On 22 February, 2018, I had the pleasure of presenting the annual Credit Management Symposium for the benefit of the New South Wales division. There were about 50 credit managers in attendance, who remarked how much they benefited from the session regarding the two subjects of "ipso facto clauses" and "unfair contract terms".

There was great interaction with the audience, as we reviewed about 15 different of the attendee companies Terms of Trade ("Conditions") that the attendees submitted prior to the session.

I proposed a series of questions to the audience.

If the Conditions contain a term which, if sought to be used by the creditor would be a breach of the new ipso facto law, does the existence of such a term breach the unfair contract law?

If we assume that the term is, due to the new "ipso facto" law, ineffective and incapable of use, does its existence create a contract which, as a whole, is unfair?

In other words, is the whole contract between supplier and debtor exposed to attack under the unfair contracts legislation or just those particular terms, which "breach" the ipso facto law?

I note that under section 243 of the Australian Consumer Law, as an example only, the orders which a court may make, include:

(a) an order declaring the whole or any part of a contract made between the respondent and a person (the injured person ) who suffered, or is likely to suffer, the loss or damage referred to in that section, or of a collateral arrangement relating to such a contract:
(i) to be void; and
(ii) if the court thinks fit--to have been void ab initio or void at all times on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);
(b) an order:
(i) varying such a contract or arrangement in such manner as is specified in the order; and
(ii) if the court thinks fit--declaring the contract or arrangement to have had effect as so varied on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);
(c) an order refusing to enforce any or all of the provisions of such a contract or arrangement.

Having regard to the risk that the above sub-sections will be used against a creditor, I posed the question as to "why have those terms, if they can't be used?"

My question brought us to the next question of what are these terms, which offend the new law.

It is interesting to note that the new laws relating to "ipso facto clauses" never uses the term "ipso facto" within the law. The term "ipso facto" translates as "by that very fact".

The new law is based on a simple principle, best described by way of an example.

If a company is paying its debts and trading in compliance with the Conditions of all of its trade suppliers and, for some unusual problem, it is placed into Administration for the purpose of surviving that problem, then (as an example) the landlord should not be entitled to take any action against the Company to evict it from the premises, unless there are other breaches of the Conditions. The sole fact that the company has been placed into administration should not be reason for a creditor, such as a landlord, to exercise rights against the company.

The principle is that such a breach of the Condition (e.g. going into Administration) should not entitle the creditor to take action. The Corporations Act now provides;

451E Stay on enforcing rights
(1) A right cannot be enforced against a company for:
(a) the reason that the company has come or is under administration; or
(b) the company's financial position, if the company is under administration; or
(c) a reason, prescribed by the regulations for the purposes of this paragraph, that relates to:
(i) the company coming, or possibly coming, under administration; or
(ii) the company's financial position;
if the company later comes under administration; or
(d) a reason that, in substance, is contrary to this subsection;
if the right arises for that reason by express provision (however described) of a contract, agreement or arrangement.

The law is similar in respect of Schemes, Receiverships and Administrations (not Liquidations). The same principles, using fundamentally the same wording, has been applied to each of those circumstances;

415D Stay on enforcing rights merely because of a proceeding under this Part etc.

434J Stay on enforcing rights merely because of the appointment of a managing controller of a corporation's property etc.

451E Stay on enforcing rights merely because the company is under administration etc.

I will now focus on the precise wording which has been used in respect of Administrations, noted in part above.

At the Symposium, we took the opportunity to consider where these clauses are likely to be appear within the Conditions and what rights are likely to be impacted.

The most common clauses start under the heading of "Default" or "Breach" and they involve something of the following nature;

If the Customer or any person who has guaranteed the debts of the Customer to SUPPLIER;
(a) becomes an 'externally-administered body corporate' within the meaning of the Corporations Act 2001;
(b) has any step taken for its winding up or dissolution;
(c) holds a meeting of directors which considers a resolution that an administrator should be appointed;
(d) is insolvent within the meaning of the Corporations Act 2001, or being taken or presumed to be insolvent;
(e) commits an 'act of bankruptcy' within the meaning of section 40 of the Bankruptcy Act 1966 or any amendment or replacement thereof;
(f) has distress, attachment or other execution levied or enforced over any of its property;
(g) fails to pay the entire Amount Payable in accordance with this Agreement;
...

In some instances, the above circumstances are defined as being a "Default" and in others, the clause then continues and explains what consequences follow (usually in the form of the SUPPLIER having rights). I haven't seen a clause which continues and says something like "and therefore the debtor is allowed an extra 90 days to pay (because we feel sorry for them)".

