Are your contracts enforceable?

In Australia, unfair contract terms are made void and unenforceable under Australian Consumer Law. These laws apply to contracts with individual consumers, as well as small business contracts.

What is a small business contract?

Small business contracts are any contracts entered into or renewed after 12 November 2016, which satisfy the following conditions:

  • the contract is a ‘standard form contract’;
    • A contract prepared by one party, where the other party has little or no opportunity to negotiate the terms;
  • the contract is for the supply of goods and services OR sale of grant of interest in land;
  • at least one of the parties involved is a small business;
    • employees less than 20 people, including casual employees employed on a regular and systematic basis; and
  • has an upfront price payable under the contract of;
    • $300,000, if for less than 12 months; or
    • $1 million, if for longer than 12 months.

The Australian Competition and Consumer Commission (ACCC) has been primarily focused on investigating contracts where a business will not agree to be liable for loss or damage caused by another party from which it is receiving an indemnity (e.g. a supplier that does not agree to liability but wants it customer to indemnify it for loss).

What is a liability or indemnity clause?

It is very common for contracts to contain a limitation of liability clause.  For example, a wholesaler that sells goods to a retailer may have a contract which excludes or places a cap on liability of the wholesaler under the contract.  Such a contract may also contain an indemnity clause, which requires the retailer to compensate the losses of the wholesaler in circumstances such as if the retailer breaches the contract.

When is a liability or indemnity clause unfair?

In a recent spate of investigations, the ACCC has identified reciprocity of liability limitations and indemnities as a factor when considering whether these terms are unfair under Australian Consumer Law.  If a liability and indemnity is one-sided, it may be considered unfair.

In April 2019, standard form contracts of three container companies were changed following concerns from the ACCC that non-reciprocal liability limitations and indemnities clauses could be considered unfair.

What is the impact of including unfair terms in your contracts?

Although unfair contract terms are considered void and carry no penalty, having your contract voided can have a significant impact, preventing you from relying on a limited liability or indemnity clause if a reciprocal one is not provided for the other party.

There has been a push to make unfair terms under Australian Consumer Law illegal. This would in addition to making unfair terms void, introduce hefty penalties for those supply contracts with unfair terms.

If you are, or are dealing with a small business, you should review your contracts to ensure any limitation of liability and indemnity provisions are reciprocated.

If you need assistance with Australian Consumer Law compliance including contract review, do not hesitate to contact me at rosalyn@gladwinlegal.com.au or give me a call on 1300 033 934 for a no-obligation quote.

Source: https://www.lexology.com/library/detail.aspx?g=f998310e-44ec-4011-af4d-bc022bef1a08&l=8D8HBUV