Our unfair contract terms (UCT) blog post series has been exploring various aspects of the UCT regime.
In light of recent legislative amendments, which include the introduction of civil penalties for breaching the UCT regime, as explained in our client alert, it is essential that businesses understand the types of clauses that may be considered unfair terms. This post provides examples of how indemnity and limitation of liability clauses may breach the UCT regime.
What are indemnity and limitation of liability clauses?
An indemnity clause requires one party to cover losses, damages or costs suffered by another party. A limitation of liability clause limits the damages that one party is required to pay to another party in the event of breach. These terms are commonly used in commercial contracts to allocate risks between parties and to protect parties from suffering losses from events which are outside their control.
When might indemnity and limitation of liability clauses breach the UCT regime?
The UCT regime applies to certain types of standard form contracts, as explained in our post here. Courts consider various factors in determining whether a clause is unfair, as explained in our post here. The cases below illustrate when indemnity and limitation of liability clauses may be considered unfair.
ACCC v Servcorp Limited [2018] FCA 1044
This case involved several contracts relating to Servcorp’s supply of office spaces and office services to clients. The clauses in the contracts included:
- A limitation of liability clause providing that Servcorp would not be held responsible for loss, theft or damage of goods held in the offices, howsoever caused.
- A clause providing that the Client would indemnify Servcorp, its employees, caretakers, cleaners, agents or invitees, against any theft or loss from the offices, or damage to the offices that is attributable to the Client. There was an exception for gross negligence or wilful misconduct of Servcorp.
The Court determined that these were unfair contract terms because there was a significant imbalance in the parties’ rights and obligations predominantly because:
- These terms indemnified or limited the liability of Servcorp but there was no similar clause in the client’s favour; and
- The only exclusions to the indemnity were gross negligence or wilful misconduct by Servcorp. Therefore, the indemnity could apply even if Servcorp had caused the loss.
ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716
This case concerned a large number of bank contracts signed by small businesses. These contracts included terms that required the customer to indemnify the bank against any liability, loss, cost or expense caused or contributed to by certain specified events.
The Court found that these terms could be relied on by the bank to make the customer liable for liability, loss or costs suffered or incurred by the bank that the customer had not caused; had been caused by the bank’s mistake, error or negligence; and/or could have been avoided or mitigated by the bank. The Court held that these contract terms created a significant imbalance in the parties’ rights and obligations and were unfair because:
- The customer had no corresponding rights;
- The circumstances in which the liability, loss or costs may be incurred were not within the customer’s control; and
- The bank controlled at least some of the circumstances in which the liability, loss or costs may be incurred and thus could avoid or mitigate that liability, loss or costs.
What should businesses do?
From 9 November 2023, significant civil penalties will apply to breaches of the UCT regime. We explained those penalties in our client alert.
Businesses should review their standard form contracts to identify clauses which may be caught by the UCT regime and update terms as necessary, as explained in our client alert.
Businesses should carefully consider whether indemnity or limitation of liability clauses should be retained in their SFCs. If they are retained, businesses might consider reducing the risk of them being found to be unfair including by ensuring:
- limitation of liability clauses are not overly broad and provide a similar benefit to the consumer or small business counterparty; and
- indemnity clauses are targeted so that they do not make the consumer or small business counterparty responsible for losses which are outside their control.
Look out for the next blog posts in this series which will cover other types of unfair contract terms and the steps businesses should take to ensure compliance with the UCT regime.
Image credit: Still life with the scales of justice by Freepik / Freepik / Licence / Remixed to B&W and resized
