Often you see such clauses quoted in support of an argument that a claim for misrepresentation cannot succeed where a contract contains this clause.

But that ain’t necessarily so.  In fact, it ain’t even normally so.

‘Entire agreement’ clauses

Typically they read something like this:

This document is the entire agreement between you and us and you acknowledge that we have made, and you rely on, no promise, representation or warranty to you that is not set out expressly in this document.

What they are supposed to achieve

In theory, an ‘entire agreement’ clause prevents you from claiming that you relied on something a salesperson told you, or otherwise sits outside the document.

But the law sidesteps them with ease

The law sees it this way:  If a person was told something misleading that caused them to decide to enter a contract, then their entry into the contract was obtained ‘on false pretences’.  That taints the contract from the moment of its inception.  It is, and always was, a contract obtained by misrepresentation.

So, when the law comes to the ‘entire agreement’ part of that tainted, flawed contract it reasons that it cannot operate as its black & white words suggest it does.  It simply won’t be enforced so as to wipe out the misrepresentation.

So are ‘entire agreement’ clauses irrelevant ?

No, they can have effect.

In deciding whether a person was induced into entering a contract by some external misrepresentation, the court must decide:

• what was actually said or otherwise represented
• whether it was true or false
• if it was false, whether the person would not have entered the contract has they known the truth.

This third element, often called the ‘reliance question’, is frequently overlooked by lay people.  They think that they can avoid a contract if they can show there was a misrepresentation leading up to it.  But they need to show more: they must show that they relied on the misrepresentation as a material factor in entering the contract.

A court can take an ‘entire agreement’ clause quite seriously as evidence that a person did not rely on some external representation.  It can say ‘We accept that a misrepresentation may have occurred, but in judging whether you relied on it we give weight to the fact that you signed a piece of paper saying that you didn’t.’

A high water mark example

Let’s say you sign a short contract after getting legal advice, and it contains a clear ‘entire agreement’ clause.  A court might well say:

• it’s a short contract
• the clause is clear
• you obtained legal advice
• you actually signed the document
• you must have very clearly considered the clause and chosen to assent to it -

so we are satisfied that you did not rely on the external representation you now complain about.  We accept that it was made, and that it was untrue.  But in all the circumstances including the ‘entire agreement’ clause, we don’t accept that you relied on it.

An example at the low water mark

At the other end of the scale, let’s say you sign up for a mobile phone service in store.  The provider uses a Standard Form of Agreement, which you don’t actually see before signing up.

Even if you did see it, it would be dozens of pages long and the ‘entire agreement’ clause is buried on page 24.

The only ‘advice’ you get about the deal is from the commission salesperson.

In those circumstances, if you can later point to a material misrepresentation, the court will sidestep the ‘entire agreement’ clause in a blink.  You did not carefully and consciously assent to the proposition that there was nothing more to the deal than what’s in black & white.

Section 18 of the Australian Consumer Law

This must be the most quoted piece of consumer law on CSP Central.

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

In virtually every section 18 claim that involves a contract, there is an ‘entire agreement’ clause.  If such clauses could lock out misrepresentation claims, there’d be very few contract cases based around section 18.  (You should be aware that, until 1 January 2011, a nearly identical provision appeared in the old Trade Practices Act 1974, which has since been upgraded and re-named the Competition and Consumer Act 2010.)

But just take a stroll through these cases and you’ll see how many there have in fact been.

Myth busted

‘Entire agreement’ clauses can be important and effective.  But especially in consumer situations where the deal moves fast, the contract is not focused on and there’s no independent advice, they are no sure defence to a misrepresentation or section 18 claim.

To demystify the topic, here’s a dowloadable SFoA backgrounder that overviews what they are and why they can improve CSP business processes, with the compliments of CSP Central and Logie-Smith Lanyon Lawyers

You should also check out this post about complying with the SFoA Summary notification regime.

