In an earlier article by Clive Nichol and Sidney Page it was explained that, from 12 November 2016, amendments to Part 2-3 of The Australian Consumer Law (ACL) extended protections for unfair contract terms in standard form contracts to small businesses, which comprise 97% of all businesses in Australia.
It is commonplace for policies of liability insurance to contain a term excluding from cover liability arising from contractual indemnities agreed to by an insured in favour of a claimant (a contractual indemnity exclusion). The effect of such an exclusion may leave an insured without cover for claims made against them in reliance upon such indemnities.
In this context, 2 issues arise:
- Whether a contractual indemnity may be void pursuant to Part 2-3 of the ACL; and
- If not, whether an insured might successfully argue that a contractual indemnity exclusion, contained in the insured’s insurance policy, is void pursuant to Part 2-3 of the ACL.
The contractual indemnity
With the passage of the amendments to Part 2-3 of ACL it may now be possible for a small business, that is sued pursuant to a contractual indemnity for which liability is excluded under their insurance policy, to challenge the efficacy of the indemnity clause and seek that it be declared void. In order to do so, however, a small business must be able to establish a number of things to the satisfaction of the Court. We consider those matters below.
Firstly, the indemnity was entered into from 12 November 2016.
Secondly, the contract containing the indemnity must be a “small business contract”. A contract will be a small business contract if:
- the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
- at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
- the upfront price payable under the contract does not exceed $300,000; or
- the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1 million.
Thirdly, the indemnity clause must be “unfair”. Such a clause will be unfair if:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (a clause will be presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise); and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Finally, the contract containing the indemnity must be a “standard form contract”. Although there is a presumption that a contract will be a standard form contract, the Court must still take into account the following when making a finding in this regard:
- whether one of the parties has all or most of the bargaining power relating to the transaction;
- whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
- whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;
- whether another party was given an effective opportunity to negotiate the terms of the contract;
- whether the terms of the contract take into account the specific characteristics of another party or the particular transaction; and
- any other matter prescribed by the regulations.
The Federal Court of Australia has found an indemnity clause contained in a “consumer contract” was void pursuant to Part 2-3 of the ACL (Australian Competition and Consumer Commission v Bytecard Pty Ltd Federal Court Proceedings (P)VID301/2013). This reasoning may yet be extended to small business contracts.
The contractual indemnity exclusion
As alluded to above, if a contractual indemnity is not void, the question arises as to whether an insured could successfully argue that a contractual indemnity exclusion, contained in the insured’s insurance policy, is void pursuant to Part 2-3 of the ACL.
In that regard section 28(4) of the ACL provides that Part 2-3 does not apply to a small business contract to which a prescribed law of the Commonwealth, a State or a Territory applies. Currently there do not appear to be any such prescribed laws.
Section 15 of the Insurance Contracts Act 1984 (Cth) (ICA) is also relevant. It provides that a contract of insurance is not capable of being the subject of relief under any other Act, where “relief” means “relief in the form of:
(a) the judicial review of a contract on the grounds that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable; or
(b) relief for insureds from the consequences in law of making a misrepresentation;
but does not include relief in the form of compensatory damages.”
It therefore appears that Part 2.3, to the extent that it can be applied to have a contract or a term of a contract deemed to be “unfair” and hence void, cannot be relied upon in relation to a contract of insurance that is subject to the ICA. How the exception for compensatory damages may operate is unclear.
The implications of the above are that, in the event that insurance cover is denied on the basis that liability for a claim arises from an indemnity clause, an insured may still be able to escape liability by arguing that the relevant indemnity clause is void pursuant to Part 2-3 of the ACL.
Having said that, small businesses should be careful in considering whether or not to agree to any particular indemnity clause. For this reason insurance brokers acting for small businesses, and other advisers, should also be cautious about advising their clients regarding the risks associated with agreeing to indemnity clauses.