Petroleum Contract Series – carrying too much liability under carrier agreements
Australia’s downstream petroleum industry is continuing its evolution into a complex commercial environment that combines sophisticated multinationals, emerging national fuel businesses and local goods and service providers. For many years, the downstream petroleum industry largely shunned the use of formal legal agreements – a hand shake, a pat on the back and good faith were enough to get the job done. New players and greater risks have resulted in legal contracts becoming common place for most, if not all, transactions. However, these contracts have been introduced in a patchwork manner and have often been borrowed and butchered from other industries, which has resulted in many existing contracts being unclear, unenforceable and hopelessly imbalanced.
In this new series, Moulis Legal will look at the legal agreements used every day in Australia’s downstream petroleum industry to identify key risks and pitfalls in preparing and signing these agreements. In this first newsletter, Moulis Legal lawyer Alexandra Geelan examines petroleum carrier agreements and the allocation of risk and liability.
More than just an agreement to “carry”
Carrier (or transport) agreements are a common and critical, albeit unexciting, part of the downstream petroleum industry. Most participants in the Australian petroleum industry are parties to carrier agreements (often without being aware of it) – from fuel suppliers; to transport business; and station owners or franchisees receiving the fuel.
The subject matter for a carrier agreement is fairly standard: one party (the carrier) agrees to deliver goods for, and on behalf of, the other party (the customer). If a station owner or franchisee is not the customer, they may be party to a supplementary agreement relating to granting access and the allocation or risk and liability. The carrier agreement itself deals with the logistical framework of timeframes, collection, delivery, payment and how to manage delays and disputes. In generic carrier agreements the most important issue is usually meeting deadlines and liquidated damages for delays. However, when the goods being collected, carried and delivered are petroleum and petroleum products the parties to the agreement should be most concerned about the words under the headings “Indemnities” and “Warranties”.
The collection, carriage, delivery and receipt of petroleum and petroleum products attract certain risks that are unique to the petroleum industry:
- environmental risks associated with leakage, spillage and contamination;
- community safety and health risks associated with the transportation and delivery of petroleum products (often in developed and residential areas); and
- occupational health and safety risks unique to the petroleum industry, including the potential for significant personal and property damage.
A carrier agreement must manage each of these risks and allocate liability to the appropriate party in the event the risk materialises.
Liability and risk – who has to carry the load?
Obviously, each party to the carrier agreement will seek to allocate the risk and liability to the other party. Although, as we will see some risks and liabilities cannot be allocated under contract.
Under a carrier agreement, a carrier will seek to frame the risk, liability and indemnity clauses so that the fuel provider, customer or service station is assigned the risk and must indemnify the carrier against liability. The commercial justification for this is obvious – the goods belong to the other party and the carrier is merely transporting them. The carrier should not be ‘on the hook’ for losses and damages that arise, provided the carrier did not cause the loss and damage through gross negligence. Similarly, the fuel provider, customer or service station has good reason to argue that the risk and liability should be borne by the carrier. When the goods are being collected, transported and delivered the customer is relying on the carrier’s expertise to complete the job safely and without incurring loss and damage. The customer may be willing to accept responsibility for risks arising from its direct fault – such as defects in tanks or gantry – but the customer will want this responsibility to be strictly limited.
A single incident during fuel carriage can result in multiple forms of loss or damage including damage to vehicles, loss of petroleum, substantial consequential loss, liquidated damages for failure to deliver, environmental damage through land contamination, damage to persons or property, and worker’s compensation. If parties are not clear on their rights and obligations, disputes surrounding responsibility and liability can take up significant time and resources.
Balancing the opposing positions of parties in allocating these risks is critical and often challenging. In practice, the balance tips in favour of the bigger party or the party with greater negotiating leverage. However, commercial contracts (including carrier agreements) do not have to be battlegrounds where the larger party imposes its will and burdens the smaller party with risks and liabilities that outweigh the contractual benefits. The result of such imbalanced agreements is a smaller party risking its survival by taking on risks that it cannot meet or fully insure against. This is not the foundation for a strong, long-term business relationship.
A further issue arises because many carrier agreements are standard form agreements that the larger party – either the carrier or the customer – provides to the smaller party, who in turn signs it without careful review. That party then carries around risks that threaten their business (often unknowingly). Standard form contracts are also a significant risk for the larger party due to the potential unenforceability of certain clauses, and new national legislation that will void unfair contracts that impose imbalanced liability on small businesses.
