CASE COMMENTARY:
ASSOCIATED ALLOYS PTY LTD
v
METROPOLITAN ENGINEERING AND
FABRICATION PTY LTD AND SHIRLAW
byDenis SK Ong[1]
SUMMARY OF FACTS
1. In 1981 Associated Alloys
Pty Limited (hereinafter the Seller) commenced selling steel to
Metropolitan Engineering and Fabrication Pty Limited (hereinafter
the Buyer), a manufacturer of steel products. In 1987 or 1988, the
Seller started the practice of including the following printed clause
(hereinafter the printed clause) on the reverse side of the invoices
which it issued to the Buyer:
"It is expressly agreed and declared that
the title of the subject goods/product shall not pass to the purchaser
until payment in full of the purchase price. The purchaser shall
in the meantime take custody of the goods/product and retain them
as the fiduciary agent and bailee of the vendor.
The purchaser may resell but only as a
fiduciary agent of the vendor. Any right to bind the vendor to any
liability to any third party by contract or otherwise is however
expressly negatived. Any such resale is to be at arms length and
on market terms and pending resale or utilisation in any manufacturing
or construction process, is to be kept separate from its own, properly
stored, protected and insured.
The purchaser will receive all proceeds
whether tangible or intangible, direct or indirect of any dealing
with such goods/product in trust for the vendor and will keep such
proceeds in a separate account until the liability to the vendor
shall have been discharged.
The vendor is to have power to appropriate
payments to such goods and accounts as it thinks fit notwithstanding
any appropriation by the purchaser to the contrary.
In the event that the purchaser uses the
goods/product in some manufacturing or construction process of its
own or some third party, then the purchaser shall hold such part
of the proceeds of such manufacturing or construction process as
relates to the goods/product in trust for the vendor. Such part
shall be deemed to equal in dollar terms the amount owing by the
purchaser to the vendor at the time of the receipt of such proceeds."
2. In 1995 the Seller issued
three invoices (Numbers 583, 592 and 598) to the Buyer for sums
totalling $US211,911.29. The printed clause did not appear on invoice
583.
3. In January 1996 the Buyer
paid to the Seller the sum of $US14,000 in respect of those three
invoices, leaving an unpaid balance of $US197,911.29.
4. On 9 February 1996 Mr Kevin
Shirlaw and another person were appointed the administrators of
the Buyer. Subsequently to that date, the Buyer went into liquidation
and Mr Kevin Shirlaw (hereinafter the Liquidator) was appointed
the liquidator of the Buyer.
5. By summons, the Seller claimed,
inter alia, a declaration that the Liquidator or the Buyer held
$US197,911.29 upon trust for the Seller's benefit, and an order
that the Liquidator or the Buyer account to it. On 10 May 1996 Bryson
J dismissed the Seller's claim. The Seller's appeal to the Court
of Appeal of the Supreme Court of New South Wales (Sheller, Beazley
and Stein JJA) was unanimously dismissed by that Court on 21 September
1998, where Beazley and Stein JJA concurred in the judgment delivered
by Sheller JA.
COMMENTS
6. The Seller's claim of a trust
for its benefit was based on the fifth subclause of the printed
clause. The Seller's claim was so based because the Buyer had used
the steel supplied (under the three invoices amongst others) by
the Seller to make steel products which the Buyer subsequently sold
to a Korean company called Lucky Goldstar[2]
(hereinafter the Third Party).
7. Neither in the fifth
subclause nor in any other part of the printed clause did the Seller
claim either partial or sole ownership of, or a charge or other
legal security over, the steel products (as distinct from the proceeds
of sale of those products) manufactured by the Buyer from steel
supplied by the Seller, although under the first subclause
the Seller did purport to retain ownership of the steel supplied
(as distinct from the manufactured products) until it had been fully
paid for. Applying the reasoning in Borden
(UK) Ltd v Scottish Timber Products Ltd[3]
the first subclause would not entitle the Seller to either
the ownership of, or a charge on, the products manufactured from
the steel supplied.
8. Under the fifth subclause,
if the Buyer sold steel products in the manufacture of which the
Seller's steel was used, then the Buyer would come under an immediate
obligation, in respect of those proceeds of sale, to hold in trust
for the Seller an amount in those proceeds equal to the invoice
price of the steel so used.[4]
9. Did the fifth subclause
create a charge on the proceeds of sale, in favour of the
Seller, being a charge which was registrable under section 262(1)(f)
of the Corporations Law? The New South Wales Court of Appeal
held that the fifth subclause did create such a charge
which, because notice of it had not been lodged under section 263
of the Corporations Law, was void as against the Liquidator
and Administrators of the Buyer under section 266(1) of that Law.[5]
Is this finding by the Court of Appeal, that the fifth
subclause created a registrable charge, persuasive? It is respectfully
suggested that this finding is not persuasive.
