Missed Part 1 on early termination fees? Catch up here: Sierra Series: Unfair Contract Terms Under the Microscope (Part 1 - Early Termination Fee Clauses)

Missed Part 2 on automatic renewal clauses? Catch up here: Sierra Series: Unfair Contract Terms Under the Microscope (Part 2 - Automatic Renewal Clauses)

‍

Welcome to Part 3 of the Sierra Series: Unfair Contract Terms Under the Microscope - our deep dive into the “usual suspects” that often attract scrutiny under the Australian Consumer Law’s (ACL) unfair contract terms (UCT) regime.

This week, we’re examining liability and indemnity clauses - essential tools for managing contractual risk, but also a frequent source of unfairness when drafted too broadly. When balanced, they can allocate risk fairly between parties. But when they go too far, they risk breaching the UCT regime and attracting significant penalties.

‍

1. Liability and Indemnity Clauses: What Are They and Why They Matter

Liability clauses set boundaries on what losses a party may be responsible for, often capping exposure (for example, to fees paid under the contract) or excluding certain types of damages.

Indemnity clauses require one party to compensate the other for specific losses, costs, or liabilities.  They are designed to shift risk and provide certainty, but they can create imbalance if they operate one-sided manner.

Problems arise where clauses:

• shift all liability onto one party, regardless of fault;
• exclude liability for negligence; or
• require indemnification for matters beyond a party’s control.

‍

2. When Is an Indemnity or Liability Clause “Unfair”?

Under section 24 of the ACL, a term within an indemnity or liability clause will only be considered unfair, if it:

• causes a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the legitimate interests of the advantaged party; and
• would cause detriment to the other party if enforced.

‍

3. Specific Risk Factors for Indemnity Clauses

• The clause is one-sided, requiring one party to indemnify the other regardless of fault.
• It covers losses that could have been avoided or mitigated by the indemnified party.
• It applies to events outside the indemnifying party’s control, such as third-party actions or negligence.
• It excludes losses caused or contributed to by the indemnified party.
• It lacks mutuality, meaning only one party bears the risk.
• The indemnified party is indemnified for losses caused by the indemnified party itself (or its agents).
• The indemnifying party is required to compensate the other party for losses outside the control of the indemnifying party.
• Having no carve-outs or limits to the indemnity (e.g. in the event of negligence or breach by the indemnified party).
• The indemnity is not reciprocal.

‍

4. Specific Risk Factors for Limitation of Liability Clauses

• The clause limits liability for one party without offering a corresponding benefit or limitation to the other.
• It excludes all liability, including for consequential loss, which may be the only recoverable loss in some contracts (e.g. confidentiality breaches).
• It removes proportionate liability protections, making one party fully liable even if others contributed to the loss.
• It includes complex drafting, making it hard for the disadvantaged party to understand their obligations.

‍

5. Case Spotlight: ACCC v JJ Richards & Sons Pty Ltd

Note: This case was decided before the 2023 reforms, which now make it illegal to include or rely on unfair terms in standard form contracts.  Today, similar conduct could attract significant penalties.

a. Background

JJ Richards & Sons Pty Ltd (JJ Richards), a waste management company, used standard form contracts with small business customers.  One clause required customers to indemnify JJ Richards for “all liabilities, claims, damages, actions, costs and expenses … arising … in connection with this agreement,” on a full indemnity basis.  The clause contained no carve-outs for JJ Richards’ own conduct.

b. What was the issue?

The indemnity clause operated in a one-sided manner.  Customers could be liable for losses caused by JJ Richards itself, including its own negligence or breach.

c. Why was the clause found to be unfair?

Applying the ACL’s three-limb test:

1. Significant imbalance
   • The clause exposed customers to unlimited liability.
   • JJ Richards faced little to no reciprocal responsibility.
   • Customers could be held liable even where they had no role in the loss.
2. Not reasonably necessary
   • JJ Richards did not demonstrate why a blanket indemnity was required to protect its interests.
   • The court noted that the company could still protect itself through proportionate, targeted clauses.
3. Detriment
   • Customers risked financial loss out of proportion to the contract value.
   • Liability extended to matters outside customers’ control, including JJ Richards’ own wrongdoing.

d. Takeaway

One-way indemnities that shift all liability onto the weaker party, including for the stronger party’s own conduct, are highly likely to be unfair under the UCT regime.

‍

6. Case Spotlight: ACCC v Servcorp Limited

Note: This case was decided before the 2023 reforms, which now make it illegal to include or rely on unfair terms in standard form contracts.  Today, similar conduct could attract significant penalties.

a. Background

Servcorp Limited (Servcorp) provided serviced office arrangements to small business customers.  Its contracts included broad indemnity and limitation clauses:

• Servcorp was not responsible for “any loss, theft or damage to goods … howsoever caused.”
• Data loss exclusions applied except in cases of “gross negligence” or “wilful misconduct”, still leaving customers exposed where Servcorp was at fault.

b. What was the issue?

