If a financier takes excessive security it may be unenforceable

Summary

In March 2022 the Federal Court decided that part of the security granted under a standard form supply contract was unfair and so void and unenforceable. The part of the security deemed void was a typical ‘all monies’ charging clause. This clause was found to be unfair because it was additional to other specific security in the contract.

There are several implications. Firstly there can now be too much security taken in a standard form finance contract. Specific security over goods or equipment is still as usual, but additional, more general security over other property of the borrower is not.

Secondly, even though this kind of additional security is likely to be unfair at law, neither borrower nor financier may be aware at the time the contract is signed.  However the borrower could still turn around later and say the financier should have pointed it out.

Thirdly, even if the borrower identifies the doubtful clause, the contract may be presented as “take-it-or leave it”. The borrower may be desperate for the accommodation so may still sign up. If so the transaction documents should include an acknowledgement that the borrower read and understood the contact and/or chose not to get legal advice.

Case Discussion

The relevant case is called Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204. In it, Lobux (the ‘Supplier’) had partially completed manufacturing a waste products transportation tank ordered by Willshaun (the ‘Customer’). The transaction was documented under the Supplier’s standard form supply contract, and so fell under the purview of the Competition & Consumer Act 2010  (‘CCA’).

For reasons unclear, the Supplier permitted the Customer to uplift the Goods prior to completion of their manufacture. However the Supplier must have felt protected against any risk of the Customer’s non-payment by a provision in the contract which comprised a standard retention of title (‘ROT’) clause. The effect of this clause was to say that ownership of the Goods would not pass to the Customer until it had paid in full. Whilst the ROT clause would require perfection by registration on the PPSR, it was still valid against the Customer.

The contract also granted the Supplier a general security interest over all of present and future assets and undertaking – in effect, an “all monies” charging clause, or ‘ALLPAP’ security interest under the PPSA.

The judge decided that as the Supplier took the ALLPAP security interest in addition to the ROT clause, the ALLPAP clause was deemed to be an unfair contract term under the CCA. As such the ALLPAP was void and unenforceable.

 Conclusion

At first glance the Lobux v Willshaun decision is good news for borrowers being asked to grant security interests. Financiers now cannot go too far, otherwise the extra security risks being deemed unenforceable in a default situation. Another kind of ‘excess’ security threatened by the case is the type of clause which give a financier the right to register a caveat over real estate owned by a defaulting client.

However, these are factors which potentially increase legal risk, so introducers may find it more difficult to place deals if financiers perceive greater exposure than previously. Also, pricing may need to rise to allow for the enhanced risk. This will penalise borrowers who may otherwise qualify for better credit terms, or even be excluded from suitable credit entirely.