The subject has been addressed any number of times by the Commission in the past.  Despite that, serious breaches by organisations that should know better are commonplace.  In recent months, CSP Central has pointed out breaches by:

• TPG
• Best Buy Australia
• Dodo.

Misrepresenting consumer rights is a criminal offence under the Trade Practices Act, so business and lawyers alike would be wise to study the new ACCC guide.

 The answer has some pretty serious consequences.

When the word ‘Consumer’ is used, one usually thinks mum, dad and the kids, right ? Well, its potentially more like mum, dad, the kids, the local milk bar operator, the local accountant, the local builder and the local solicitor, just to name a few under the TCP Code. So this puts a heap of contracts for telecommunications services into the contracts with ‘Consumers’ pile.

The TCP Code

The TCP Code defines a ‘Consumer’ as:

(a) a person who acquires a Consumer Product for the primary purpose of personal or domestic use; or

(b) a business or non-profit organisation which at the time it enters into the Consumer Contract:
(i) does not have a genuine and reasonable opportunity to negotiate the terms of the Consumer Contract; and
(ii) has or will have an annual spend with the Supplier which is, or is estimated on reasonable grounds by the Supplier to be, no greater than $20,000, other than a person acquiring a Consumer Product for resale.

And ‘Consumer Contract’ as:

an agreement between a Supplier and a Consumer for the supply of a Consumer Product, other than for the supply of content services by third parties who are not Carriage Service Providers.

(Note ‘Consumer Product’ includes a Carriage Service)

Fair Trading Laws

It is worth noting that state-based consumer fair trading laws, like Victoria’s Fair Trading Act 1999, contemplate ‘consumer contracts’ as being:

an agreement, whether or not in writing and whether of specific or general use, to supply goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption, for the purposes of the ordinary personal, domestic or household use or consumption of those goods or services

Don’t forget

This inconsistency makes it even easier for the industry to forget its obligations under the TCP Code, not to mention those under the state-based Fair Trading laws.

Don’t get caught out !  Our tip is to carefully refer to both your TCP Code obligations and those under state-based consumer laws at the same time when reviewing your customer-facing processes.

(a)   hardly understood by anybody

(b)  extremely important in contracts

(c)   a fast way to accidentally turn your company into an insurance business

(d)  very expensive if you get them wrong

(e)  all of the above.

The answer is ‘(e) all of the above’

We’ll explain carefully why you can’t just glaze over this admittedly technical legal issue.

First, let’s talk about liability caps

As a general rule, two parties to a non-consumer contract are allowed to agree that they won’t sue each other for more than a certain amount.  If SuperTel contracts to cable up and service BigCo’s new office building, they are free to include a clause like this:

The parties agree that the aggregate liability of one to the other under or in relation to this agreement or SuperTel’s services, or any act or omission of a party with respect to them, whether in contract, tort or on any other basis, shall not exceed $100,000.

Now, as long as they get the drafting right, such a cap means what it says.

• If SuperTel completes the job three months late and costs BigCo $1m, it only has to pay $100k.
• If SuperTel blows up the electrics of the whole site and it costs BigCo $500k to fix, SuperTel only has to pay $100k.

OK, so hold that thought.  Parties can agree that whatever happens under their dealings, they can never be asked to pay more than a capped amount.

Now let’s think about joint wrongdoing

Let’s say Joe Public is walking along the road and two drivers manage to have a nearby bingle, pushing one onto the footpath and hurting Joe.  And let’s say that both drivers were a bit careless, and each made some contribution to the accident happening.

For along time now, the legal rule has been that Joe has three options.

• He can sue one driver, and as long as he can prove some fault on his part, Joe can recover his full damages claim from that driver.
• Or he can sue the other driver, and as long as he can prove some fault on his part, Joe can recover his full damages claim from that driver.
• Or he can sue both drivers, and hope for judgments against each of them.

