In a recent decision (Ferme & Ors v Kimberley Discovery Cruises [2015] FCCA 2384), an Australian Federal Circuit Court judge has applied the Australian Consumer Law (ACL) to strike down "unfair" ticket terms under which cruise passengers forfeited their fares if the cruise was cancelled.

In March 2012 Kimberly Discovery Cruises Pty Ltd (the Company), the Respondent, cancelled cruises on board its cruise ship, Discovery One due to Tropical Cyclone Lua then operating off the Western Australian coast.

In purported reliance on its terms and conditions, it refused to refund the fares paid by passengers who had already travelled to Western Australia to join the cruise. The terms and conditions purported to forfeit the fare paid if the Company was required to "vary the itinerary or cancel the Cruise if the carrier considers that this is necessary as a result of some Unexpected Event or prevailing inclement weather conditions."

Under the ACL, a term of a consumer contract is void if the term is unfair and the contract is a standard form contract.

The ACL provides that a term is unfair if

  1. it would cause a significant imbalance in the parties rights and obligations arising under a contract; and
  2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The ACL also provides that in making a decision about fairness, the Court must also consider the extent to which the term is transparent, and the contract as a whole.

The Company tried unsuccessfully to argue that the contracts with the passengers were not standard form contracts. The contracting process was the same as in many industries. Standard terms and conditions appeared on the company's web site and were posted to every passenger. The Court was not satisfied that the passengers were given any opportunity to negotiate these terms and conditions. While the company said it would have been willing to negotiate, it could not produce evidence of ever having done so.

The judge then considered whether the term was unfair within the meaning of the ACL. Of particular relevance was the issue of the point in time that this was to be assessed.

The Company sought to rely on the steps it took after the event to accommodate the passengers by providing flights, tours and accommodation, measures it said went beyond what it was contractually obliged to do. Moreover, it used the forfeited fares to fund these additional measures.

The judge concluded that the relevant time for considering unfairness was the time the contract was entered into, and to ignore actions taken after the contract was entered into.

In concluding that there was a significant imbalance, the judge observed that:

"There is nothing in the contract that obliges the respondent to repatriate any passengers should the cruise be cancelled. The argument relied upon the good will of the respondent towards its customers, something that might wax and wane."

In considering whether the term was reasonably necessary to protect the legitimate interests of the Company, the judge concluded that an objective approach was required and (under the ACL) the respondent must provide some basis for determining that the impugned term passes the test of reasonable necessity. The judge found that the Company had not provided sufficient evidence of the cost actually incurred prior to cancellation and had concentrated instead on evidence of the costs it had incurred after cancellation.

In relation to the third consideration, namely detriment, the Company argued that the passengers in fact benefited from the forfeiture because it provided the funds to allow the Company to take remedial measures. The judge quickly rejected this argument on the basis (as previously mentioned) that the contract did not require the company to take these steps.

Conclusion

The case is a valuable illustration of the need to take care in the drafting of standard terms to avoid unfairness. In particular, where amounts paid under a contract are deemed forfeited before the substantial part of the contract is performed, a respondent should be able to demonstrate that the forfeiture is reasonably necessary compensation for costs already incurred.

This is particularly the case if and when the unfair contract provisions in the ACL commence to apply to small businesses, and not just consumers.

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