In brief - New provisions to take effect on 12 November 2016
Although some logistics contracts are excluded from the new provisions and some marine insurance contracts and air carriage contracts may incorporate limitations permitted by other legislation, all participants in the transport sector should review, update or amend their contracts before 12 November 2016. Terms found to be unfair by a court will void a contract.
Logistics operators, customs brokers, freight forwarders, road and rail carriers among those to be affected by new provisions
Our September 2015 article, Unfair contract terms protections to be extended to small businesses, was about the extension of the current "unfair contracts" provisions in the Australian Consumer Law (ACL) and Australian Securities and Investments Commission Act 2001 to small businesses.
It has recently been confirmed that the new provisions (enacted by the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015) will commence on 12 November 2016. This article focuses on the application of the new provisions to the transport sector, which includes many small business operators.
Participants in the sector such as logistics operators, customs brokers, freight forwarders, road and rail carriers, which will all fall within the scope of the extended legislation, have less than a year to "get their shop in order".
There will be a clear impact on such industries that have traditionally relied on standard form, "one sided" exclusion and other clauses to limit their liability to customers and principal contractors. Accordingly, those operators will need to review their terms to identify whether any clauses are at risk of being "unfair terms" and therefore unenforceable.
However, importantly, some logistics contracts (and in particular certain shipping contracts) are specifically excluded from the new provisions.
Small businesses will be afforded greater protections
It is not surprising that the government has sought to extend provisions that have historically benefited retail consumers (e.g. mobile phone contracts and electricity/gas contracts) to small businesses.
It is often the case that small businesses are offered services (e.g. for the carriage of goods by road or rail) on a "take it or leave it" basis without the ability to negotiate the terms.
When will the provisions operate?
Many logistics contracts will fall within the new provisions which apply where:
- at the time that the contract is entered into, at least one of the parties to the contract is a "small business", being a business which employs fewer than 20 people (who include full-time, part-time and casual employees, working on a regular and systematic basis), and
- the upfront price payable is for less than $300,000 (where the contract is for a term less than 12 months), or $1 million (where the contract is for a term not less than 12 months)
The new provisions will not affect existing contracts or contracts which are not renewed or varied after 12 November 2016. While that may be regarded by some as encouragement for inaction, the implications need to be considered before any decision to do nothing is made.
Standard form contracts are common in the transport sector
Although the term is not defined in the legislation, it is clear that the transport sector is rife with standard form contracts, which would be subject to the new provisions.
A court will be left to make its own determination, and the factors which it will take into account include:
- the bargaining power of the parties, such as whether the service provider provides the contract on a "take it or leave it" basis
- whether the contract is a pro-forma (which is often the case in the transport sector, for example with standard terms referred to on the reverse side of consignment notes and delivery dockets) rather than a specifically tailored arrangement
Liability exclusion clauses will likely be regarded as unfair
In considering whether a term is unfair, a court will take into account the transparency of the term and the contract as a whole. In particular, they will consider whether the term:
- causes a significant imbalance in the parties' rights and obligations
- would cause detriment to a party if it were to be relied on
- is not reasonably necessary to protect the legitimate interest of the party who would be advantaged by the term
- lacks transparency in its formatting or the way in which it and the contract are presented
Certain terms are excluded from being unfair, such as those which define the main subject matter of the contract, set the upfront price payable under the contract, and are otherwise required or permitted by law.
In most cases it can be expected that a clause which excludes liability in all circumstances will likely be regarded as "unfair".
An "unfair term" will void a contract
If a small business considers that a particular term is unfair, it will be able to commence court proceedings and seek a declaration or other relief. (ASIC, ACCC or state and territory Fair Trade offices may also issue proceedings on behalf of small businesses to seek appropriate orders regarding the nature of the term.)
To the extent that a term is determined by a court to be unfair, it will be void and therefore unenforceable. However, the contract will still bind the parties, if it can operate without the unfair term.
What will likely be an "unfair term"?
For carriers, the industry has stated in its terms and conditions for some considerable time that they are "not common carriers" and that they accept no liability as such. It is the terms and conditions which identify the basis on which the carrier will operate.
Those terms are usually most favourable to the carrier, which is reflected in the (reduced and competitive) pricing which is charged to customers. Frequently, principal carriers use sub-contractors who will themselves expect limitation or exclusion of liability (for example, through enforceable Himalaya clauses).