10.1 Although the trust purportedly
created under the fifth subclause, in contradistinction to
the trust purportedly created under the third subclause,
did not, in terms, continue only "until the liability to the vendor
shall have been discharged", the trust under the fifth subclause
should nevertheless be construed to be thus defeasible.
10.2 Suppose, by way of example,
the trust created for the benefit of the Seller under the fifth
subclause amounted to a trust of $US10,000, because the amount relevantly
owing to the Seller was $US10,000. If this trust for the benefit
of the Seller was indefeasible, then it would mean that this
trust, of $US10,000, would continue even after the Buyer
paid the Seller the sum of $US10,000. If this was to be the case,
then the Buyer would be liable to the Seller for $US20,000 (being
$US10,000 as trustee and an additional sum of $US10,000 as debtor)
in respect of goods the invoice price of which was only $US10,000.
The parties could not rationally have intended such a result, nor
should such an irrational intention be imputed to them.
10.3 Would the Seller, in the
aforementioned hypothesis, be able to avoid such an irrational result
by arguing that, under the fifth subclause, the creation
of the trust of $US10,000 would be regarded as the payment to it
of the relevant debt by the Buyer, such that the relevant debt would
be extinguished by the creation of the trust, and thus the Buyer
would not be exposed to a double liability to the Seller? No. Any
such argument would not succeed because if the trust money is, in
equity, the Seller's own money, and has never been
the Buyer's money, then it would be legally impossible for the Buyer
to pay its debt to the Seller with the Seller's own money,
namely, it would be legally impossible for the Buyer to pay the
Seller with money which the Buyer held in trust for the benefit
of the Seller. A trustee cannot use trust money to pay to the beneficiary
under the trust a debt owed by the trustee to the beneficiary where
the debt has arisen antecedently to, and independently of, the trust.
Therefore, any trust created under the fifth subclause must
be a trust which is defeasible upon the payment by the Buyer
to the Seller of the relevant debt, in order to avoid the imposition
of a double liability on the Buyer.
11. Nevertheless, does the mere
circumstance that a trust created under the fifth subclause
is defeasible upon the payment of the relevant debt to the
Seller entail that the Seller has been given, under that subclause,
a mere charge on the proceeds of sale, such that those proceeds
are solely owned by the Buyer, subject only to the Seller's charge
thereon? In other words, does the mere defeasibility of the
trust of the relevant part of the proceeds of sale for the benefit
of the Seller created under the fifth subclause, unavoidably
characterise that trust as a mere charge given to the Seller by
the Buyer? It is suggested that the fifth subclause does
not create a defeasible trust out of the property of the
Buyer, and that it is only a purportedly defeasible trust which
is created out of the property of the Buyer that constitutes
a mere charge given by the Buyer to the Seller. The fifth
subclause does not create a mere charge in favour of the Seller,
because the relevant part of the proceeds of sale, being the intended
subject-matter of the trust, was not initially acquired beneficially
by the Buyer, but was, rather, initially beneficially
acquired by the Seller, and the Seller cannot have a charge over
its own property.
12.1 In some contracts, a seller's title to
the goods originally supplied by it to a buyer is made defeasible
upon the payment of relevant debts by the buyer to the seller. Nevertheless,
the defeasible nature of the seller's title to such goods does not
make the seller's retention of title to the goods into a mere charge
on those goods: Armour v Thyssen
Edelstahlwerke AG[6]; Clough
Mill Ltd v Martin[7]; Sale
of Goods Act 1923 (NSW), s 22.
12.2 Where a seller retains title to goods until
the buyer pays to the seller the relevant debts, the mere defeasibility
of the seller's title does not transform that defeasible title into
a mere charge on those goods. This is so because it is legally impossible
for the buyer to give to the seller a charge on goods owned by the
seller. The buyer may give to the seller a charge on goods only
if those goods are owned by the buyer. No one is capable of receiving
a charge, or other legal security, over its own property: McEntire
v Crossley Brothers Limited[8];
Armour v Thyssen Edelstahlwerke
AG[9]; Clough
Mill Ltd v Martin.[10]
12.3 A seller who thus retains title to the
goods which it supplies acquires security in the non-legal
sense of the term. The seller in such a situation does not acquire
security in the legal sense of the term. In a situation where
the seller's title has not been created out of the buyer's
title, the seller's title, notwithstanding its defeasible nature,
is not capable of constituting a mere charge on the relevant property:
Armour v Thyssen Edelstahlwerke
AG.[11]
12.4 The issue of whether or not a seller obtains
a mere charge on the goods (or on the proceeds of their sale) depends,
not on whether or not the seller's title to those goods (or to the
proceeds of their sale) is defeasible, but, rather, on whether
or not the buyer has the capacity, and the intention,
to confer on the seller a charge on those goods (or on the proceeds
of their sale). The buyer will lack this capacity if the goods (or
the proceeds of their sale) are owned by the seller.
