Australia: Cruising along: clause forfeiting fare for cancelled cruise - unfair

Cruise contracts often include a term allowing the operator to cancel the cruise at short notice if, for example, unfavourable weather is expected, and for fares paid to be forfeit.

In Ferme & Ors v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384, Judge Jarrett of the Federal Circuit Court found that a clause permitting a cruise company to cancel a scheduled cruise and forfeit all fares paid was an "unfair term" under the Australian Consumer Law, with the term being void and unenforceable.

The facts

Kimberley Discovery Cruises Pty Ltd (the respondent) operated the business of Kimberley Discovery Cruises and the vessel Discovery One. The applicants each purchased tickets for the cruise and paid the full fare, with the cruise to take place from 13 to 26 March 2012. The respondent cancelled the cruise because of Tropical Cyclone Lau, as the cruise was likely to be unsafe and would certainly be unpleasant. By this time, the respondent had already made preparations for the cruise, had provisioned the vessel for the voyage, purchased fuel and engaged a crew. The respondent forfeited the fares but provided some alternative accommodation to the applicants as well as some drinks and meals from 13 to 16 March 2012.

The applicants commenced proceedings for the fares paid. All of the applicants had travel insurance and the proceedings were brought by the applicants' insurer, exercising its right of subrogation.

The relevant clause

The cruise contract allowed the respondent to cancel the cruise if this was considered necessary as a result of some "Unexpected Event", such as a storm or cyclone. In this circumstance, the contract stated that: "... the passenger accepts that the passenger will not be entitled to any compensation or a refund of the fare paid should this occur..." (the so-called "forfeiture term"). The applicants claimed this part of the clause was void as an unfair term under s 23 of the Australian Consumer Law (ACL).

Section 23(1) of the ACL provides that a term of a consumer contract is void if:

1. the term is unfair; and
2. the contract is a standard form contract.

Standard form contract

The first issue was whether the cruise contract between each of the applicants was a "standard form contract" for the purposes of s 23(1)(b). It was clear that the terms and conditions were presented as a "take it or leave it" proposition and were prepared by the respondent before there were any discussions with the applicants. There was no evidence that the respondent was willing to negotiate the terms and conditions before the applicants completed the bookings. Judge Jarrett accordingly found that the contracts were standard form contracts.

Unfairness

The second issue was whether the term was "unfair". Section 24(1) of the ACL provides that a term is "unfair" if:

1. it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and
2. it is not reasonably necessary in order to protect the legitimate business 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.

Judge Jarrett held that unfairness is to be judged at the time when the contract is formed, and not in light of subsequent events, such as the respondent's later conduct in providing gratuitous services to the applicants.

The respondent's ability to cancel the cruise and retain the full fare resulted in a significant imbalance in the parties' rights and obligations under the contract. The terms and conditions did not actually oblige the respondent to provide the alternative accommodation and activities that it did. The question was whether a term of the contract was unfair, not whether the overall conduct of the respondent was unfair. Further, the definition of "Unexpected Event" was very wide and the cancellation clause allowed the respondent to cancel the cruise in numerous other contexts, including in circumstances were there would be no danger to the passengers and no need for them to be repatriated.

The respondent argued the clause was necessary to protect the goodwill and financial well-being of the business. Judge Jarrett considered that if there had been evidence of what expenses the respondent ordinarily incurred over a particular period, and if the forfeiture term had provided for a "sliding scale" of the amount forfeited corresponding with those expenses, then such a term may have been reasonably necessary to protect the respondent's legitimate business interests. However, the respondent did not put forward sufficient evidence on this issue and Judge Jarrett concluded that the respondent had not proved that the cancellation term was reasonably necessary to protect the respondent's legitimate business interests.

Although the respondents had provided some gratuitous services to the passengers, the forfeiture term caused financial detriment to the applicants if it was applied according to its terms.

The forfeiture term was consequently determined to be an unfair term that was void and could be severed from the balance of the clause.

Remedy

The final issue was the remedy to which the applicants were entitled. The respondent argued that the passengers were not entitled to be reimbursed because they had already received a substantial part of the benefit expected under the contract (relying on Baltic Shipping Company v Dillon (1993) 176 CLR 344 per Mason CJ). The Judge disagreed and found that the passengers were entitled to full restitution of the fares paid because despite the temporary arrangements put in place, the applicants had not received a substantial part of the benefit (i.e. the cruise) expected under the contract.

Significance for cruise and tour operators

This decision is a timely reminder to suppliers that standard terms and conditions issued to consumers can go too far, with the end result that they are held to be void as being "unfair" under the ACL, and hence of no assistance.

Cruise and tour operators no doubt issue standard form contracts to passengers on a daily basis, probably on very similar terms to the contracts in the Kimberley Discovery Cruise case. This decision should prompt operators, and all other companies who supply services to consumers, to review their standard contracts and to consider whether any terms in those contracts may be "unfair" under the ACL.

Contractual clauses that give cruise operators the unilateral right to cancel a scheduled cruise and forfeit all fares paid will almost certainly cause a significant imbalance in the parties' rights and obligations, particularly if the operator is under no obligation to provide alternative accommodation or activities. Even if the operator is well-meaning and provides gratuitous services to passengers, the term is still likely to be considered unfair and void under the ACL in such circumstances.

If cruise operators wish to retain the right to cancel scheduled trips and retain any fares paid, then the clause should, at a minimum, include a "sliding scale" setting out the percentage of the fare that will be forfeited, set by reference to the operator's actual expenses at the point in time when the trip is cancelled. The operator would also need to be able to justify the amounts applied under the scale with evidence of the costs the operator is likely to have incurred at the various points in time.

Cruise operators might also consider offering potential customers choices as to forfeiture on cancellation, so that terms are arguably not standard form.

If operators anticipate using the forfeited funds to provide alternative transport and accommodation arrangements for passengers, then operators should also include a clause in their terms and conditions requiring the operator to do so. Such a clause should assist in ensuring the forfeiture term does not fall foul of the ACL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.