My place of business was impacted by a disaster and my customer’s property was damaged. What are my obligations?

Am I a “service provider”? 

A “service provider” is any person, business or organisation that agrees to do something for someone, in exchange for payment.  

A service provider could be: 

• a small business 

• a franchise or chain store 

• a large business or corporation 

• a sole trader 

• someone who occasionally performs work on someone else’s property in exchange for something us (this person could be family, a friend, a neighbour, or someone else) 

If you own a small business that sells services to customers, then it is very likely that the content of this resource is relevant to your business. Services could include: 

• repairs 

• delivery or couriering 

• cleaning

• drycleaning or tailoring 

• consignment 

• a parking lot or garage 

Does a contract establish or limit the obligations of your small business in relation to the customer’s goods?

Contracts between a service provider and a customer may also: 

• establish duties; and 
• limit the service provider’s responsibility for any breaches of their duties.  

If your contract does establish or limit your duties in relation to your customer’s property, you will need to consider these terms first. This is because by entering a contract, it is possible to agree with the other party to add to, change, or ignore certain rights and responsibilities that you both might otherwise be entitled to.  

If a contract does not talk about, address, or provide instructions or requirements about a particular issue or topic, this means that the contract is “silent” on that issue or topic. If your contract with your customer is silent on your duties, then your obligations are established by the laws governing bailment relationships.

Contractual obligations and limitations of liability

A contract can establish certain duties that you, as the service provider, commit to fulfil in relation to your customer’s property, and/or limit your liability for any loss of the customer. Your liability for property damaged or lost while in your possession will depend on what the contract says and the circumstances surrounding the damage.

Remember, if your contract establishes duties or limits your liability, then this will be considered first, before looking at bailment obligations.

You will need to show that either:

1. The damage to your customer’s property was not because of your failure to fulfil your contractual obligations
   OR
2. That your contract contains an enforceable limitation of liability clause that limits your responsibility for any damage caused by the disaster.

Contract terms that establish duties

Examples of contract terms that establish duties for the service provider in relation to their customer’s property include a requirement that:

• A requirement that you exercise reasonable care over your customer’s property while it is in your possession.

• A requirement that you return the customer’s property in the same, or better condition than when they took possession of it.

• A requirement that you implement certain security or safety measures to safekeep your customer’s property while it is in your possession.

• A requirement that you return your customer’s property in a timely manner.

• A duty to handle your customer’s property in a professional and skilled manner.

If you did not fulfil your duties under your contract with the customer, and your failure to do so contributed to the damage to their property, you may be liable to pay compensation.

You can agree to pay your customer compensation through negotiation, alternative dispute resolution, or you might be ordered to do so if your customer makes a claim in court.

Contract terms that limit liability

A customer and service provider may agree to limit the scope of the service provider’s duties in relation to the customer’s property, through their contract. This is called a “limitation of liability” clause. Limitation of liability clauses are contract terms that define how much responsibility a service provider is willing to take on if there are any problems with the service they provide or if anything goes wrong while their customer’s property is in their possession.

If your customer’s property is damaged by a disaster while in your possession, and your contract contains a valid limitation of liability clause, then you may be protected to some extent from a claim for compensation by the customer for the damage. In some case, you may be protected to the fullest extent (for example, if the customer has no right under the contract or consumer laws to bring a claim for compensation in court).

There are some conditions that a limitation of liability clause must meet for it to be relied upon. It must be sufficiently:

1. Clear in excluding the service providers liability. This means that it cannot be ambiguous as to what the contract term means: it must be obvious that the contract term establishes the boundaries of the service providers responsibility for any damage to their customer’s property.

2. Brought to the customer’s attention. Service providers must take reasonable steps to bring the clause to their customer’s attention when they enter the contract. Generally, this requires more of the service provider than just providing a document for their customer to read and/or sign. Rather, the service provider is likely to be required to have taken some positive steps to bring the clause to their customer’s attention, such as telling them about it or directing them to read the relevant term closely.

