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New fines up to $50 million introduced for unfair contract terms – have you checked your indemnity forms?

Nov 23, 2023

The Unfair Contract Terms (UCTs) regime will often apply to indemnity clauses and forms entered into as part of a consumer (or small business) contract, as such indemnity is likely to be in a standard form and provided to customers on a “take it or leave it” basis without negotiation or variations.

UCTs have been prohibited in standard form consumer or small business contracts for some time, however previously there was no consequences for parties who include or try to enforce them beyond the fact that they are void and unenforceable. This means that historically, it has been somewhat common practice to draft indemnities in a broad manner on the understanding that even if they are not enforceable, they will at least act as a deterrent to someone seeking to make a claim.

However, substantial penalties for UCTs were implemented last week which apply to standard form contracts made or renewed on or after 9 November 2023. Anyone who uses or continues to use standard form contract indemnities in a form that is unfair under the UCT laws could now face hefty penalties up to $50 million (in addition to the provisions being unenforceable).

A term will be unfair if all three of the following elements are established:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The Australian Consumer Law sets out examples of terms that may be unfair, including:

  1. terms which limit one party’s vicarious liability for its agents; and
  1. terms which limit one party’s right to sue another party.

In previous cases before the Court, the following indemnities have been found to be unfair:

  • Client indemnified a supplier of serviced offices against “any theft or loss from the offices or damage to the offices that is attributable to [the client], but with the exception of gross negligence or wilful misconduct by [the provider]”.
  • Customers indemnified a waste management provider to the maximum extent permitted by law “in respect of all liabilities, claims, damages, actions, costs and expenses which may be incurred by [the provider] on a full indemnity basis (whether successful or not) as a result of or arising out of or otherwise in connection with this agreement”
  • A clause requiring the borrower to indemnify the lender against any liability, loss, cost or expense that was directly or indirectly contributed to by various events, some of which were not within the control of the borrower.
  • A clause requiring a consumer to indemnify an internet service provider even where there had been no breach of the contract, negligence or other wrongful act by the consumer; any loss may been contributed to by the provider’s own wrongdoing; and the provider was not required to indemnify the consumer in any circumstances.

An indemnity is at risk of being declared unfair if:

  • the indemnity requires a consumer (or small business) to indemnify the provider against losses that are not within the reasonable control of the consumer or may have been caused by the provider;
  • the consumer or small business does not have the benefit of a similar indemnity;
  • there are very limited exceptions to the indemnity (such as gross negligence or wilful misconduct by the indemnified party); and
  • the circumstances where the indemnity applies are unclear.

The indemnity may be found to be unclear due to the uncertain meaning of a particular expression or from the apparent width of possible application of the indemnity, for example words such as “arising from whatsoever cause” may be considered unclear.

More information

For more information, please contact Lauren Buckley, Special Counsel on (03) 8600 8891 or lbuckley@kcllaw.com.au.

Article written by Lauren Buckley, Special Counsel.