Holiday Cruise 'No Refund' Clause Deemed Unfair: Insights from Ferme & Ors v Kimberley Discovery Cruises

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Ferme & Ors v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384 (2 September 2015)

 

Key Takeaways

 

• This case emphasises the importance of carefully reading through the terms and conditions of any standard form contracts before they are entered into.

• It is a timely reminder of the purpose of and consumer protection objectives of the Australian Consumer Law.

• If you are not able to negotiate your contract or were not given an opportunity to negotiate a standard form contract, the unfair contract terms protections under the Australian Consumer Law may apply.

• Even if a standard contract has a ‘no refund’ clause this does not necessarily mean that a business can rely on it or that a court will consider it fair.

• This decision is likely to extend to any standard form contract that includes a ‘no-refund’ clause.

• Although you may have received reimbursement, a court may still consider a term of  a contract as ‘unfair’ as it will look to the context of the contract as a whole.

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Background

 

Kimberley Discovery Cruises, the respondent in these proceedings, was a cruise ship operator, and offered for sale passage aboard the Discovery One a two week cruise from Wyndham, Western Australia to Derby, Western Australia between 13 March 2012 and 26 March 2012.

 

The cost of the fares for the cruise varied from approximately $7,500 to $15,000 per person, which was payable in advance by each passenger.

 

The passengers entered into a contract with Kimberley Discovery Cruises which also included a document described as Kimberley Discovery Cruises Terms and Conditions which also applied to each passenger. In particular, the Terms and Conditions contained the following clause (the cancellation clause):

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The carrier will endeavor to follow the Cruise itinerary as described in the brochure and the passenger accepts that the carrier has the right 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 and the passenger accepts that the passenger will not be entitled to any compensation or a refund of the fare paid should this occur except as provided for in these Cruise Ticket Conditions.

 

Shortly before the cruise was set to depart, a cyclone of category 4 strength entered the area of the Western Australia coastline. On about 15 March 2012, Kimberley Discovery Cruises cancelled the cruise for safety reasons.

 

Kimberley Discovery Cruises asserted that the adverse weather conditions were an ‘Unexpected Event’ within the meaning of the Terms and Conditions of the contract.

 

Although the cruise had been cancelled, Kimberley Discovery Cruises subsequently organised accommodation and entertainment for impacted passengers until it was safe for commercial flights to resume.

 

Kimberley Discovery Cruises relied on the cancellation clause to refuse requests from impacted passengers for a full refund of the fares that they paid.

 

Fortuitously, each of the passengers held travel insurance which enabled them to receive a reimbursement for their losses. However, the applicant’s insurer, exercised their right to recover the amounts paid by them to passengers for the cruise from Kimberley Discovery Cruises and brought an action on behalf of the passengers.

 

This case considered whether or not the Kimberley Discovery Cruises was entitled to retain the whole of the fare paid by each of the passengers, or whether the cancellation clause (or the no-refund part of that clause) was ‘unfair’ pursuant to section 23(1) of the Australian Consumer Law (ACL).

 

Jarret J held that the part of the cancellation clause (which denied passengers of a full refund) was ‘unfair’ within the meaning of section 23(1)(a) of the ACL and therefore void. Kimberley Discovery Cruises was ordered to provide a full refund of the amounts paid by impacted passengers.

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The legislation

 

The applicants argued that the cancellation clause was ‘unfair’ pursuant to section 23 of the ACL which provides:

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23 Unfair terms of consumer contracts

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(1) A term of a consumer contract is void if:

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(a) the term is unfair; and

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(b) the contract is a standard form contract.

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(2) The contract continues to bind the parties if it is capable of operating without the unfair term.

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(3) A consumer contract is a contract for:

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(a) a supply of goods or services; or

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(b) a sale or grant of an interest in land;

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to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

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Whether a term of a contract is ‘unfair’ is determined by the tests set out in section 24(1) of the ACL. That section is in the following terms:

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24 Meaning of unfair

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(1) A term of a consumer contract is unfair if:

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(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

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(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

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(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

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In addition to the requirement that the cancellation clause be an unfair term, the consumer contract at issue needs to be a standard form contract in order to attract the operation of section 23(1) of the ACL. In determining whether a contract is a standard form contract, a court may take into account matters including the bargaining power of the parties, whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties, whether another party was, in effect, required to either accept or reject the terms of the contract, and or whether another party was given an effective opportunity to negotiate the terms of the contract.

 

Kimberley Discovery Cruises argued that the contracts were not standard form contracts within the meaning of section 27 of the ACL asserting that passengers were able to ask them to vary or waive any clause in the contract. However, Jarret J determined that there was no evidence that the contracts and particularly the terms and conditions which contained the cancellation clause were negotiated, the terms were settled separately with each passenger, or any evidence of Kimberley Discovery Cruises’ willingness to negotiate them.