The indemnity and limitation clauses operated as blanket exclusions and indemnities, heavily favouring Servcorp.  Customers had limited or no recourse even when Servcorp caused the problem.

c. Why was the clause found to be unfair?

Applying the ACL’s three-limb test:

1. Significant imbalance
   • Servcorp excluded almost all liability for its own conduct.
   • Customers bore disproportionate risk without reciprocal protection.
2. Not reasonably necessary
   • Servcorp failed to show why these broad exclusions were required.
   • The court noted that narrower, more tailored provisions could protect Servcorp’s legitimate interests without such imbalance.
3. Detriment
   • Customers risked uncompensated financial loss (e.g. theft or damage of goods) caused by Servcorp.
   • The data loss exclusion left customers exposed to significant costs in circumstances where Servcorp was at fault.

d. Takeaway

Clauses that attempt to absolve one party from liability, even for their own negligence, will almost always be unfair.  Indemnities should be mutual, proportionate, and exclude losses caused by the indemnified party.

‍

7. Key Lessons and Takeaways

Drawing from JJ Richards and Servcorp, the key lessons for businesses are:

• Avoid blanket indemnities - don’t make one party responsible for all losses, particularly those caused by the other party’s own negligence or misconduct.
• Ensure mutuality - where appropriate, indemnities and liability limits should operate both ways.
• Proportionality matters - caps should reflect contract value or actual loss, not eliminate liability entirely.
• Preserve statutory rights - exclusions that attempt to contract out of ACL guarantees will not be enforceable.
• Transparency isn’t enough - even clearly worded clauses can be unfair if they create imbalance and detriment.

‍

8. Drafting Tips: Limitation of Liability Clauses

✕ Unfair clause (liability exclusion):

“The supplier is not liable for any loss or damage howsoever caused, whether in contract, tort (including negligence), statute or otherwise.”

✓ More balanced clause (limit, not exclude):

“To the extent permitted by law, the supplier’s liability for loss or damage arising under or in connection with this agreement is limited to [insert an appropriate limit, e.g. the contract price, or an amount calculated by reference to a multiple of the contract price].”

‍

Why this is better:

• It limits rather than generically excludes liability.
• It seeks to set a reasonable cap tied to the contract value.
• It avoids excluding liability altogether for negligence or breach.

‍

9. Drafting Tips: Indemnity Clauses

Let’s compare an unfair vs. fair approach to drafting an indemnity clause.

✕ Unfair (overbroad indemnity):

“The customer indemnifies the supplier against all losses, liabilities, costs and expenses suffered or incurred by the supplier under or in connection with this contract.”

‍

✓ Fairer (targeted indemnity):

“The customer indemnifies the supplier for losses, liabilities, costs and expenses suffered or incurred by the supplier arising from the customer’s breach of this contract, except to the extent any such loss, liability, cost or expense is caused or contributed to by the supplier’s own acts or omissions.”

‍

Why this is better:

• It limits the indemnified losses, liabilities, costs and expenses to those arising from a breach of the contract by the customer, rather than generally in connection with the contract (which could cover losses, etc outside the customer’s control, as well as the ordinary business expenses incurred by the supplier in performing the contract).
• There is an exclusion for losses, etc to the extent they are caused or contributed to by the supplier itself (e.g. where a loss is partly caused by the customer’s breach, and partly by an act or omission of the supplier).

‍

10. What Should Businesses Do? Practical Steps Forward

When reviewing liability and indemnity clauses, businesses should:

• Balance the risk – ensure indemnities apply only to losses within the indemnifying party’s control.
• Limit exclusions and caps – avoid one-sided clauses that unreasonably or disproportionately shield only one party.
• Be clear and specific – use plain language to set out what’s covered (and what isn’t).
• Preserve statutory rights – don’t exclude liability for mandatory guarantees under the ACL.
• Document your rationale – keep records of why a clause is necessary to protect legitimate interests.

‍

11. Wrapping Up

Liability and indemnity clauses are critical risk-management tools, but under the UCT regime, they can’t be drafted as “catch-alls” that leave one party unfairly exposed.  Businesses should carefully review these clauses to ensure they are transparent, proportionate, and reasonably necessary.

‍

That wraps up our three-part look at the “usual suspects” of unfair contract terms.  Stay tuned for future editions of the Sierra Series, where we’ll continue unpacking common pitfalls in contract drafting - and how to avoid them.

‍