This contract tip explains how security interests appear in commercial contracts.
Security interests are liens on goods or other assets. Here are 3 ways they usually appear in U.S. law contracts:
1. When a vendor attempts to retain title after delivery - Section 2-401 of the Uniform Commercial Code automatically converts the seller's interest from title to into an unperfected security interest at delivery. This happens even if the parties say in the contract that the seller keeps title after delivery until payment. The vendors often don't know they have a security interest so they don't perfect (aka register) it. This means their unperfected security interest falls behind the perfected ones in a bankruptcy.
2. Granting the vendor a security interest in the goods - I often see this in goods contracts with a high value. Talk to your corporate lawyers before you agree to it. Your company may have financing that prohibits these.
3. Granting a purchase money security interest (PMSI) - PMSI is like a security interest on steroids. It can give the vendor priority even over the customer’s other secured vendors. It's complex so I'll talk more about PMSI in a different post.
Do you see security interests in your commercial contracts in other ways?
