Authors: Judith Miller and Bindhu Holavanahalli
The Federal Circuit Court has struck down the validity of a ‘no refund’ clause in a cruise contract under the unfair contract term provisions of the Australian Consumer Law (ACL) in its recent decision Ferme & Ors v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384.
Background
Kimberley Discovery Cruises Pty Ltd (KDC) advertised a cruise off the Western Australian coast, for which the applicants had purchased tickets. The terms provided that a passenger would not receive any compensation or refund of the fare paid if the cruise itinerary was varied or cancelled due to an unexpected event. The extensive definition of “unexpected event” included bad weather.
However, KDC was forced to cancel the proposed cruise due to Tropical Cyclone Lua.
On cancellation of the cruise, KDC did not refund the fare to the applicants, relying on its right to do so under the terms of the contract.
The applicants argued that this term was ‘unfair’ within the meaning of the ACL and should be void.
Was it a standard form contract?
The unfair contract term provisions in the ACL apply only to standard form contracts. KDC argued that the contract was not standard because the fares paid and the holiday packages chosen varied between passengers.
However, the Court rejected this argument because the contract was offered on a take it or leave it basis with no real opportunity for the passengers to negotiate the terms.
Was the term ‘unfair’?
A term is ‘unfair’ under the ACL if:
(a) it causes a significant imbalance in the parties’ rights and obligations under the contract;
(b) it is not reasonably necessary to protect the rights and obligations of the non-consumer party under the contract; and
(c) it would cause financial or other detriment to a consumer if it were to be relied upon.
When should ‘unfairness’ be assessed?
KDC argued that it had made alternative arrangements for the passengers once the cruise was cancelled, such as organising accommodation, which should be taken into account when determining unfairness.
The Court rejected KDC’s argument and found that ‘unfairness’ for the purposes of the ACL was to be assessed at the time of formation of the contract.
Was there a ‘significant imbalance’ in the rights of the parties?
The term allowed KDC to cancel the cruise at any time before it commenced a cruise and keep the fares. The contract did not require KDC to take any action subsequent to cancellation. The Court therefore found that the term resulted in a significant imbalance between the parties.
Was the term ‘reasonably necessary’ to protect KDC’s interests?
The onus of proving the term was reasonably necessary rests with KDC under the ACL.
KDC relied heavily on its conduct after the cancellation (and the expenses it had incurred) to justify the necessity of the term. However, KDC did not advance any evidence of the types of costs it would incur in the lead up to the commencement of a cruise and the Court found that the clause was not reasonably necessary to protect KDC’s rights.
The Court indicated that the term may have been reasonably necessary if it provided a “sliding scale” of the amount that would be retained by KDC if it cancelled a cruise, to balance the rights between the parties.
The Court also found that the insistence of KDC for passengers to purchase travel insurance further highlighted the unfairness of the clause.
Was there a detriment to the consumer?
The applicants suffered a financial detriment due to KDC’s reliance on the clause. The fact that all the applicants were insured for the loss was irrelevant. There was no evidence that all passengers were likely to take up KDC’s recommendation to purchase travel insurance.
Transparency
The ACL also requires the transparency of the clause to be considered when determining ‘unfairness’. The Court found that even though the term was transparent, it was still unfair.
Remedy
The term was void in relation to the forfeiture of the entire fare in the case of an unexpected event and the applicants were entitled to a full refund.
Take away points
When assessing whether a term in a standard form consumer contract is “unfair”:
(a) The “unfairness” is assessed at the time of the contract’s formation. Conduct after formation is irrelevant, unless the conduct is required by the contract.
(b) Clear evidence is required to establish whether a term is reasonably necessary to protect the interests of the non-consumer party. An itemised account of costs ordinarily incurred may be required.
(c) The term should balance the rights and obligations of the parties. Mechanisms such as a ‘sliding-scale’ may indicate an attempt to ensure that the detriment to each party is proportional.
(d) Any insurance carried by the consumer is irrelevant to the question of detriment (unless such insurance was mandated by the contract).
If you would like further information on the material in this article, please contact Judith Miller, National Practice Leader – Commercial.