Managing risk for misleading or deceptive conduct under the ACL through carefully drafted contracts

It is commonplace for contractual disputes between commercial parties to also include allegations of misleading or deceptive conduct in breach of the Australian Consumer Law (ACL). ^[1] Section 18 of the ACL (formerly section 52 of the Trade Practices Act 1974 (Cth) (TPA)) has become a powerful provision used by plaintiffs to impose liability, and obtain remedies, for conduct both pre- and post-execution of a contract which might otherwise be unavailable by reason of the terms of the contract itself. The power of this provision is, in many respects, attributable to the fact that it is clearly established that parties cannot contractually exclude the application of section 18 of the ACL.

However, in the context of at least business to business contracts, ^[2] there are certain drafting techniques which can be employed to manage liability and the risk of a claim under section 18 of the ACL. This article will explore three of those techniques. Underpinning two of these drafting techniques is an apparent preparedness by the courts, in the last few years, to draw a distinction between clauses that impose procedural limits on the extent of the statutory remedy, such as monetary or temporal limits, and clauses that purport to bar the statutory remedy altogether.

The traditional way of managing risk — no reliance clauses

Many readers will be familiar with one of the traditional ways that commercial parties have sought to manage the risk of statutory claims for misleading or deceptive conduct, namely, through the inclusion in their commercial contracts of a “no reliance” clause. Such clauses purport to record a party’s acknowledgement that they have not relied, in entering into the contract, upon any statement, representation or warranty made by the other party other than those contained in the contract itself.

“No reliance” clauses can have varying degrees of success. At best, clauses of this kind will assist in an evidentiary argument as to whether or not the necessary element of causation can be proved in a statutory claim for misleading or deceptive conduct. Yet there are many cases ^[3] (where the courts have found that such clauses have been ineffective to negative the true fact that a party did rely on the relevant pre-contractual representation. This is because reliance is ultimately a question of fact to be determined by the court on all the available evidence. ^[4] Further, such clauses will only be relevant for pre-contractual representations. They cannot be of any assistance where the allegation is one involving post contractual representations. While such clauses are still worth including, parties need to be aware of their limitations.

Imposing temporal limits to claims under section 18 of the ACL

The good news for commercial parties is that there are now a small number of decisions where the courts have considered a party’s ability to impose temporal limits on any liability for misleading or deceptive conduct under the ACL or the TPA:

• In Owners SP 62930 v Kell & Rigby Pty Ltd ^[5]  (Owners Strata Plan 62930), the cross-claimant sought damages for alleged defects to building work. Contractual limitations sought to limit the quantum of liability and the period of time within which a claim could be made “under the law of contract, tort or otherwise”. On a proper construction, that language was considered to be sufficiently broad to encompass a claim for breach of section 52 of the TPA. Justice McDougall agreed that the contract therefore had the effect of excluding any liability under section 52 in respect of any claims brought more than 2 years after the date of completion of the work.
• The limitation clause in Lane Cove Council v Davies & Associates ^[6]  (Lane Cove Council), being another building defects case, contained similar wording to the clause in Owners Strata Plan 62930. Again, the contractual limitations sought to limit the quantum of any liability and the period of time within which a claim could be made “under law of contract, in tort or otherwise”. The court held that the plaintiff was unable to establish that the defendant had engaged in any misleading and deceptive conduct. However, even if it had, the plaintiff would have been out of time by reason of the clause in the contract requiring all claims to be brought within one year of the date of practical completion.
• The language of the limitation clause in Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd ^[7] (Firstmac) specifically sought to impose a time limit on any statutory claims, and again the court held that it had effectively done so in respect of a claim for breach of section 52. In Firstmac, which concerned the sale of a mortgage, a five-year limit was placed on notification of “any Claim for or in connection with a breach of warranty” and court proceedings were required to have commenced within three months of the date of that notice. “Claim” was defined in the contract as “a claim, action, proceeding or demand…, however it arises (whether on a representation, in tort, for negligence, under a statutory provision…) …”. Proceedings including a claim under section 52 of the TPA were served on the defendant five months after notice was given. The court held that the limitation clause validly operated to exclude this claim.

