In the wake of the unfair contract terms regime changes in Australia, the High Court of Australia recently considered the application of the unfair contract terms regime to contracts created outside of Australia, and whether a class action waiver clause was an unfair contract term (UCT).
The case, Karpik v Carnival plc  HCA 39, stems from a class action relating to the COVID-19 outbreak on the Ruby Princess cruise ship between 8-19 March 2020. 696 of the class members (US subgroup) were travellers from overseas who purchased cruise tickets outside of Australia. Tickets purchased by the US subgroup contained particular "US Terms and Conditions", which included three clauses considered by the High Court:
- A choice of law clause, which applied the general maritime law of the United States;
- An exclusive jurisdiction clause, in favour of the United States District Courts; and
- A class action waiver clause.
One class member of the US subgroup, Mr Ho, contended that the UCT provisions under the Australian Consumer Law (ACL) applied to the US Terms and Conditions, and the class action waiver clause was void. Carnival and its subsidiary, Princess Cruise Lines Limited (collectively, Princess) sought to rely on the exclusive jurisdiction clause of the US Terms and Conditions to exclude the operation of the ACL.
The High Court found the ACL applied to the US Terms and Conditions, and the class action waiver was an UCT under section 23 of the ACL.
Extra-territorial application of the ACL
Relevantly for Australian businesses with overseas customers, the High Court confirmed that the ACL provisions apply to the "engaging in conduct outside Australia by bodies corporate incorporated or carrying on business within Australia". Princess made submissions to the effect that, given the absence of a "Conflict of laws" section relating specifically to the UCT provisions of the ACL, ordinary choice of law rules applied, the proper law being US law as expressly stipulated in the contract. However, the High Court found no legislative intent allowing parties to evade the consequences of Australian law in respect of corporations carrying on business in Australia.
In this case, the UCT regime applied irrespective of the exclusive jurisdiction/choice of law clause, and whether performance occurred predominately outside Australia. The exclusive jurisdiction clause did not vitiate the fact that the creation of US subgroup contracts constitutes engaging in conduct outside Australia as contemplated by section 5 of the Competition and Consumer Act 2010 (Cth), the object of the Act being to "enhance the welfare of Australians through the...provision for consumer protection". Parties, and indeed Australian businesses contracting with overseas customers, are not permitted to "contract out" of the ACL simply by including foreign choice of law and exclusive jurisdiction clauses.
Class action waivers: Unfair contract terms?
A class action waiver clause is not of itself an UCT when appearing in a standard form consumer or small business contract subject to the ACL. A three-stage test applies:
Firstly, the clause must cause a significant imbalance in the parties' rights under the contract. In this instance, the significant imbalance was that the clause operated to impose limitations on passengers but in no way restricted the options of Princess. While the clause may not affect the existence of an individual right to sue, or capacity to exercise the right, practically, the clause prevents or discourages individuals from vindicating their rights where the individual cost to do so is high.
Secondly, the clause must be reasonably necessary to protect the legitimate interests of the party advantaged by the term. Princess did not identify any legitimate interest. An important consideration for a company is whether it has a legitimate interest in preventing individuals from realising their legal rights under a contract as part of a class, where to do so individually as a litigant would be vastly more expensive.
Finally, the detriment caused by the term must be considered. Detriment is not solely financial. The identified detriment in the case was denial of statutory benefits under Part IVA of the Federal Court of Australia Act 1976 (Cth). Neither was the clause considered to be transparent, as it was only visible to the US subgroup after receiving a booking confirmation.
Important considerations for companies subject to the UCT regime
Australian companies should be aware that the UCT regime will apply to contracts entered into with customers located overseas.
The scope of the UCT regime is not limited to consumer contracts entered into by consumers located in Australia. The UCT regime will apply, for example, to a contract between an overseas consumer and a corporation incorporated under the Corporations Act 2001 (Cth) that has its principal place of business in Australia.
The recent changes to the UCT regime substantially increased penalties for non-compliance with the regime. Companies must ensure standard form contracts are compliant with the UCT regime to avoid significant penalties.
Penalties for contravention of the ACL are the greater of:
- AU$50 million;
- three times the benefit obtained from the conduct; or
- 30% of the company's adjusted turnover during the breach period (minimum 12 months).
Australian courts have also demonstrated a reluctance against enforcing exclusive jurisdiction/choice of law clauses in relation to ACL claims, where to do so would "fracture the litigation" and deprive the claimant of judicial benefit in Australia. Therefore, care should be taken before including exclusive jurisdiction/choice of law clauses that seek to limit a consumer's ability to enforce their rights in Australia.
Lander & Rogers is watching the UCT space with interest and will continue releasing updates as legal developments arise.
For more information on changes to the UCT regime or the ACL, please contact our team of experienced practitioners.
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