This is the starting point. For the new law to apply, the 'default clause' needs to relate to Administration, Receivership or Schemes. If the default clause never mentioned administration etc., such as being limited to clause (g) above, then the new law would not apply. There may be other circumstances which result in a default, such as not making payment on time, but those other conditions are not affected by this new law. The law focusses on Schemes, Receiverships and Administrations (not Liquidations).

Therefore, this new restriction does not operate in all circumstances and well drafted Conditions should protect you adequately.

The Conditions then usually state that, when the above circumstances arise, there is a consequence of that default or breach.

In theory, if the Conditions referred to Administrations and then stated nothing more, then because there are no consequences of the Administration, the new law would not operate.

The issue is then to determine what rights arise.

In reviewing number of terms it became apparent that the rights are fairly common and consistent between different creditors.

These common rights were to entitle the creditor to;

• Make all amounts owing by the debtor to be immediately due and payable
• Terminate any obligation to provide further credit or supplies,
• Attend upon the debtor's premises for the purpose of re-taking their "retention of title" stop

Some examples were;

SUPPLIER may, at its election and without prejudice to other rights which the SUPPLIER may have:
(a) declare the Amount Payable immediately due for payment;
(b) enter the premises at which the Bailed Goods are kept ("Premises") to claim and remove the Bailed Goods from the Premises;
c) The Company may without prejudice to any other rights and without liability to any person in trespass or otherwise enter the premises of the Customer where the goods are located and recover possession of the goods;
d) the Company may, without prejudice to any other remedies it may have, repossess any of those Goods and commence proceedings to recover the balance of any monies owing to the Company by the Customer on any account.

There was one example which concerned me greatly.

What if the right to lodge a caveat to secure a charge over property arose only after a default and the default was "Administration"? You can see my point!

The law also recognises that some rights arise without the need to do anything.

The Conditions could say that, upon a default, the creditor can then, by notice, make the balance become immediately due and payable in full.

Alternatively the Conditions could say that upon a default, the balance becomes immediately due and payable, without any action on the part of the creditor.

In the first case some action is needed by the creditor, which the law prohibits

In the second case no action is needed, but the law also caters for that situation;

451GA Self executing provisions
(1) The object of subsection (2) is to ensure that a self executing provision:
(a) cannot start to apply against a company for certain reasons; and
(b) can be the subject of a Court order providing that the provision can only start to apply against a company with the leave of the Court, and in accordance with such terms (if any) as the Court imposes.
(2) Sections 451E to 451G also apply in relation to a self executing provision in a corresponding way to the way they apply in relation to a right. For this purpose, assume those sections apply with such modifications as are necessary, including any prescribed by the regulations for the purposes of this subsection.

What is clear under this new law is that the restrictions operate expressly upon the appointment of, for example, an Administrator.

What remains unclear is a clause which operates merely because of "the financial position" of the debtor company (see s 451E(1)(b) earlier in this article).

I foresee disputes and litigation on that point alone.

I also see future litigation on the issue of whether contract terms are unfair because they contain these clauses which are, as a result of this new law, ineffective.

It should be appreciated that this law is now operational and it applies to contracts entered into after September 2017.

On this point, you may recall from previous articles or seminars that the relationship between a creditor and debtor, or a supplier and its customer, is governed by effectively two contracts. There is the contract which governs the overall terms and conditions of supply. The terms of this contract are within your Conditions, often attached to your application for credit form, or displayed on your website. These are the terms and conditions of the contract which governs the future supply of goods or services.

Separately there is the individual contract for the supply of goods or services which deals with what I call the fine details. That is the order for X number of widgets at the price of $Y dollars to be delivered by Z date. This is the order which your customer places and the offer which you accept, so as to form a contract. That is a separate contract which is governed by the terms of your overarching or overriding Conditions. This issue was covered at the 2016 Symposium and in the decision relating to PPS registrations whereby the court determined that there is no need to register individual PPS security interests for each and every invoice, because there is this one overarching contract governing the supply of goods and services and the provision of a security interest. In Central Cleaning Supplies (Aust) Pty Ltd v Elkerton [2015] VSCA 92 (12 May 2015) at [39], the Court held;

"It is clear that, in its terms, each ROT clause had application only to the invoiced goods the subject of the particular supply. The result of the contractual analysis, however, is that ... 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... the ROT clause was in existence, as a standard term of supply, at the date on which the credit agreement became binding on Swan... and under that agreement, Swan accepted that all future supplies of equipment would be governed by that standard term".

While these are all technical and legal issues, I noted that the credit managers attending my Symposium were across them. Yet, we all recognised that there was a need, in all cases bar one, for the Conditions to be updated. My co-speaker, Mr. Rappaport from Gavin Parsons and Associates and I offered to assist in that regard!

Geoffrey McDonald
Barrister at Law
www.9windeyer.com.au/barristers/geoffrey-mcdonald/

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