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14 Jul 2016

Unfair Contract Terms: Changes for Logistics Operators

New Provisions to take effect from 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 are among those to be affected by new provisions.

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.

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 contracts amended.

There will be a clear impact on such industries that have traditionally relied on standard form, “one sided” exclusions 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.

Whilst 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 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 as it is often the case where 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.

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 greater 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 place in Transport

Although the term is not defined in the legislation, it is clear that the transport sector is widespread with standard form contracts, which will 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) or 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” to 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.

Transport sector participants should review, update or amend contracts and review existing insurance arrangements

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, 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.
  • Review, understand and arrange necessary insurance contracts to protect your business.

As an alternative, consider having different standard form contracts for small business and other business customers. The imperative is 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.

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