However, there a many examples in current transport sector contracts which may be considered "unfair terms" vis-à-vis small businesses, including clauses which:
- require the customer to indemnify the service provider for its own negligence or breach
- enable the service provider to amend the terms unilaterally without the consent of the customer
- significantly reduce the standard limitation period for breach of contract/tort. (It is common in the industry for the time-bar to be reduced to 9 or 12 months)
- exclude liability in the absence of any notice of claim being issued within a prescribed time after the subject incident (often being within 7 or 14 days)
- impose limitations of liability, such as package limitations which are available under the Carriage of Goods by Sea Act 1991 (COGSA), but in circumstances where COGSA does not ordinarily apply (such as for solely inland road carriage)
- extend contractual benefits in terms and conditions to third-party sub-contractors (Himalaya clauses)
- impose foreign jurisdiction clauses
As such, in the event that such clauses are excluded as being "unfair terms", it will be interesting to see how the industry in fact responds.
It is likely to be expected that there will be an impact on pricing, not only between service provider and customer (as the service provider will be taking on more risk) but also between service provider and insurer (as the insurer will expect a higher premium by reason of increased risk in the service provider).
Carriage of goods by ship contracts may be affected by "unfair terms" provisions
Certain types of shipping contracts are specifically excluded from the current "unfair terms" provisions under section 28 of the ACL, including:
- contracts of marine salvage and towage
- charter parties
- a contract for the carriage of goods by ship
It is this last category which will, perhaps, have a cross over and be affected by the extension of the "unfair terms" provisions to small businesses.
A contract for the carriage of goods by ship is, on most occasions, governed by a bill of lading which incorporates certain terms and conditions.
Where the bill of lading comprises only a shipping component (such as an ocean bill of lading), then it would appear to be specifically excluded.
However, some bills of lading include inland components, which may (subject to any further clarification by the courts) be subject to the new provisions including:
- inland bills of lading
- through bills of lading, which will often include a sea component (excluded) and land component (possibly included)
- multimodal/combined transport bills of lading which include a land component (possibly included)
Air carriage contracts must take "unfair terms" provisions into account
Unlike shipping contracts, there has been no "carve out" for air carriage contracts. Accordingly, air carriers and freight forwarders who issue air waybills (which incorporate terms and conditions which, for example, exclude liability) will need to take into account the "unfair terms" provisions.
However, the new provisions do not exclude any unfair terms which are otherwise permitted. For example, where an air waybill incorporates the package, time-bar and other limitation provisions of the Civil Aviation (Carriers' Liability) Act 1959 (CA(CL)A), such terms would not be "unfair" vis-à-vis small businesses.
Limitations permitted by the Marine Insurance Act will not fall under "unfair terms"
The unfair terms provisions will not apply to terms regulated by the Insurance Contracts Act 1984 (ICA) (which will include many goods in transit, cargo liability, freight forwarder, port liability and logistics operator insurance policies). Section 15 of the ICA confirms that it is the sole source of remedies available in relation to insurance contracts which are governed by the ICA.
However, the position may be different in relation to some provisions in marine insurance contracts, which are governed by the Marine Insurance Act 1909 (MIA) (and which are specifically excluded from the ICA). Such contracts (e.g. marine open cover contracts) often incorporate standard forms such as the various Institute Cargo Clauses. To the extent that those standard form marine insurance contracts incorporate limitations which are permitted by the MIA (e.g. exclusions for wilful misconduct of the insured, or inherent vice or nature of the subject matter insured), then the extended "unfair terms" provisions would not apply.
Transport sector participants should review, update or amend contracts
A few recommendations for the transport sector include:
- Consider whether an update or amendment of your contracts is required.
- Review and update any standard form contracts before 12 November 2016 to adopt clearer language and where appropriate, remove or modify clearly unfair terms.
- In undertaking the review, and when considering individual terms, test whether the term is legitimate and extends no more than is reasonably necessary.
- To the extent that transport sector participants are able to rely upon limitation provisions in other legislation (such as the CA(CL)A and the MIA), standard terms should be amended to include them.
- Adopt a fully open and transparent approach with all customers to ensure that terms and conditions are brought to their attention prior to any services being provided, and in particular the terms which are heavily weighted in the service provider's favour.
As an alternative, consider having different standard form contracts for small business and other business customers. The imperative would be to identify, before a contract is entered into, whether the other party falls within the definition of small business; this may be difficult without alerting that customer to the disadvantaged position they may be in if they do not fall within the small business requirements and the protections given by the newly extended provisions.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.