Unfair contract terms

If you can show that the limitation of liability clause in your contract meets these conditions, you may also need to demonstrate that the clause is not “unfair”, under the Australian Consumer Law.

The Australian Consumer Law is legislation that establishes enforceable obligations upon customers and service providers when they enter into certain agreements about the provision of services. The Australian Consumer Law does not apply to all contracts and only courts have the final say in determining if a contract term is unfair. If the Australian Consumer Law applies to your contract with your customer, then the court will consider all of the rights and responsibilities established for you and the customer under the contract, as well whether the language is transparent.

If a court decides that the term is unfair, then the term will be “void”. This means that it will no longer apply to the parties to the contract. If the term is “void”, then this will re-enliven your responsibility for any breach of your obligations that resulted in damage to the customer’s property.

For more information on unfair contract terms, see:

• NSW Fair Trading

• Australian Competition and Consumer Commission

What are a service provider’s obligations in bailment relationships?

If a contract does not specify your obligations in relation to your customer’s property nor limit your liability for any damage to your customer’s property, then the obligations of the service provider are established through the laws about bailment relationships.

In a bailment for reward, these duties require you to:

1. Do the work you have both agreed upon

2. Exercise reasonable care and skill in the task you have agreed to perform

3. Personally undertake your obligations

4. Care for your customer’s property as is reasonable in the circumstances

5. Comply with the terms of the bailment.

If your customer’s property is damaged by a disaster while it is in your possession, the relevant question is: did you take reasonable care of your customer’s property while it was in your possession?

Reasonable care according to bailment relationship obligations

A service provider has a duty to take reasonable care of its customers’ goods. This requires the service provider to take the same amount of care that a careful and vigilant person would of their own property in the same circumstances. This means that whether you are in breach of your duty to take reasonable care depends on the context in which your customer’s property was damaged.

In the context of a disaster event, services providers are required to:

1. Take reasonable care prior to a disaster event

A service provider’s duty to take reasonable care of the customer’s goods may require the service provider to take steps to prevent a disaster event from damaging goods in its possession. The extent of the service provider’s obligation will depend on whether they could or should foresee that their place of business may be affected by flooding.

For example, if it’s reasonable to expect a mechanic to foresee the possibility that flooding would affect its property, then they may be required to take precautions to prevent flood damage from arising (and subsequently damaging goods in its possession). However, if the mechanic’s premises had no history of flooding, then they are less likely to be expected to consider flood risks when storing goods and less likely to have a duty to keep goods (such as a customer’s car) safe from flood damage.

2. Take reasonable care during a disaster event

A service provider will still have a duty to take reasonable care of goods in its possession if there is a disaster event imminent or in progress. If a disaster event occurs, then the service provider’s duties may extend to moving the goods to a safer place or notifying a customer of upcoming risk to their goods.

However, in an emergency situation, this may depend on how much notice the service provider had to respond to the situation. What is “reasonable” depends on the nature of the disaster event and how a person would reasonably respond to circumstances facing them, particularly if it is an emergency.

The actions of a reasonable person depend on the context they are acting in. If a person is forced to act in a sudden crisis, like a disaster event, without time for calm reflection, then they may not be in breach of their duties if they make an error of judgement.

There are many things that might be taken into account when determining the standard of reasonable care during a disaster event. Some examples include:

• What was the nature and scale of the disaster event?

• Was an evacuation order issued, and if so, how long did the service provider have to evacuate?

• Did a government official or agency provide a warning to the public that a disaster event was imminent, and if so, how far in advance did the public receive that warning?

• Would it have been safe for the service provider to take action to protect their customer’s property?

• Did the service provider have other peoples’ property in their possession as well?

• What was the value of the damaged property?

• What location was the property placed in?

It can be challenging to work out exactly what duties you have as a service provider in a disaster context because the law is not entirely clear. Getting legal advice can help you work out the extent of your obligations. See here on how to apply for free legal help.