The thought to hold here is that if two people cause a third party’s loss, the third party can often sue one of them for the entire amount of the loss.

But if that happens, the person sued can say ‘Hey, you also caused this problem.  I want you to reimburse me part of what I paid Joe.’

It’s called a claim for contribution.  You say, ‘I am being sued by Joe, and the law says he can claim all his loss from me.  But I claim that you should be responsible for (say) 60% of Joe’s loss.  So I’m asking the court to order that you pay me that.’

So let’s draw the strings together.

Imagine I’m a building owner and Joe is badly electrocuted in my premises.  Joe sues me for $1m, and he’s going to win the case.

But I say that the electrical contractor Electrico is responsible for 95% of his loss.  So I say to the court, ‘I demand that Electrico pays $950k of the claim, as a contribution.’

At that moment, the contractor pulls out of the drawer the agreement I signed with it.  Sure enough, it contains a clause:

The parties agree that the aggregate liability of one to the other under or in relation to this agreement or Electrico’s services, or any act or omission of a party with respect to them, whether in contract, tort or on any other basis, shall not exceed $100,000.

Guess what ?  Electrico successfully argues that my claim for contribution is a claim ‘in relation to the agreement or Electrico’s services’.  The court says that Electrico doesn’t have to pay any more than the capped amount.

The result

The result is that:

• Joe was electrocuted.
• Electrico was 95% to blame.
• I was 5% to blame.
• I paid Joe $1m.
• Electrico contributed $100k.
• So I ended up paying $900k for damage that Electrico caused.

The lesson

There are a few.

First, it may make sense for two contracting parties to agree that they’ll cap liability for harm they cause each other, but it’s almost always crazy to agree to cap your right to claim the full contribution from the other party if you are sued by a third party.

If you agree to such a cap, you are effectively agreeing to act as an insurer for the other side.

Even if the cap is two-way, it makes no sense.  It means that liability is a lottery depending on who gets sued.  The only sensible outcome is that if a third party sues one of us, liability is decided according to normal legal rules, without caps between you and me.

Liability is complicated and – until you end up paying $900k you shouldn’t have – boring.  If you don’t really understand it and / or can’t be bothered, get a good lawyer to work on it.

The answer is ‘yes’ if you understand what an NDA can and can’t achieve.  Peter Moon explains …

You don’t need an NDA to have confidential info

The law recognises that important, secret information that is handed over in circumstances of confidence should be protected.

Even if you don’t sign an NDA, obligations of confidentiality apply to info that the law regards as confidential.

But you do need confidential info to have an (effective) NDA

The law refuses to allow a party to pretend that non-secret information is suddenly confidential just because an NDA says so.  If it isn’t really confidential, an agreement can’t make it so.

If a court considers that an NDA tries to lock up information that is not genuinely confidential, it will throw it out.

So if you try to do too much, you shoot yourself in the foot

This is the main reason that most NDAs are useless.  They try to define as confidential a whole range of stuff that really isn’t.

For instance, imagine you are dealing with someone and your NDA says that all information whatsoever about your plans and pricing is ‘Confidential Information’.

That has to be nonsense.  If you are already doing business, there’s lots of information freely available about your plans and pricing.  People just need to check your website, read the newspaper or call you.

Sure, unreleased plans and pricing might be confidential, but not all plans and pricing.

If you write an NDA that steps across that line, and tries to create confidential information out of open information, the courts will throw it out.

So why bother with an NDA ?

Let’s assume that our NDA relates only to information that’s (at least arguably) secret.  In that case, there are several advantages to having it signed.

It will help in relation to ‘grey’ areas.

If an NDA is sensibly drawn, and there’s debate about whether certain information was truly confidential, a court will give credit to what the parties agreed in writing.  It’s a helpful factor.

It will help prove ‘confidential circumstances.’

If a person discloses confidential information in circumstances that don’t suggest it needs to be kept confidential, the recipient may not be obliged to do so.

