A holiday cruise, a cyclone and an unfair contract term: Ferme v Kimberley Discovery Cruises Pty Ltd

In 2016, there is likely to be an increased interest in the unfair contract term provisions of the Australian Consumer Law (ACL) due to the extension of the protection they provide to small businesses.^[1]  The provisions only apply to “standard form contracts”.  There have been few court cases addressing the provisions and, until the recent Federal Circuit Court decision of Ferme v Kimberley Discovery Cruises Pty Ltd,^[2] none that address what is a “standard form contract” in detail.^[3]  For this reason, the decision is of interest.  It is also of interest due to its consideration of the relevant time for determining whether a term is “unfair” and whether a consumer may claim damages under s 236 of the ACL for loss arising from an unfair contract term.  These three matters are addressed in this article.

Facts of the case

Kimberley Discovery Cruises Pty Ltd (Kimberley Cruises) offered cruise trips off the coast of the Kimberley region in Western Australia.  Nine Tourists (the Tourists) each booked a cruise with Kimberley Cruises for March 2012.  The cruise was cancelled at short notice due to a cyclone.  At the time of cancellation, the cruise vessel had been provisioned and fuelled and crew had been engaged, but the Tourists had not yet boarded.  No criticism was made of Kimberley Cruises’ decision to cancel the cruise. 

The Terms & Conditions entered into by the Tourists and Kimberley Cruises (Terms & Conditions) contained a provision that Kimberley Cruises may cancel the cruise in the event of a cyclone (among other things) and in the event of such cancellation, the Tourist will not be entitled to a refund of their fare or any compensation (the forfeiture term).  Kimberley Cruises refused to refund the Tourists’ fares relying on the forfeiture term.  The Tourists all had travel insurance and were compensated for their lost fares by their insurer.  The insurer then commenced proceedings in the Federal Circuit Court in the name of the Tourists by exercising its right of subrogation.  The insurer sought a declaration under ss 23 and 250 of the ACL that the forfeiture term was void due to it being “unfair” within the meaning of s 24(1).  The insurer also sought restitution of the lost fares and alternatively, damages under s 236.

The total amount sought by the insurer, apart from interest and costs, was a mere $67,655.  Presumably the insurer was more concerned about the precedential value of the decision.  It is interesting that a set of provisions of the ACL, which are currently intended to protect individual consumers, can be harnessed by a large business such as an insurer.  Further, a sophisticated and well-resourced litigant, such as an insurer, can avail itself of presumptions contained in these provisions which assist it in proving its case. 

Standard form contracts

Section 23(1) of the ACL provides that a term of a “consumer contract” is void if it is “unfair” and the contract is a “standard form contract”.  Similarly, s 250(2) provides that a court may only declare a term “unfair” under s 250(1) if it is a “standard form contract”.  The ACL does not provide a detailed definition of a “standard form contract”.  However, s 27 provides a framework for a court to determine whether a contract is in standard form.

Section 27(1) provides that if a party alleges a contract is a standard form contract, it is presumed to be so unless proven otherwise.  Section 27(2) provides that when determining whether a contract is in standard form, the Court may take into account such matters as it thinks relevant but must take into account the following six matters:

1. whether one party has “all or most of the bargaining power relating to the transaction”;
2. “whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties”;
3. whether a party was effectively required to accept or reject the terms of the contract, other than a term referred to in s 26(1),^[4] in the form those terms were presented to it;
4. whether a party was given “an effective opportunity to negotiate the terms of the contract” other than a term referred to in s 26(1);
5. whether the terms of the contract, other than a term referred to in s 26(1), take into account the specific characteristics of another party or the particular transaction; and
6. any matter prescribed by regulations.  Currently there are no prescribed matters.

Before considering these six matters, Jarrett J considered some preliminary matters.  First, his Honour noted that s 27 of the ACL refers to a standard form contract and not standard form terms.^[5]  For this reason, his Honour considered that the entire contract had to be identified.  In this case, the entire contract consisted of a booking form, a form containing the Terms & Conditions and a brochure.

Secondly, his Honour said that the phrase “standard form contract” might suggest that the whole contract must be “in identical and immutable terms on each occasion it is used”.^[6]  In this case, the whole contract was not identical and immutable for each Tourist.  However, the parties did not address any argument to this point and hence his Honour did not consider it further.^[7]  The parties addressed their arguments to the Terms & Conditions and accordingly, Jarrett J focused on these.  His Honour considered the six mandatory considerations in sub-ss 27(2)(a)-(f) referred to above.