13. What are the legal consequences where a
seller does not merely purport to retain defeasible legal
ownership of the goods which it has supplied to the buyer,
but additionally purports to acquire defeasible equitable
ownership of the proceeds of sale of those goods as soon
as those proceeds come into existence, namely, without any intervening
act by the buyer? In such a case, not only does the seller retain
defeasible legal ownership of the goods, but the proceeds of sale
are acquired by the buyer solely in the capacity of a trustee of
them for the benefit of the seller (albeit under a defeasible trust).
Thus, the buyer does not acquire equitable ownership of the proceeds
of sale when those proceeds come into existence. The seller does
so. The buyer, never having been the beneficial owner of
the proceeds of sale, therefore lacks the capacity to confer
a charge on those proceeds in favour of the seller. In such a case,
the buyer does not acquire legal and beneficial ownership of the
proceeds first, and only afterwards declare a trust
over those proceeds for the benefit of the seller: In
re Kayford Ltd (in liq)[12] No
such declaration of trust is possible because the buyer has received
those proceeds as trustee for the benefit of the seller.
14.1 Where a buyer receives the proceeds
of sale in trust for the benefit of the seller, as distinct
from the buyer declaring a trust over those proceeds for
the benefit of the seller, the buyer does not thereby confer,
because it lacks the capacity to confer, on the seller any
right (including a charge) in respect of those proceeds. The mere
circumstance that the seller's equitable ownership of those proceeds
is defeasible does nothing to capacitate the buyer to confer
on the seller a charge over those proceeds.
14.2 When the buyer pays the relevant debts
to the seller, the seller's equitable ownership of the proceeds
of sale (of which the buyer was the trustee) will be thereby extinguished,
leaving the buyer (the former trustee) with the absolute title to
those proceeds. In such a situation, the equitable ownership of
the proceeds does not revert to the buyer, since it was the
seller, and not the buyer, who acquired the equitable ownership
of those proceeds as soon as they came into existence. Thus, the
buyer's payment to the seller of the relevant debts does not constitute
the buyer's redemption of a charge but, rather, constitutes the
buyer's acquisition of the absolute title to the proceeds of sale
for the first time.
15. The seller's acquisition of defeasible equitable
ownership of the proceeds of sale, otherwise than from the buyer,
is totally different from the situation in In
re Bond Worth Ltd[13] where it
was held that the seller, having transferred to the buyer the ownership
of the goods, received, from the buyer, defeasible equitable
title to those goods. The lastmentioned situation was clearly one
in which the buyer had, out of property which it owned, conferred
on the seller a right in respect of that property which was defeasible
upon the buyer's payment of relevant debts to the seller, namely,
a charge.
16.1 In the instant case, the fifth subclause
purports to make the Buyer a trustee for the benefit of the Seller,
not of all of the proceeds of sale of the steel products, but of
only that proportion of those proceeds which is commensurate with
the invoice price of the steel used in the manufacture of those
products. Thus, under the fifth subclause the Buyer receives
the legal title to the proceeds of sale in the capacity of trustee
of them for the Seller's benefit, as to the relevant proportion
thereof, and for the Buyer's own benefit, as to the remainder thereof.
16.2 Since the Buyer does not acquire any equitable
title to the Seller's proportionate equitable ownership of the proceeds
of sale when the Buyer first receives the legal title to those proceeds,
it cannot be said that the Seller's proportionate equitable ownership
of those proceeds is conferred on it by the Buyer. Hence,
under the fifth subclause, the Buyer does not confer a charge
on the proceeds of sale in favour of the Seller. This is so because
the Buyer, not having initially acquired the relevant property beneficially,
lacks the capacity to create a charge over that relevant property
in favour of the Seller.
16.3 Since the fifth subclause does not
create a charge on the Buyer's property in favour of the Seller,
that subclause does not create a registrable charge under section
262 of the Corporations Law.
17.1 Even if the proceeds referred to in the
fifth subclause were the book debts (as distinct from the
payments made in discharge of those book debts) owed
to the Buyer by the Third Party in respect of the sales of the steel
products to the Third Party, there would be no conceptual difficulty
in the view that the Buyer acquired those book debts solely in the
capacity of trustee of them for the benefit, respectively, of the
Seller and of the Buyer itself, in the relevant proportions.
17.2 If and when the Third Party paid any one
or more of those book debts to the Buyer, the trust of those book
debts so paid will be merely transformed into a trust of the payments
so received.
