Upcoming Mallesons seminarsWhen you are negotiating a contract, take the time to consider what type of exclusion clause will best serve your interests. Do you know the main factors to consider in negotiating an exclusion clause?
If you are entering into a contract, it is likely that you will want to allocate contractual risk and to define each party's liability obligations using an exclusion of liability clause. Exclusion clauses operate as a defence to claims for breach of contract. If the other party claims a breach of contract they must prove that you have breached the contract. If they are successful in doing so, you may then rely on any exclusion of liability clause as a defence to exclude, limit or restrict your liability for the breach.
An exclusion clause can be used to exclude, limit or restrict a party's liability as follows:
- exclude - eg by excluding liability for a certain type of loss, such as loss of profits
- limit - eg by limiting liability for loss to a specified monetary amount, or
- restrict - eg by requiring claims for liability to be made within a specified period of time.
If you are drafting an exclusion of liability clause, bear in mind that being able to rely on the clause will depend on applicable common law principles (including principles of interpretation that apply to exclusion clauses) and the provisions of the TPA and State Fair Trading laws. When drafting exclusion clauses you should carefully consider whether any industry-specific rules apply - eg for supplying telecommunications goods and services. Here are five things that every in-house counsel should know about exclusion clauses.
1. Consider how the court would interpret the clause if there is a dispute
Make sure that the exclusion clause is unambiguous. That way it will be interpreted according to its natural and ordinary meaning, read in the context of the contract as a whole, and the intention of the parties will be considered. If there is ambiguity, the courts will adopt a construction less favourable to the party wanting to rely on the clause. For example, a clause that excludes liability for a breach of warranties will not exclude liability for a breach of conditions.
Make sure that the exclusion clause is not so broad that it removes the legal characteristics of a contract from the agreement. For example, if an exclusion clause is so wide that it completely protects a party from liability for non-performance, it may destroy any consideration that the liable party was to provide in exchange for the other party's promises.
Specify that the exclusion clause continues after the contract has expired or has been terminated. It will then apply to claims which have arisen but have not been notified prior to expiry or termination.
Although recent Australian case law suggests it may be unnecessary, if you intend liability for negligence to be excluded, it is best that you expressly state this.
2. Remember that the exclusion of TPA implied terms (eg that goods will be of merchantable quality) for supplying goods or services to a "consumer"1 will be void
You are unable to exclude or limit liability for loss or damage caused by breach of any of the TPA implied terms if the goods or services are ordinarily acquired for personal, domestic or household use.
You may limit (but not exclude) damage caused by breach of any of the TPA implied terms if the goods or services are priced below $40,000 and not ordinarily acquired for personal, domestic or household use. As long as the limitation is fair and reasonable, you may limit liability:
- for goods - to the replacement or repair of the goods or payment of the cost of replacement or repair
- for services - to the resupply of the services or payment of the cost of resupply.
3. Exclusion clauses will not protect against "misleading or deceptive conduct" under section 52 of the TPA or the equivalent provisions in the State and Territory Fair Trading legislation
It is well-established that an exclusion clause cannot be used to defeat liability under section 52 of the TPA or its equivalent in the State and Territory Fair Trading laws. Once you have established that the other party's conduct was misleading or deceptive and that you suffered loss as a result, no exclusion clause, however well-drafted, will protect the other party from liability for that conduct.
However, an exclusion clause may be relevant in the context of section 52 of the TPA in relation to the question of a party's reliance or inducement to enter a contract. An exclusion clause may effectively break the reliance nexus where it provides the party to whom the misrepresentation was made with sufficient information, so that it would be hard for that party to claim that it has relied on the misrepresentation in entering the contract. To maximise its effect, ensure that the exclusion clause:
- is appropriate in the context of the particular contract
- clearly indicates that the other person or corporation has only relied on the representations and warranties in the contract
- is brought to the attention of the other person or corporation entering the contract, and
- is the subject of legal advice obtained by the other person or corporation entering the contract.
4. Unfair terms in Victorian consumer contracts will be void
New provisions in the Victorian Fair Trading Act 1999 (Victorian FTA) make any term in a consumer contract2 found to be "unfair" void.3 These provisions focus on the substantive fairness of contract terms, rather than the way in which they are enforced.
Terms that may be "unfair" include terms that:
- permit the supplier (but not the consumer) to avoid or limit performance
- limit the supplier's vicarious liability for its agents
- limit the consumer's right to sue the supplier
- avoid, limit or restrict the supplier's liability for breach of contract or negligence, or make the consumer carry a risk that the supplier is better able to bear.
To avoid allegations that an exclusion clause is unfair, ensure that you draft the clause in plain English and avoid words which are unclear to those without legal knowledge.
To avoid allegations of unconscionable conduct, also ensure that the circumstances surrounding the existence and enforcement of the exclusion clause are fair. For example, suppliers should not use unfair tactics to compel consumers to accept an exclusion clause. Be willing to negotiate the scope of the exclusion clause and bring it to the consumer's attention.
5. Specifically exclude consequential/ indirect loss
When drafting an exclusion clause, be careful to specify exactly what loss is being excluded.
Avoid relying on clauses excluding liability for "consequential" or "indirect" loss to cover loss of profits, loss of revenue and loss of opportunity. The courts have narrowly interpreted broadly drafted exclusion clauses that exclude liability for "consequential or indirect loss" and have broadly interpreted "direct losses". Where, for example, loss of profits flow directly from a breach of contract an exclusion of liability for indirect or consequential loss will not cover such loss of profits.
So, if you intend a particular loss, such as loss of profits, to be excluded, don't rely on a clause that excludes "consequential or indirect loss (including loss of profits...)". Otherwise you run the risk that only indirect loss of profits will be excluded.
Renae Lattey
Senior Associate
T +61 3 9643 4065
renae.lattey@mallesons.com
1 In general terms, a person is deemed to acquire goods or services under the TPA as a "consumer" where the goods or services are priced at $40,000 or less or, if the price exceeds $40,000, where the goods or services are of a kind ordinarily acquired for personal, domestic or household use or consumption.
2 The definition of "consumer contract" in the Victorian FTA is substantially different from the definition of that term in the TPA. The Victorian FTA defines "consumer contract" as a contract to supply goods or services of a kind ordinarily used for personal, domestic or household use for the purpose of the ordinary personal, domestic or household use or consumption of those goods or services. The TPA definition is broader in that it encompasses goods or services ordinarily acquired for personal, domestic or household use. In addition, the Victorian FTA does not contain the $40,000 threshold for consumer contracts which appears in the TPA.
3 There are proposals to create a uniform approach to unfair terms across the States and Territories.