Whether a party was given an effective opportunity to negotiate the terms of the contract: s 27(2)(d)

Jarrett J concluded that the Tourists were not “given an effective opportunity to negotiate the terms of the contract” for two reasons.^[8]  First, there was no evidence that the Terms & Conditions were negotiated or settled separately with each Tourist.^[9]  Secondly, there was no evidence that Kimberley Cruises “telegraphed” to the Tourists that it was willing to negotiate the Terms & Conditions.^[10]  Jarrett J reached this conclusion even though Kimberley Cruises led uncontested evidence that none of the Tourists indicated they were unhappy with the Terms & Conditions or wished to alter them.  Further, Kimberley Cruises led uncontested evidence that if one of the Tourists had taken issue with the Terms & Conditions, it would have negotiated with the Tourists in an endeavour to reach a mutually agreeable arrangement.  Jarrett J noted that Kimberley Cruises led no evidence that it had negotiated with “would-be travellers” in this way in the past.^[11] 

Whether the terms of the contract took into account the specific characteristics of another party or the particular transaction: s 27(2)(e)

Kimberley Cruises led no evidence that the Terms & Conditions took into account the specific characteristics of any of the Tourists.^[12]  Kimberley Cruises led evidence of it making concessions for other customers who became unable to travel after making a booking.  Jarrett J considered this evidence irrelevant since it related to actions taken by Kimberley Cruises after the relevant contract was entered into and hence gave no indication of whether Kimberley Cruises was willing to negotiate the Terms & Conditions before the booking was completed.^[13] 

Elsewhere in the reasons, Jarrett J emphasised the importance of being willing to negotiate prior to formation of the contract.  Kimberley Cruises referred to a waiver and variation clause in the Terms & Conditions as an indication of “flexibility” on its part and “flexibility within the terms of the relevant contract”.^[14]  The clause provided that “No variation or waiver of any term or condition of these cruise ticket conditions will have any effect unless they are in writing and signed by the carrier”.  Jarret J said that this clause, when considered objectively, was not an invitation to negotiate the Terms & Conditions before the contract was made and “suggests a possibility of variation or waiver, but … not until the contract has been formed.”^[15]

Other matters to be considered under s 27(2)

In relation to s 27(2)(b), Jarrett J concluded that the Terms & Conditions were prepared by Kimberley Cruises before any discussions occurred with the Tourists.^[16]  His Honour appears to have based this conclusion on evidence presented by Kimberley Cruises.^[17]

In relation to s 27(2)(c), Jarrett J concluded that the Terms & Conditions were presented to the Tourists as a “take it or leave it” proposition.^[18]  His Honour came to this conclusion on the basis that the Terms & Conditions were posted on Kimberley Cruises’ website and sent to “would-be travellers” without them being informed that they could negotiate the Terms & Conditions or that they may be varied.

The reasons do not indicate that Jarrett J considered whether one party had “all or most of the bargaining power relating to the transaction”, as required by s 27(2)(a).  None the less, his Honour concluded that Kimberley Cruises had not overcome the presumption that the Terms & Conditions were a standard form contract and hence they were presumed to be so.^[19]

The relevant time for considering unfairness

Jarrett J considered whether the time to judge whether the forfeiture term was unfair was “as at the time the contract was formed, or perhaps at a later point when account can be taken of how the contract has operated and the way in which it has affected the parties in the circumstances of the particular case.”^[20]  The issue was significant because Kimberley Cruises led evidence that the Tourists were not treated unfairly following entry into the contract.  For example, while the weather conditions were being monitored pending a decision to cancel the cruise, Kimberley Cruises arranged accommodation, meals and drinks, and activities for the Tourists in Kununurra for four days.  Further, following the decision to cancel the cruise, Kimberley Cruises arranged a chartered flight to evacuate the Tourists to Broome, provided accommodation and meals in Broome for four days and provided sightseeing and recreational activities.  This was all provided by Kimberley Cruises at its own expense without further charge to the Tourists.^[21]

Jarrett J concluded that the correct time to consider unfairness of an impugned term is the time of formation of the relevant contract.^[22]  His Honour reached this conclusion for three reasons.^[23]  

• First, s 23(1) of the ACL renders an unfair term void.  A term that is rendered void is “usually void for reasons that have occurred before or at the time of the formation of the contract”.
• Secondly, s 24 of the ACL contemplates a prospective inquiry.  Section 24(1)(a) of the ACL provides that a term is unfair if “it would cause a significant imbalance in the parties’ rights and obligations under the contract” and not if it did.  Similarly, sub-ss 24(1)(b) and (c) contemplate whether a term would advantage a party and whether it would cause detriment (not whether it did).
• Thirdly, s 24 generally focuses upon the form of the contract.

