Limitation of liability clauses in business-to-business (B2B) supply contracts are often the subject of intense negotiations, particularly around liability caps, consequential loss exclusions and ‘carve outs’ to those liability caps and consequential loss exclusions. However, clauses relating to liability for a breach of consumer guarantees under the Australian Consumer Law1 (ACL) are often either left out of the mix or are mistakenly considered as not applicable in the context of a B2B supply agreement, which can have risky implications for businesses seeking to protect their interests.
In a previous article, we examined how businesses (even large businesses) may fall within the definition of “consumer” under the ACL,2 and how the proposed changes to the definition of “consumer” are likely to capture even more businesses from 1 July 2021.3
In this article, we examine the importance of accurately drafting an ACL limitation of liability clause in a B2B contract where the buyer falls within the definition of “consumer” under the ACL, as failing to do so may expose suppliers to liability for consequential loss even if the contract includes a general consequential loss exclusion clause.
When do consumer guarantees apply?
Under the ACL, consumer guarantees apply when a supplier supplies goods or services to a “consumer”. If the goods or services supplied are goods or services ordinarily acquired for personal, domestic or household use (and the consumer has not acquired the goods for the purposes of resupply or to use up in the course of manufacture or to transform the goods) (Domestic Goods or Services), a supplier cannot limit its liability to that consumer for a breach of consumer guarantees, even if the consumer happens to be a business. An example of a B2B supply contract for Domestic Goods or Services is the supply of carpet to a business that occupies an office building. Carpet is likely to be classified as a good ordinarily acquired for personal, domestic or household use, even if supplied to a business, for business use.
If, however, a supplier supplies goods or services that are not Domestic Goods or Services and the goods or services are priced (individually) at less than $40,000,4 (Business Goods or Services) the acquirer of those goods or services will be a consumer (as long as, in the case of the goods, the goods are not acquired for the purposes of resupply or to use up in the course of manufacture or to transform the goods). An example of goods that would fall into this category is a conveyer belt priced at $35,000, and an example of services that would fall into this category is the supply of business consultancy services for $25,000. From 1 July 2021, the price threshold for when goods or services fall within the category of Business Goods or Services will increase from $40,000 to $100,000. A supplier of Business Goods or Services, unlike a supplier of Domestic Goods or Services, will normally be able to limit its liability to consumers under section 64A of the ACL.
As a result, it is important that suppliers of Business Goods or Services that wish to limit their liability for consumer guarantee breaches in their supply contracts, do so in accordance with section 64A of the ACL, as a poorly drafted limitation of liability clause may fail and result in costly repercussions for the supplier.
How does section 64A work?
Section 64A allows suppliers that supply Business Goods or Services to limit their liability for breaches of consumer guarantees as follows:
- Goods – the replacement of the goods or the supply of equivalent goods; or the repair of goods; or the payment of the cost of replacing the goods or acquiring equivalent goods; or the payment of the cost of having the goods repaired; and
- Services – supplying the services again; or the payment of the cost of having the services supplied again.
However, suppliers that supply Business Goods or Services must ensure that their contracts (or terms and conditions) are drafted in the manner prescribed under section 64A in order to benefit from any ACL limitation of liability clauses applicable to breaches of consumer guarantees that apply in the case of the supply of Business Goods or Services. Section 64A effectively states that a limitation of liability clause which limits liability for breaches of consumer guarantees in such circumstances will not be void if the clause merely limits a person’s liability for failure to comply with an applicable consumer guarantee to one of the Permissible Remedies stated above.
To illustrate this point, let’s consider an example ACL limitation of liability clause in a supply contract for Business Goods or Services that may not achieve this goal:
Nothing in this agreement limits, excludes or modifies any warranties or guarantees that are implied in this agreement for which it is unlawful under the ACL to exclude (Non-Excludable Term). If it is legally permitted to do so, where Supplier is liable for a breach of any such Non-Excludable Term, then Supplier limits its liability to the following: (1) in the case of goods, one or more of the following at Supplier’s discretion: (a) the replacement of the goods or the supply of the equivalent goods; (b) the repair of the goods; (c) the payment of the cost of replacing the goods or of acquiring equivalent goods; or (d) the payment of having the goods repaired; and (2) in the case of services: (a) the supplying of the services again; or (b) the payment of the cost of having the services supplied again.