18. It is therefore difficult to see why there
needs to be an issue[14]
as to whether the word "proceeds" in the fifth subclause
means the book debts themselves or, alternatively, the payments
made to the Buyer by the Third Party in discharge of those book
debts. Such an issue will arise only if, which is not the case here,
the Seller's interest in the proceeds (howsoever construed) constitutes
a charge given to it on the Buyer's property.
19. Nevertheless, in the instant case, the Buyer
has not done anything to identify,[15]
from the proceeds of sale (whether such proceeds be taken to mean
the book debts themselves or the payments made to discharge them),
such parts (if any) of those proceeds which reflected the invoice
prices of the steel delivered under the three relevant invoices
and used in the manufacture of the steel products sold by the Buyer.
It therefore appears that any purported trust for the benefit of
the Seller under the fifth subclause will fail on the ground
of uncertainty of the subject - matter of the purported trust, in
that it does appear that it cannot be established as to which of
the existing book debts (or which payments of previously existing
book debts) are to constitute the proceeds required by the fifth
subclause to be held proportionately in trust by the Buyer for its
own benefit and for the benefit of the Seller, respectively.
20. However, if there be (which is doubtful)
any identifiable parts of the proceeds of sale which, under the
fifth subclause, are required to be held in trust for the
Buyer for the benefit of the Seller, then there is no reason in
principle why such parts of the proceeds cannot be held on a defeasible
trust ( not amounting to a charge) for the Seller, given that such
a trust will not be one which is created out of the Buyer's
property.
21. On a different point, it is suggested that,
because the course of dealing between the Buyer and the Seller since
1987 or 1988 generally comprised invoices which included the printed
clause, the omission[16]
of the printed clause from invoice 583 (being one of the three invoices
in issue) would not remove the goods supplied under that invoice
from the operation of that clause.
22. Finally, the provision of a period of credit
for the Buyer, in each one of the three invoices in issue, is difficult
to reconcile with the Buyer's inability to use all of the proceeds
of sale of the steel products for its own purposes, since
the imposition of a trust on the relevant part of the proceeds for
the benefit of the Seller will deprive the Buyer of the benefit
(being the Buyer's right to use all of the proceeds for its
own purposes) contractually intended by the parties to be
conferred on the Buyer through the provision of a credit period
for the Buyer.[17]
Thus, the possibility of any purported trust under the fifth
subclause is negated by the existence of the credit period,
thereby making that subclause completely ineffectual for inconsistency
with the Buyer's right to use all of the proceeds of sale for its
own purposes, a right which is implicit in the Buyer's contractual
right to a credit period. Consequently, the observations made in
the preceding paragraphs will be relevant only if the mere
existence of the credit period is held not to have negated
the possibility that the fifth subclause was intended to
create a trust in favour of the Seller.
ENDNOTES
[1] Associate Professor
of Law, Bond University.
[2] Application Book
at 24.
[3] [1981] 1 Ch 25.
[4] Application Book
at 25-26 and at 36.
[5] Application Book
at 33, 40 and 41.
[6] [1991] 2 A C 339.
[7] [1985] 1 WLR 111.
[8] [1895] A C 457
at 466 (per Lord Herschell LC).
[9] [1991] 2 A C 339
at 352 (per Lord Keith of Kinkel).
[10] [1985] 1 WLR
111 at 116 (per Robert Goff LJ).
[11] "I am, however,
unable to regard a provision reserving title to the seller until payment
of all debts due to him by the buyer as amounting to the creation
by the buyer of a right of security in favour of the seller. Such
a provision does in a sense give the seller security for the
unpaid debts of the buyer. But it does so by way of legitimate retention
of title, not by virtue of any right over his own property
conferred by the buyer." [1991] 2 AC 339, at 353 (per Lord
Keith of Kinkel). Emphasis added.
[12] [1975] 1 WLR
279 at 281 (per Megarry J).
[13] [1980] 1 Ch
228.
[14] Application
Book at 35 and 37.
[15] Application
Book at 36.
[16] Application
Book at 28.
[17] Hendy Lennox
(Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1
WLR 485 at 499 (per Staughton J); Re Andrabell Ltd (in liq) [1984]
3 All ER 407, at 416 (per Peter Gibson J); Chattis Nominees Pty
Ltd v Norman Ross Homeworks Pty Ltd (1992) 28 NSWLR 338,
at 346 - 347 (per Cohen J); Puma Australia Pty Ltd v Sportsman's
Australia Limited (No 2) [1994] 2 Qd R 159, at 170 (per Shepherdson
J), and at 179 (per Williams J); 1C1 New Zealand Ltd v Agnew
[1998] 2 NZLR 129, 135-136 (per Henry J, in delivering the judgment
of the New Zealand Court of Appeal). |