Damages under s 236 of the ACL

Jarrett J concluded that the forfeiture term was unfair and hence void.^[24]  The Tourists sought restitution of their fares on the basis that there had been a total failure of consideration.  Jarrett J granted this relief.^[25]  Alternatively, the Tourists sought damages under s 236 of the ACL.  Jarrett J expressly said that he did not need to determine whether the Tourists were entitled to this relief so his Honour’s remarks are obiter. 

Section 236(1) provides that a claimant may recover loss or damage from a person who was involved in a contravention of Chapter 2 or 3 of the ACL if the claimant suffers loss or damage because of the conduct of the other person and the “conduct contravened a provision of Chapter 2 or 3”.  Jarrett J considered that a finding that a term is unfair for the purposes of s 23 of the ACL and hence void does not amount to a contravention of the ACL.^[26]  With respect, it is submitted that this conclusion is quite logical.  Section 23 does not prohibit a person from entering into a contract containing an unfair contract term or giving effect to such a term.  Hence, entering into a contract containing such a term or giving effect to it is not a contravention of the ACL.  Section 23 may be contrasted with provisions of the Competition and Consumer Act 2010 which clearly do prohibit certain terms and hence make the entry into such a term a contravention of the Act; for example, s 45(2) of the Act provides that a corporation shall not make a contract if it contains an “exclusionary provision”.  Further and more decisively, s15(a) of the ACL provides that conduct is not taken to contravene the ACL merely because a term is void for being unfair.

Other matters of note

Two other matters are worth noting in Ferme v Kimberley Discovery Cruises.

First, when determining whether the forfeiture term “would cause a significant imbalance in the parties’ rights and obligations arising under the contract”, as required by s 24(1)(a), Jarrett J considered it irrelevant that Kimberley Cruises went beyond its contractual obligations to look after the Tourists.^[27]  His Honour said the inquiry is to the rights and obligations “arising under the contract”, as clearly stated in s 24(1).  The real issue is whether the impugned term is unfair and not whether the “overall conduct” of the respondent is unfair.^[28]    

Secondly, when determining whether the forfeiture term “would cause detriment … to a party if it were to be applied or relied on”, as required by of s 24(1)(c), Jarrett J considered the fact the Tourists were insured to be irrelevant. ^[29]  The Terms & Conditions recommended that all passengers purchase insurance covering cancelation and interruption of the cruise.^[30]  However, his Honour dismissed this as there was no evidence suggesting that “all passengers are likely to take up the respondent’s invocation to purchase travel insurance.”^[31]  With respect, the fact that the Tourists had travel insurance protecting them from the consequences of the forfeiture term seems relevant.  Section 24(1)(c) contemplates whether the impugned term would cause detriment to a party.  Jarrett J concluded that whether a term is unfair must be determined at the time of formation of the contract.  Hence, one should ask whether each Tourist had travel insurance at the time of formation of the contract and if not, whether they were likely to acquire it.  These two questions seem relevant to whether the forfeiture term “would cause detriment” to any of the Tourists if it were relied on.  Although the contracts for travel insurance were separate to the Terms & Conditions, it is submitted that the court could still consider them since s 24(2) provides that it “may take into account such matters as it thinks relevant”.

Conclusion

Some valuable points can be drawn from Ferme v Kimberley Discovery Cruises.  First, in many cases it may be difficult for a respondent to establish that a contract is not in standard form.  This is largely due to the presumption created by s 27(1) that a contract is in standard form if a party alleges that it is.  To help overcome this presumption, it would assist the business if it clearly told a consumer prior to formation of the contract that it is willing to negotiate the terms of the contract.  Secondly, the time for determining whether a term is unfair is the time of formation of the contract.  Hence, a business cannot save a term from being unfair by providing gratuitous assistance to a consumer after the contract is entered into so as to alleviate any resulting unfairness.  If the contract requires the business to provide the assistance, the matter may be different as the mandatory assistance (as opposed to gratuitous assistance) would be relevant to whether the impugned term would cause a significant imbalance in the parties rights and obligations under the contract and whether the impugned term would cause detriment if relied on.  Thirdly, it appears that a consumer cannot claim damages under s 236 of the ACL in relation to loss arising from an unfair contract term, but may seek redress through the law of restitution.