While these cases have not been tested on appeal and the latter two cases were decided by the same judge, Sackar J, they suggest a willingness by the courts to permit commercial parties to impose temporal limits on any claim for misleading or deceptive conduct under section 18 of the ACL shorter than the 6-year limitation period set out in section 236(2) of the ACL ^[8]

Limiting procedural conditions do not amount to excluding the ACL — but reasonableness is important

In each of the above mentioned cases, the court was careful to approach the issue as one of construction, seeking to ascertain what the parties’ objective intention was when agreeing to the clause and specifically whether it was intended that liability under the TPA was to be curbed by the temporal limit imposed. In Owners Strata Plan 62930, the court also stated at the outset that there was no suggestion that the parties negotiated the contract on unequal terms or were unable to bargain for appropriate contractual protection. ^[9] Further, the court referred to the decision of Darlington Futures Ltd v Delco Australia Pty Ltd [^10] and the issue of whether the application of an exclusion clause would have the effect of denying substantially to one party the entire benefit of the contract, and commented that the effect of imposing the temporal limit did not have the effect of denying one party the benefit of the contract. ^[11]

In the Firstmac case, the court also stated that the imposition of a temporal limit on liability does not amount to contracting out of the TPA. In the judge’s opinion, a distinction needs to be drawn between a contractual term purporting to “bar a statutory remedy” and one that purports to “impose a monetary or temporal limit on the extent of the remedy”. The judge saw nothing wrong in principle with the parties fixing a shorter time period than that provided in the TPA (6 years).

However, these decisions suggest that if the temporal limitation is unreasonable or nominal, then it may make the clause indistinguishable from an exclusion clause which impermissibly seeks to contract out of the TPA/ACL. Assuming these decisions are followed in subsequent cases, the limits of the extent to which parties can agree to shorten the period for bringing claims are likely to be tested and clarified in future cases. In the meantime, parties should be careful to ensure that any temporal limit imposed is one which, objectively assessed, is likely to be considered reasonable by a court.

Specific reference to the ACL has not been required, but it is recommended

As you can see from the brief description of the cases above, the clauses in question did not contain an express reference to claims for misleading and deceptive conduct under the TPA/ACL. Clauses limiting liability “under the law of contract, tort or otherwise” were held to be sufficiently broad to cover claims made under the ACL.

However, in order to avoid any argument about how such a clause should be construed, the prudent approach would be to specifically refer to liability under the ACL when drafting these clauses.

Capping liability — Imposing monetary limits to claims under section 18 of the ACL

The judgments in the three cases referred to above also appear to suggest that parties can effectively impose monetary limits on claims for damages for misleading or deceptive conduct under the ACL/TPA. However, the comments by the judges were obiter dicta — in none of the cases was the effectiveness of the monetary limits contained in the relevant contract in issue.

In the authors’ opinion, the issue of whether parties can agree to cap the damages otherwise recoverable under section 236(1) of the ACL ^[12] and, if so, the limits of such a cap, is a matter which will likely be the subject of further judicial consideration in the future. ^[13] In the meantime, in light of the judgments referred to above, parties wishing to minimise their exposure under section 18 of the ACL should ensure that any contractual cap on damages specifically includes damages for misleading or deceptive conduct.

Practical considerations in drafting

In light of these recent cases, it seems that in addition to the traditional “no-reliance” clauses, parties may agree to limit (but not exclude) their liability for misleading or deceptive conduct under the ACL. When drafting such limitation clauses, one should place particular attention on the following factors:

• Procedural conditions such as a temporal limit (shorter than the statutory six years), and possibly also a monetary limit, may be fixed between the parties.
• Monetary and temporal limits must not be nominal or so unreasonable to have the effect of amounting to a contracting out of the ACL or denying substantially to one party the benefit of the contract.
• For contracting parties wishing to limit their liability, ensure that the wording of the limitation clause is sufficiently broad to cover liability for misleading or deceptive conduct under the ACL. To clearly show the parties’ intentions, the prudent approach is to specifically reference the ACL.
• Conversely, for contracting parties wishing to avoid any limitations on their rights to bring claims for misleading or deceptive conduct under the ACL, a specific carve out for such claims from any general limitation of liability clause should be considered.

Finally, the appropriate use of contemporaneous qualifications or disclaimers to any representations made, ^[14] no matter how informal the discussions or negotiations, will also assist in managing the risks arising from one of the most powerful provisions in the ACL and a source of significant liability in commercial dealings.
 

This article was first published in Inhouse Counsel, Vol 18 No 8, October 2014.