8 March, 2016
What you need to know
- Recent judgments at first instance suggest that parties may be able to limit their statutory liability for misleading or deceptive conduct by including a certain exclusion clause in their contracts.
- The specific issue of whether limitation of liability clauses should be read down or declared void has not yet been considered by appellate courts. Appellate courts have historically upheld statutory prohibitions against clauses purporting to exclude liability completely.
What you need to do
- Parties should consider including cascading exclusion clauses in their contracts to attempt to limit liability for misleading or deceptive conduct, although there is a real possibility that these clauses may be declared void or read down by appellate courts.
Trial judges allow limits on statutory liability for misleading or deceptive conduct
Recent judgments by trial judges in the NSW Supreme Court have held that parties to a contract are able to set limits on their liability for misleading or deceptive conduct under section 52 of the Trade Practices Act 1974 (now section 18 of the Australian Consumer Law).
Justices McDougall and Sackar have held that limitation of liability clauses can limit:
- the amount of the parties' damages; and/or
- the time within which a claim can be made (effectively bringing forward the limitations period for the claim), for misleading or deceptive conduct.
Why does this matter?
There are various ways that a party can attempt to limit their liability for misleading or deceptive conduct, including:
- capping the amount of their liability (or excluding liability completely);
- capping the time within which a claim can be made;
- limiting the type of damage recoverable, such as the exclusion of consequential loss; and/or
- inserting a "non-reliance clause" stating that the parties do not rely on each other's prior conduct or statements when entering into an agreement (see our September 2014 Contract Law Update 'Reliance on non-reliance clauses – not a safe harbour').
If limitations on liability are permitted under the Australian Consumer Law, it follows that similar limitations would be available under the corresponding provisions of the Corporations Act 2001 and the ASIC Act 2001 concerning misleading or deceptive conduct.
In our view, there is a real risk that clauses that seek to limit liability for misleading or deceptive conduct will be read down or declared void by appellate courts.
What do the cases say?
In Owners SP 62930 v Kell & Rigby [2009] NSWSC 1324, engineers had entered into a contract with developers of a strata title development which limited their liability to a period of 2 years following the completion of the contractual services.
Justice McDougall held that there was no reason why this time limitation should not apply to claims brought under the then Trade Practices Act, despite the fact that the Act had a prescribed limitations period. His Honour also indicated that the limit on the amount of damages set out in the contract would also stand.
In Firstmac Fiduciary Services Pty Limited & Anor v HSBC Bank of Australia Limited [2012] NSWSC 1122, HSBC and Firstmac entered into a sale deed, under which HSBC agreed to sell a mortgage to Firstmac. Firstmac alleged certain misleading and deceptive representations had induced it to enter into the contract.
Justice Sackar held that the exclusion clause limiting the time for any claims to be made was valid, as parties may extinguish or curtail statutory rights in their favour if those rights are private and procedural in character. Justice Sackar stressed the distinction between a contractual term purporting to wholly exclude a statutory remedy (such as damages) and one that seeks to limit that remedy (such as by placing a cap on damages or limiting the time for the making of claims). His Honour had previously decided a case for similar reasons in Lane Cove Council v Michael Davies & Associates and Others [2012] NSWSC 727.
In Omega Air Inc v CAE Australia Pty Limited [2015] NSWSC 802, Justice Ball observed that if the parties can agree to limitations on statutory rights, it is difficult to see how the line can be drawn between those limitations that are acceptable and those that are not.
What will the appellate courts do?
To date, appellate courts have not had to address the specific issue of whether a limitation of liability clause should be read down or declared void.
In our view, there is a real risk that appellate courts may invalidate contractual limitations on statutory liability. The Full Federal Court has previously held in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83, 98 that parties cannot use exclusion clauses to "oust the effect of the [Trade Practices Act] or deprive an applicant of remedies under it".
If parties are permitted to limit the extent of some statutory rights by use of limitation of liability clauses, it raises the question as to which limitations are "acceptable" and which are "unacceptable", as identified by Justice Ball.
It may be argued that limiting statutory rights undermines Parliament's intent to protect consumers and businesses by creating those statutory rights and obligations and by legislating that parties cannot contract out of them.
What should you do when negotiating a contract?
If a court finds that such a clause is void, the clause will be severed from the contract to the extent that it is void and the contract will otherwise operate as intended.
It may be important that exclusion clauses have separate, cascading provisions so that if one provision is void, it does not affect the operation of the other provisions.
The initial provisions in the exclusion clause could be as comprehensive as possible, excluding claims to the fullest extent permitted by law, with subsequent provisions excluding or limiting individual elements (such as the amount of damages and/or the time in which a claim can be made).
To increase the chances of a limitation of liability clause withstanding judicial scrutiny, the exclusions and limitations should be drafted so as to be reasonable in all the circumstances of the contractual relationship.
For further information, please contact:
Peter Voss, Partner, Ashurst
peter.voss@ashurst.com