A written confidentiality agreement makes it very clear that disclosure was indeed in confidential circumstances.

It can create procedures that best suit the situation.

A written agreement can set out processes and procedures that are tailored to the case.  The general rules a court might adopt may not suit so well.

It helps people do the right thing.

Some people are unaware of their legal obligations, but will obey them if they are pointed out.  A written agreement can be educational, and help people to understand and do what’s required.

It can improve your legal position.

For instance, there’s a general legal rule that a person seeking an injunction must make certain big promises to the court.  A written agreement can pre-agree that they would not be required.  Although such a pre-agreement isn’t always water-tight (because it can depend on the circumstance that apply when the parties come to court), it can be a big help.

Conclusion

Many NDAs are a waste of paper, but a sensible one can do a lot of good.  The golden rule is only to use them to protect genuinely confidential material.

No, it doesn’t. You might still be responsible for loss of income or profits.

To understand, we need to talk about words like ‘direct’ loss and ‘indirect’ or ‘consequential’ loss.

Direct loss

Direct loss is sometimes also called ‘normal loss’. It means the loss that a certain breach of contract would cause every person who suffered that breach, or at least every person in the same situation.

An example: Let’s say I sell you a wireless router for $200 that’s rated to carry signal 30 metres in normal circumstances. But in fact, it carries just 20 metres, and customers could have achieved that by spending just $100 on a less powerful router.

Everyone who buys the router is paying $200 for a device that is as useful as a $100 device. Every one of them has wasted $100 the moment they pay their money. That’s the ‘direct’ or ‘normal’ loss they all suffer.

Indirect loss

Now, think of a business that buys the router. It can’t get it to work over 25 metres, and thinks it must be doing something wrong. It calls in a techie, who spends a few hours trying to get it to work, and eventually learns from a forum that the model is underpowered. He charges $180 for his time, and the business loses $1,000 in sales revenue because its staff were offline for the day.

Now, you certainly can’t say that every purchaser will end up out of pocket by the extra $1,180. So it isn’t ‘direct’ or ‘normal’ loss.

They call it ‘indirect’ or ‘consequential’ loss. They mean the same thing.

Let’s see if you get the difference

Imagine I sell you an EFTPOS terminal, and promise 6 hour fix time on breakdowns. And imagine your business loses revenue for a day when it fails, and I don’t respond for 24 hours.

Now, the sole purpose of an EFTPOS terminal is to take revenue. If it breaks and isn’t fixed on time, it’s a given that you will lose some income. How much you lose remains to be seen. And the law might require you to try and reduce the loss e.g. by getting a temporary replacement unit. But if you suffer loss of income, it has to be counted as the direct result of my contract breach. Everyone with an EFTPOS unit that fails can be expected to lose revenue.

So in that case, loss of business revenue would probably count as direct loss. But in our earlier example, the wireless router, loss of business revenue would probably count as indirect, or consequential, loss.

Get it ?

To summarise so far

Direct, or normal, loss is loss from a contract breach that everyone in the same position would suffer.

Everything else is indirect, or consequential, loss.

Where loss of income meets the test of being a loss all similar users would be expected to suffer, it can qualify as ‘direct’ loss. If it’s something extra, it counts as ‘indirect’ or ‘consequential’ loss – even if the parties both knew it was likely to apply to a particular customer.

Conclusion

If your contract says ‘indirect and consequential loss are excluded’, that’s good (but see the important note below). As a service provider, you want them to be excluded. But don’t let anyone tell you that this always excludes loss of income or profits. Those things can count as ‘direct’ loss in some cases.

Important note: Be careful about these ‘limitation of liability’ clauses … some laws ban some kinds of limitations. If you go too far in trying to limit liability, the limitation doesn’t work.

Liability clauses are no place for amateurs. 99% of amateurs (and plenty of lawyers) get them seriously wrong.

Legal references:

See Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 (26 February 2008) for recent law on this topic.