much security may not be good for you?

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Written by Paul Miller

23 November 2022

Just as the tiny Moon may sometimes eclipse the mighty Sun, so too it seems, the humble Retention of Title clause may cancel out an all-embracing charge over the entirety of a business’s assets. At least that appears to be the conclusion reached in this years Federal Court decision in LOBUX PTY LTD V WILLSHAUN PTY LTD [2022] FCA 204.

The Lobux case saw a clash between the PPSA and the unfair contract provisions of the Competition & Consumer Act, with the CCA coming out on top.

Lobux (the supplier in this case) required that their customer accept their standard form Terms & Conditions in order to open a credit account – those T&Cs contained both a Retention of Title clause and an all-assets charging clause along the following lines:

Retention of Title Clause (ROT)

Title to the goods shall remain with the supplier until such time as those goods have been fully paid for.

Charging Clause

We [the customer] charge all our real estate assets and personal property, now and in the future, as security for the payment of any monies that we may owe you at any time.

Under the PPSA, the security rights represented by both clauses would need to be registered separately on the PPSR in order to be effective against third parties, such as other creditors or liquidators/receivers. The ROT would need to be registered as an ‘Other Goods/PMSI’ while the Charging Clause would be registered as an AllPAAP (All present & after acquired property).

As it transpired, Willshaun took possession of the goods before Lobux had finished their work on them and declined to pay the balance of the purchase price. Lobux sought an order for the return of the goods, while Willshaun brought a cross-claim alleging that the goods were not fit for purpose and thus no further payment need be made. They additionally sought a declaration from the court that, under Australian Consumer Law (the CCA), Lobux’s charging clause represented an unfair term.

While the court dismissed the cross-claim and ordered the goods returned to Lobux (honouring their ROT right), the judge held that the inclusion of the charging clause in the agreement between the parties did indeed constitute an unfair term.

The court’s reasoning being that the ROT on its own represented sufficient security for Lobux and that taking a charge over the entirety of their customer’s assets was excessive and unreasonable.

We have noticed a modest increase in cases where prospective buyers have struck out charging clauses in our clients’ standard T&Cs and the Lobux finding is only likely to encourage that practice.