Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

A supplier cannot exclude its liability for breach of the consumer guarantees. Importantly, a B2B party may be able to limit its liability to a certain extent. 

More generally, when drafting clauses limiting or excluding liability, it is important to use clear language. It is preferable to spell out the areas of liability being limited or excluded. If a clause seeking to exclude or limit liability is ambiguous or unclear, a court will construe it against the interests of the party seeking to exclude or limit its liability.

If the parties are seeking to exclude liability for serious matters such as negligence or repudiation, the contract should explicitly identify that liability for those matters is excluded. General wording such as ‘all liability is excluded’ will ordinarily not be construed to apply liability limitations or exclusions to liability for negligence or repudiation.

For franchise agreements, the Franchising Code of Conduct prevents the franchisor obtaining a general release or waiver from a franchisee. Such clauses are of no effect.

Finally, if a party engaged in misleading conduct (in breach of the Australian Consumer Law) to induce the other party to enter the contract, the limitations and exclusions of liability included for the benefit of the party who engaged in the misleading conduct are unlikely to be enforceable.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

Subject to the Australian Consumer Law, parties are generally free to agree contractual liability limitations.

Under the Australian Consumer Law, a supplier cannot exclude its liability for breach of the consumer guarantees. However, for B2B-type supplies (ie, not goods or services ordinarily acquired for personal, domestic, household use or consumption), the supplier can usually limit its liability to:

  • replacement of the goods or the supply of equivalent goods;
  • repair of the goods;
  • payment of the cost of replacing the goods or of acquiring equivalent goods;
  • payment of the cost of having the goods repaired;
  • supplying of the services again; or
  • payment of the cost of having the services supplied again.

 

The supplier cannot rely on these limitations if it would be unreasonable to do so.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

An indemnity is a promise by a party to be responsible for another party’s loss or damage arising from or associated with specific events. An indemnity claim is different from a contract damages claim because the common law rules that apply to contract damages claims, such as the obligation on a party to mitigate its loss, do not apply to the indemnity claim unless drafted into the clause.

There are a few statutory controls on indemnities. For example, under the Australian Consumer Law, if both the supplier (eg, retailer) and manufacturer are liable for a breach of a consumer guarantee (eg, if the product is defective) and the consumer takes action against the supplier, the supplier is protected by a statutory indemnity given by the manufacturer. A manufacturer cannot exclude its liability under the indemnity.

Australia has statutory controls on proportionate liability, which can impact indemnities. Proportionate liability legislation operates so that, where there is more than one concurrent wrongdoer for an apportionable claim, the legislation will allocate liability between the wrongdoers in proportion to their level of fault.

The legislation differs between jurisdictions. A key difference to be aware of in the context of an indemnity is that, in some cases, the parties can contract out of the proportionate liability legislation. For example, in West Australia and New South Wales, the parties are free to agree a contractual indemnity that overrides the liability that would have otherwise been allocated under the legislation. In other jurisdictions, the parties cannot contract out of the legislation. For example, in Queensland, a concurrent wrongdoer cannot be required to indemnify any other concurrent wrongdoer.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

If it is not a penalty, a liquidated damages clause is enforceable under Australian law.

Liquidated damages clauses are commonly used in commercial contracts. A liquidated damages clause enables the parties to agree a payment of a fixed sum for a specified breach. This avoids the need for a party to bring a claim before the courts. Common examples of liquidated damages provisions include payments of service credits or the payment of a fixed sum for each day of delay if a supplier fails to meet a contracted delivery date.

When drafting a liquidated damages clause, it is important to ensure the damages agreed upon are a ‘genuine pre-estimate of damage’ and not a penalty. Penalties are unenforceable under contract law. Some indicators of when a liquidated damages clause is a penalty are if the sum set out is extravagant and unconscionable or greater than the sum outstanding, or if it is to be uniformly applied to a series of breaches of differing severity.

An area of uncertainty in Australia in recent years is whether certain ‘non-breach’ payments under a contract can be unenforceable penalties. For example, fees payable for early termination or bad debt charges. If the amount of a fee is extravagant then it can risk being a penalty and accordingly being unenforceable.

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The content has been verified between April and July 2019.