What’s wrong with this clause?
While this clause appears to use the very language contained in section 64A, it also contains some problematic language. It refers to warranties and guarantees that are “implied” into the agreement. This is problematic because consumer guarantees are not implied into agreements and do not form part of the contract in the same way that their predecessors did under the Trade Practices Act 1974 Cth (TPA).
Under the ACL, rather than being implied into contracts, statutory guarantees sit independently from contracts as a statutory right, whenever goods or services are supplied by a supplier to a “consumer” as defined under the ACL. They can even apply where there is no contract between the supplier and the recipient of the supply.5
Limiting liability for consumer guarantees effectively
Assuming that section 64A of the ACL applies to the supply of Business Goods or Services, avoiding the use of the word “implied” is important as it removes any doubt that the limitation of liability clause is intended to deal with liability for consumer guarantees and not implied terms, such as those that may apply under the Goods Act.6
What are the consequences of getting this wrong?
A supplier that fails to properly limit its liability for a breach of consumer guarantees may end up being liable for consequential loss under the ACL. Section 259(4) of the ACL provides that a consumer may, by action against the supplier, recover damages for any loss or damage suffered by the consumer because of a failure to comply with a consumer guarantee (if it was reasonably foreseeable that the consumer would suffer loss or damage as a result of such failure).
The broad drafting of section 259(4) means that a supplier could be liable for all foreseeable incidental costs that a buyer suffers as a result of the supplier’s failure to comply with consumer guarantees, such as the cost of replacement goods or services for the period that the supplier’s goods or services were defective or faulty.
It is therefore vital that suppliers of Business Goods and Services include effective limitation of liability clauses in their B2B contracts to address liability for breaches of consumer guarantees. A properly-drafted limitation of liability clause that achieves the intent of s64A of the ACL would, in the case of a supplier that supplies Business Goods or Services, limit the supplier’s liability for a breach of consumer guarantees to one of the Permissible Remedies noted above.
How can we help?
We have a dedicated consumer law team that can help you review your contracts and terms and conditions to ensure that they adequately protect your interests and comply with the ACL. We can ensure that your limitation of liability clauses are effective and do not inadvertently expose you to liability that could have been lawfully avoided. If you would like more information about the services we provide please contact us.
This article was written by Teresa Torcasio, Partner, Caitlyn White, Senior Associate and Zoe Vise, Solicitor.
1 Competition and Consumer Act 2010 (Cth) Sch 2 (‘Australian Consumer Law’) or (‘ACL’).
2 Teresa Torcasio et al, ‘Consumer guarantees for goods and services acquired for business purposes – you may have more rights than you realise’, HWL Ebsworth Lawyers (30 May 2019) <https://hwlebsworth.com.au/consumer-guarantees-for-goods-and-services-acquired-for-business-purposes-you-may-have-more-rights-than-you-realise/>.
3 Teresa Torcasio and Caitlyn White, ‘A key change to the definition of ‘consumer’ under the Australian Consumer Law will lead to more business customers being able to rely on consumer guarantees’ (20 November 2020) <https://hwlebsworth.com.au/a-key-change-to-the-definition-of-consumer-under-the-australian-consumer-law-will-lead-to-more-business-customers-being-able-to-rely-on-consumer-guarantees/>.
4 The Current $40,000 threshold under the ACL will increase to $100,000 as of 1 July 2021.
5 This was discussed in a previous article; Teresa Torcasio et al, ‘Recent changes to the Australian Consumer Law will impact transport and storage services providers, but do consumers really stand to benefit?’ (11 December 2019) <https://hwlebsworth.com.au/recent-changes-to-the-australian-consumer-law-will-impact-transport-and-storage-services-providers-but-do-consumers-really-stand-to-benefit/>.
6 Goods Act 1958 (Vic), ss 17 and 19.