Limitations and exclusions are clauses in contracts that help to manage the risks that are inherent in contractual relationships. Exclusion clauses do two things primarily. They state what obligations a party does not have to meet, and they also define what losses or expenses a party to a contract won’t pay for. Limitation clauses, on the other hand, allow one party to cover part of the costs of any losses.

Sometimes these clauses will not be enforceable for a variety of reasons. In spite of what the contracting parties end up agreeing to, a Court may disregard the agreement entirely if it chooses to do so.

For example, our Australian Consumer Law (ACL) imposes some quite stringent limitations on how these clauses are to be drafted. These limitations come from two areas of the ACL. First, the protection of consumer guarantees, which protect consumers’ right to refund, repair or replacement.  Second, the section in the ACL that aims to prevent unfair contracts.

This article will explain the operation of these limitations.

Consumer Guarantees

If you own a business and you are providing goods or services to customers as part of your trade, chances are your business will need to comply with consumer guarantees.

A consumer is defined as any person that purchases goods or services up to the value of $40,000. The following consumer guarantees apply to all consumers:

  • A guarantee that all goods and services are ‘fit for their purpose’;
  • A guarantee that services will be provided with ‘due care and skill’; and
  • A guarantee that goods will be of an ‘acceptable quality’.

Typically, limiting or excluding the ACL consumer guarantees when entering contractual relationships is against the law. Having said that, certain exceptions to the rule do exist. Liability can be limited in the following circumstances:

  • Resupplying a service that was unsatisfactory;
  • The cost of providing the service more than once;
  • Repairing or replacing ‘faulty goods’; or
  • The cost of repairing or replacing ‘faulty goods’.

Unfair Contracts

There are certain limitations and exclusions that are unenforceable in ‘Standard Form Consumer Contracts’ according to certain unfair contracts provisions of the ACL.

Consumer Contracts

Ordinarily, consumer contracts are made up of two parts. The first part of a consumer contract is subject matter. It is typically a contract for the sale of land, goods or services.

The second part of consumer contracts speaks for itself. It is a contract where the sale of the land, goods or services is to an individual whose interests are, for all intents and purposes, domestic or personal.

Standard Form Contracts

A standard from contract can be defined in many ways. Generally, the onus falls on the party being accused of using a standard form contract to prove otherwise. A Court is permitted to consider any, and all, relevant factors when determining whether or not a contract is standard form, including the following:

  • The balance of bargaining power between the two parties; and
  • Whether the contract was fairly negotiated or simply prepared and presented by one party.

Unfair Limitations and Exclusions

A term in a contract may be considered unfair if it does any of the following:

  • Results in the inequity of the contracting parties’ rights/obligations;
  • It is not reasonable for protecting the benefiting party’s ‘legitimate interests’ and
  • It would be detrimental on the other party to allow the term.

The Courts have a very wide discretion when deciding whether or not a contract term is unfair. They assess the term in the context of the contract ‘as a whole’. For example, the Courts will look at how obvious and unambiguous the term is.

There are several types of exclusions that the consider to be unfair contract terms. The include:

  • Exclusions that permit one party to choose when to comply with their obligation; and
  • Exclusions that seek to allow employers to avoid ‘vicarious liability’ for the actions of their employees.

It is important to note that any contract terms can be considered unfair, and thus unenforceable, if a Court concludes it to be.

Conclusion

In general, limitation/exclusion clauses will not affect the applicability of consumer guarantees to contracting parties. However, some exclusions/limitations will not impact consumer guarantees and will therefore be permitted under the ACL. If these clauses are considered by a Court to be unfair terms, they will not be enforceable. A Court makes this decision by looking at the contract as a whole.

If you are unsure as to whether or not the limitations or exclusions in your contract are fair, contact LegalVision on 1300 544 755.

Lachlan McKnight

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