In today’s fast-paced digital world, lengthy terms and conditions (Ts&Cs) often go unread. However, a recent Australian judgment against Michael Hill Australia (Michael Hill) demonstrates how ignoring the fine print can lead to costly legal and financial consequences, including prolonged court battles.
THE CASE
Michael Hill had a long-term supply relationship with packaging supplier, Gispac Pty Limited (Gispac) where stores placed orders directly through Gispac’s online portal. In 2014, an individual Michael Hill store entered into several contracts via Gispac’s portal without thoroughly reviewing the Ts&Cs. Those Ts&Cs included terms incorporated by reference via a URL, and the employee contracting on behalf of the store ticked a check box agreeing to those Ts&Cs.
Key terms in the T&Cs that were incorporated by reference were:
- a “take or pay” obligation requiring Michael Hill to purchase a minimum amount of stock each year;
- Gispac being the exclusive supplier of packaging to Michael Hill; and
- automatic renewal every two years unless terminated with six months’ notice.
Gispac sought to enforce these terms against Michael Hill. The Court in the first instance found in favour of Gispac. The failure to review the Ts&Cs led to a costly legal dispute and a damages award against Michael Hill of A$2,259,971.40 plus interest and costs for breach of contract – although that amount was ultimately significantly reduced on appeal as discussed below.
COMMENTARY
This case highlights the significant risks businesses and individuals face when they neglect to read and understand Ts&Cs and when they assume the acceptability of Ts&Cs or other contracts based on past dealings. Even when working with longstanding partners, it is essential to review Ts&Cs carefully to ensure no changes have been made. Tools like Microsoft Word’s “Compare” feature can streamline this process by highlighting changes.
The case also serves as a cautionary tale about the critical importance of due diligence in contractual relationships. Investing time and resources to thoroughly understand every clause – including those incorporated by reference – is vital. Even “standard” or “boilerplate” terms, which are often overlooked, can have significant implications on legal and operational obligations.
Beyond financial costs, failing to read and understand Ts&Cs can harm business relationships, tarnish reputations, and divert management attention from core operations. In an era where contracts are often signed digitally and Ts&Cs are buried in hyperlinks or lengthy documents, careful review is more critical than ever.
REDUCTION OF DAMAGES ON APPEAL
On appeal to the NSW Court of Appeal, the Court found that minimum “take or pay” and exclusivity clauses were inconsistent with the parties’ commercial dealing and reduced the damages award against Michael Hill. Both parties would have been better served by ensuring the Ts&Cs reflected their true commercial agreement from the outset, avoiding the need for protracted legal disputes.
COMPLIANCE TIPS
Before you click to accept another business’s Ts&Cs, here are some compliance tips to consider:
- Thoroughly review each contract: Always read Ts&Cs in full. Remember that “standard” terms of another business often favour that other business.
- Where Ts&Cs are incorporated: Where Ts&Cs are incorporated into a contract by reference (for example via a URL), insist that the version number of the Ts&Cs is referenced in the contract and a copy stored, or attached to the relevant contract.
- Have clear policies: Develop an internal policy around the review, approval and entry into contracts.
- Train staff: Provide training for employees involved in procurement, sales, or supplier management. They should understand how to interpret basic contract terms and recognise when to escalate questions or concerns.
- Assess risks: Before entering into any significant contract, conduct a risk assessment to understand the operational, financial and reputational risks of entering into the contract.
- Limit signing authority: Restrict the authority to sign contracts to senior staff trained in contract review and risk management.
- Engage experts: Involve a lawyer early to review high-value, risky or long-term contracts.
- Negotiate terms: Negotiate terms when possible and for important contracts.
- Have agreed terms with important suppliers and customers: Have agreed terms for important suppliers and customers to avoid surprises; and
- Procurement terms: If you are a customer, consider asking your lawyers to prepare procurement terms and then require suppliers to agree to your procurement terms in order to supply.
- Maintain a contract register: Create a register or use specialist software to record your contracts (including versions) and any updates to your contracts. In the contract register, include key contractual obligations such as renewal and end dates.
For further information or assistance with Ts&Cs for your business, please contact one of our Business Law team listed below.