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Unfairness under the Australian Consumer Law

 

The applicants contended that the term was ‘unfair’ as it entitled Kimberley Discovery Cruises to retain the whole of the fare if the cruise was cancelled due to an unexpected event for the purposes of the ACL.

 

A term will be regarded as ‘unfair’ if it meets three cumulative requirements. First, the term must cause a significant imbalance in the parties’ rights and obligations under the contract. Second, the term must not be reasonably necessary to protect the legitimate interests of the party advantaged by the term. Third, the term must cause financial or other detriment to a consumer if it were to be relied upon.

 

The Federal Court held that unfairness is determined as at the time the contract is formed.

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First, ‘significant imbalance’

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The first of the three elements that must be present before a term in a consumer contract can be found to be ‘unfair’ is whether the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract.

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Under the cancellation clause, Kimberley Discovery Cruises would be entitled to cancel the cruise and keep the fares paid by the passengers.

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The Federal Court held that that the term caused a significant imbalance between the parties. This was because the cancellation clause allowed Kimberley Discovery Cruises to cancel at any time before it commenced a cruise (unrelated to safety of passengers or crew), say for commercial reasons, and retain the full fare paid by passengers. In these circumstances, Kimberley Discovery Cruises was not obliged by the terms of the contract to do anything.

 

Second, reasonably necessary to protect legitimate interests

 

The second of the elements necessary to establish that a term is ‘unfair’ is the requirement that the term is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term (section 24(1)(b) of the ACL).

 

Kimberley Discovery Cruises argued that the use of the fares it was entitled to retain by reason of the cancellation clause provided the funds necessary to meet the costs associated with the preparations undertaken for the cruise and its actions taken for the welfare of the applicants consequent upon the cancellation of the cruise.

 

However, Jarret J held that the clause was not reasonably necessary to protect Kimberley Discovery Cruises’ legitimate interests because:

 

• there was a lack of persuasive breakdown of costs incurred by Kimberley Discovery Cruises in what is otherwise mere speculation;

• there was insufficient evidence of the costs incurred leading up to the commencement of the cruise; and

• the retaining of the whole fare does not reflect losses actually incurred by Kimberley Discovery Cruises.

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Third, ‘detriment’

 

Kimberley Discovery Cruises argued that the cancellation clause did not cause detriment because it “saved lives.... provided a safe passage home.”

 

This argument was rejected by the Federal Court. Jarret J stated that while it was accepted the evidence that Kimberley Discovery Cruises ensured that passengers were properly accommodated, and in some respects entertained and then safely transported out of northwest Western Australia after the cruise was cancelled, it was not obliged by the contract to provide any of these things.

 

The Federal Court found that on its own and in the context of the contract as a whole, the contract would cause detriment and in particular financial detriment, to passengers who contracted with Kimberley Discovery Cruises for a cruise if it were to be applied or relied on according to its terms.

 

The Federal Court also held that the fact that passengers in this case were insured (and were therefore reimbursed) was irrelevant to the question of detriment.

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Summary

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The ‘no refund’ clause was found to be ‘unfair’ because Kimberley Discovery Cruises could cancel cruises in a wide range of circumstances (including unrelated to safety of passengers and crew), did not have to provide a refund to passengers of any of the monies paid and did not have to make alternative arrangements. While Kimberley Discovery Cruises did make alternative arrangements, out of goodwill, they were not obliged to do so under the terms of the contract and this was not a relevant factor on the assessment of the fairness of the contractual term. However, if the Contract entered into by passengers with Kimberley Discovery Cruises contained an obligation to make alternative arrangements of equivalent value for impacted passengers, or to give a partial refund, this may have driven a different outcome.

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Breaches of unfair contracts term

 

It is important that contracts are fair, transparent and comply with the Australian Consumer Law. Breaches of the unfair contracts regime have been prosecuted by the ACCC and can be costly and involve penalties.

 

Need help with unfair contracts terms

 

If you have any questions in relation to this overview of the unfair contracts regime more broadly, please contact us.

 

Arida Lawyers can assist you with your transaction or conduct a contract review to assess which contracts are deemed standard form contracts and which terms would likely be considered as unfair.

 

We are well equipped to prosecute or defend our clients, in the event of court proceedings, and will work closely with you to help you achieve the best possible outcome.

 

We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.

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This article provides general information relevant to our expert services. It is not legal advice and should not be relied upon as such. If you are seeking legal advice, you should contact us for a free initial consultation.

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