Although the Carpenter International decision was handed down several years ago, its ramifications on the sale of livestock are still not widely understood in the industry.

Even when they are understood, vendors and agents are not necessarily taking appropriate steps to protect their interests, including by registering their security interests on the Personal Property Securities Register (PPSR).

Facts and law

Carpenter International was a livestock exporter which purchased livestock from vendors through del credere vendor agents. The vendors retained title in the livestock until they were paid.

A del credere agent is a unique type of agent. They guarantee payment by the purchaser to the vendor. If the purchaser does not pay, the agent pays the vendor, takes over the vendor’s retention of title in the livestock, and pursues the purchaser for payment. The rationale is that if the purchaser does not then pay the agent, the agent can enforce the retention of title and re‑possess the livestock.

Under the Personal Property Securities Act 2009 (Cth) (PPSA), a vendor’s ownership of livestock under a retention of title arrangement is a “security interest”. If the vendor does not register its security interest (ie ownership) of the livestock on the PPSR at all, or within certain strict timeframes, it will lose its ownership of the livestock if the purchaser enters into voluntary administration or liquidation. The livestock will effectively become the property of the purchaser.

Yes, that does seem to defy common sense! And yes, that does effectively mean that ownership/title to the livestock is irrelevant. They are two of the big changes that were brought about by the commencement of the PPSA in 2012.

What happened?

Carpenter International went into voluntary administration. At the time it had about 10,000 head of cattle in its possession that it had not paid for. The cattle were worth approximately $15 million.

The agents paid their vendors, as they were required to do under the terms of their del credere agency. The agents then stood in the shoes of the vendors – they took over their vendors’ retention of title in the livestock and sought payment of the amounts owing from Carpenter International.

The problem was the agents had either not registered their retention of title security interests on the PPSR, or had registered too late. The agents argued that they weren’t required to register their retention of title security interests until the sale contracts were unconditional. The court disagreed and held that the relevant strict timeframes within which the agents had to register their security interests started running as soon as the sale contracts were entered into.

This left the agents in an unfortunate position. On the one hand they had paid their vendors. On the other hand, they were now seeking payment from an insolvent purchaser and had no retention of title in the livestock that had been sold.

The agents’ options were fairly limited – make a claim as an unsecured creditor (and hope to receive at least some payment when Carpenter International was wound up) or make a claim on their del credere insurance (if held).

A potential difficulty with the latter option is that because the agents had not registered on the PPSR (or had registered too late) they might not have been covered by their insurance. This is because insurance policies usually impose an obligation on the  insured to do all things reasonably necessary to avoid or reduce loss – a registration on the PPSR for $6.80 could have avoided or reduced the loss.

What are the lessons going forward?

We recommend that both vendors and del credere agents register security interests against purchasers on the PPSR.

But, and this is often overlooked, the starting point is ensuring there is actually a security interest to register! By that we mean ensuring the sale contract actually contains a retention of title clause. If there is no retention of title clause (which is the case with some sale contracts, particularly those prepared by purchasers), then there is probably no security interest to register! The vendor (and agent) will simply be unsecured creditors of the purchaser (without any retention of title to rely on) until they are paid.

It is clear from the Carpenter International decision that agents need to register their security interests from the outset and not wait until they have paid the vendor or the purchaser goes broke. We also think vendors should register in case both the purchaser and the agent go broke before the vendor is paid, or in case the purchaser goes broke before the agent pays the vendor.

In the case of the latter situation, if the vendor has not registered its security interest before the purchaser goes becomes insolvent, it will lose its retention of title over the livestock. That being the case, it will not have any retention of title to transfer to the agent when the agent pays the vendor.

While the registration process is not particularly time consuming or difficult to navigate, there are a number of fields to be completed. If any of these fields are completed incorrectly, the registration can be invalid. Even basic errors such as registering against an ABN instead of an ACN (even where they both refer to the same entity) can make a registration invalid.