One approach taken in more balanced carrier agreements is to allocate risk and liability on the basis of which party had control of the goods at the time an incident occurred, with exceptions for incidents caused by the direct acts or omissions of the other party. Accordingly, if the carrier is pumping fuel from its truck into a tank at the service station the carrier remains in control (and liable) during that process. However, if the service station’s tank or equipment is faulty then risk would be allocated on the basis of what causes the risk to materialise. In an ideal world, carriers should only be liable for loss and damage incurred while the products are in their control. Carriers would then be indemnified by the other party for loss or damage that occurs before collection and after delivery or as a result of the customer’s error or negligence. Equally, the customer should pass risk and liability to the carrier upon collection and be indemnified by the carrier for any loss or damage incurred while the goods are being transported and transferred.
But it is not an ideal world. Regardless of the value of balanced agreements, parties continue to enter into one-sided, burdensome contracts that risk being unenforceable. Such agreements are a commercial risk to all parties.
What about risks that cannot be allocated?
While the parties to a carrier agreement should seek to allocate all risks and liabilities under a carrier agreement, there are some risks that cannot be allocated or transferred under contract. Liability for such risks will be determined by applicable legislation. For example, in most states, liability for land contamination is based on the ‘polluter pays’ principle and the polluter cannot transfer or contract out of liability. Under the Contaminated Land Management Act 1997 (NSW), a person responsible for contamination will remain liable regardless of any contract or arrangement to the contrary. It is vital that all parties to a carrier agreement ensure that risk is mitigated through high quality risk management and compliance procedures. Failure to do so can result in costly penalties and contamination clean-up costs, despite what the carrier agreement may say.
Similarly, the legal relationship under a carrier agreement is a principle–contractor relationship where the carrier uses its own plant and equipment, staff and resources to carry out their obligations. Under the Work Health and Safety Act 2011 (NSW), a principle owes the same duties to contractors as they have to their own employees including certain duties to protect contractors from harm whilst at their premises (such as at a collection point). These duties cannot be transferred to the carrier under a carrier agreement so while the customer may seek to contractually minimise their exposure to liability, they must still maintain high quality safety procedures to legally protect themselves and their business.
While ideally each party should be able to trust that the other party will maintain high quality risk management and compliance procedures, the reality is that some companies are not diligent with their procedures. To provide greater protection against risks that cannot be allocated, parties will impose compliance and audit requirements on the other party. These obligations require a carrier to provide evidence of compliance with applicable legislation and regulations including workplace health and safety requirements, national heavy vehicle and environmental laws and regulations and driver fatigue management; and a customer to maintain safe and working equipment, tanks, gantries and access.
Parties should carefully assess whether they are willing and able to comply with these obligations, as well as the practical implications of what compliance would necessitate. For example, the compliance audits usually allow the customer to have full access to records and documents relating to the deliveries which the carrier has carried out for the customer. In some cases, the carrier may already have compliance plans in place as a requirement of the relevant legislation (such as, under the National Heavy Vehicle regulations) but, in other cases, development and implementation of such plans may result in significant and unnecessary expenditure. In most cases, acceptance of compliance and audit obligations will be a commercial decision for the parties and may depend on their relative negotiating power.
Unfair contract terms and carrier agreements
The importance of greater balance in carrier agreements has become starker with the introduction of the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (“the Act”). The Act extends unfair contract term protections currently under the Competition and Consumer Act 2010 to businesses with less than 20 employees entering into standard form contracts valued at less than the prescribed threshold. These changes will apply to any standard form small business contracts entered into, renewed or varied on or after 12 November 2016.
Under the Act, if a term in a standard form contract is deemed to be “unfair”, the term, and potentially the entire contract, will be voided and will no longer be binding on the parties. A term may be considered “unfair” if it causes a significant imbalance in the parties’ rights and obligations, is not reasonably necessary in order to protect the legitimate interests of the parties and/or would cause detriment to a party if it were to be relied on. For example, a term in a carrier agreement which imposed all risk and liability for loss and damage on one party, regardless of the cause or circumstances of the loss, may be voided under the new laws.
Businesses dealing with small business in petroleum contracts should renew their agreements to ensure they are not at risk of being unenforceable. These new provisions provide a timely reminder that parties should take a common-sense approach to considering their risk and liability under carrier agreements and seek to balance, where possible, the rights and obligations of both parties.
Moulis Legal’s petroleum law team advises Australian and international businesses on downstream petroleum issues, including production, trade and sales, transport and distribution, regulatory compliance, land contamination and the management and transfer of petroleum assets. For more information, please contact Alexandra Geelan on +61 7 3367 6900 or firstname.lastname@example.org.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.