We recommend that vendors of livestock and their agents seek advice about how they can protect their interests through registering security interests on the PPSR. For a confidential, obligation free discussion, please contact Michael Morris on 07 3220 1144 or michael@hillhouse.com.au.

Please note: the above article is a summary of, and in some instances an oversimplification of, the PPSA and the Carpenter International decision (which is some 91 pages in length). Both the PPSA and the Carpenter International decision are highly technical and their application to your circumstances requires specified consideration.

The decision of the Supreme Court of Victoria in Re Carpenter International Pty Limited [2016] VSC 118 can be found here.

Overview of the facts

A decision of the District Court of New South Wales has highlighted why a legal disclaimer is not always enough to protect a vendor from liability for misrepresentations, especially if the disclaimer is worded too broadly.

In the case of WG Riverview Pty Ltd v Ireland [2019] NSWDC 79, the purchaser of a bull at auction was awarded more than $200,000 in damages after it was discovered by DNA testing that the bull, for which they had paid $18,000, had an unknown sire, rather than the advertised sire.

It was not known how the bull came to have a different sire and there was no suggestion the vendor acted dishonestly.

As the bull’s parentage could not be established it could not be registered as a stud bull. This had two main consequences.

The first was that the bull was worth less than what was paid for it. The second was that the bull’s progeny could not be registered as stud cattle and were entitled to be registered as commercial cattle only. As commercial cattle the progeny were of lower value.

The vendor sought to rely on a disclaimer in the auction catalogue that provided the vendor did not assume any responsibility for the correctness of the information of the animals in the catalogue. However, the Court held that the disclaimer was worded too broadly to protect the vendor.

Calculation of loss and damage

The starting point for assessing the loss and damage was the difference between the price paid for the bull ($18,000) and its true value (having regard to its unknown sire). The parties agreed that the difference was $13,154 – i.e. the true value of the bull was $4,846.

The second component of the loss and damage was economic loss. In simple terms, the purchaser claimed the difference between what the bull’s progeny would have sold for if the bull’s parentage was as advertised (i.e. as stud cattle), and what the bull’s progeny actually sold for (i.e. as commercial cattle).

The Court determined that one season was an appropriate period in respect of which to calculate the economic loss. The parties had agreed that the difference in price for male progeny was $5,513 per head and for female progeny was $2,076 per head.

As the bull sired 28 male and 25 female progeny during the season, the total difference in prices was $206,264.

The court then reduced the amount by $19,226.12 to allow for certain costs the purchaser would have incurred if the progeny were sold as stud cattle.

Outcome

All up, the net loss and damage awarded to the purchaser was $200,191.88. If that wasn’t enough for the vendor, they also had to pay the purchaser’s legal costs, as is usual when a person is unsuccessful in litigation.

Lessons

There are two main lessons to take away from this case.

The first is that a claim for loss suffered by a purchaser as a consequence of the misleading and deceptive conduct of a vendor, or for breach of warranty by a vendor, can greatly exceed the price payable under the contract.

In general terms, a purchaser is entitled to be put in the position they would have been in had the vendor held up their end of the bargain. In this case, putting that principle into effect resulted in the purchaser being put into the same financial position they would have been in if the first season’s progeny would have sold as stud animals.

The second is that disclaimers, particularly when worded broadly, will not always protect against misrepresentations.

The Droughtmaster Stud Breeders Society has identified this and has amended their catalogue and online disclaimers as a consequence of this case. The Society has also sought to provide greater clarity around pedigree by introducing a scale system for classifying pedigrees – from full parental verification by DNA to no DNA verification.

It is imperative to ensure any disclaimers a vendor has in place are worded correctly to reduce the potential liability of the vendor.

Failure to do so could leave a vendor liable for damages which are well in excess of the contract price.

Conclusion

Hillhouse Legal Partners has a growing agribusiness practice and can provide advice on matters from the sale of livestock and drafting of appropriate disclaimers through to the sale and purchase of large scale cattle stations.