Class action waiver sunk in international waters by Australia's unfair contract terms laws

The High Court decision in Karpik v Carnival plc [2023] HCA 39 on class action waivers and the broad extraterritorial application of the UCT regime

What you need to know

• The High Court has found a class action waiver clause (which requires a customer to 'waive' their right to participate in a class action) to be an unfair contract term, principally because it prevented the customer from economically bringing a claim. However, the Court found such a clause to be permissible under the Federal class actions regime.
• Parties with such clauses in their consumer and small business standard form contracts should think carefully about whether they are appropriate, particularly given the penalties now available for breaches of the unfair contract terms legislation (UCT).
• In the course of its decision, the High Court confirmed that the UCT regime under the Australian Consumer Law has very broad extraterritorial application. It applies to companies carrying on business in Australia, including in respect of contracts entered into overseas and governed by foreign law.
• The Court also declined to enforce an exclusive jurisdiction clause requiring litigation be commenced in the United States, enabling foreign Group Members to participate in the Australian class action.
• While the Court downplayed the possibility of UCT proceedings being successfully pursued in Australia in respect of purely overseas conduct, companies will need to consider the risks to them arising from the Court's finding as to the extraterritorial reach of the laws and, for financial services licensees, other potential consequences.

What you need to do

• You should review consumer and small business standard form contracts for class action waiver clauses and consider whether, having regard to the circumstances of the contract, they are unfair contract terms.
• Conversely, for other contracts, the High Court has confirmed that waiver clauses are consistent with the Federal class actions regime and they may therefore be worth considering.
• You should also consider the risks posed to your business by the extraterritorial application of the UCT regime and whether further action should be taken.

The background

This case concerned a class action commenced against the owner and operator respectively of the Ruby Princess cruise ship, in respect of loss or damage allegedly suffered by passengers (and their relatives) when an outbreak of COVID-19 unfolded onboard the ship in March 2020.

For certain passengers (US group members), the terms and conditions contained an exclusive jurisdiction clause in favour of the United States District Courts in California and a "class action waiver" clause, which sought to waive any entitlement to participate in a class action. The contract was governed by Californian law.

The Full Federal Court held that the class action waiver clause was not unfair, and therefore not unenforceable, principally because the clause did not prevent passengers bringing individual claims and partly having regard to the impact of the foreign law context on the question of fairness. The Court noted, but did not decide, potentially complex issues around whether the UCT had extraterritorial application.

Extraterritorial application of the unfair contracts regime

In a unanimous and succinct judgment, the High Court determined that the UCT did apply to the contract, even though it was entered into overseas and governed by foreign law.

The Court held that where foreign companies are carrying on business in Australia, the UCT regime will apply to any standard form consumer contracts¹  or small business contracts²  irrespective of whether they are made or relate to business conducted inside or outside Australia. The Court considered that this followed from the statutory text and that there was no room for the presumption against extraterritorial application to operate in light of the words of the legislation.

In the Court's view:

"Parliament is prescribing that a corporation that does business in Australia should be required, if it uses standard terms in a consumer or small business contract, to meet Australian norms of fairness, irrespective of whether the standard terms are in a contract made in Australia or one made overseas."

The Court considered that the alleged "absurd and capricious" results of the broad extraterritorial application of UCT laws were overstated. It noted that, for example, the possibility that a consumer who purchased a car in Europe could take action against a European car manufacturer in the Federal Court of Australia is a very different question to whether a consumer would take such action and whether such an action would progress to judgment, recognising the prospect of a stay of proceedings on the basis that Australia is an inappropriate forum and that foreign courts might decline to enforce Australian law.

Those matters involve substantial discretionary elements and are far from a guarantee that litigation in relation to overseas conduct will not be attempted, including class actions litigation involving both Australian and non-Australian group members. It may well be that we see further testing of these issues, absent legislative reform.

It is also noteworthy that the judgment was given in relation to the UCT regime as it stood prior to the introduction of substantial civil penalties for breach in November 2023. There is a risk that regulators could seek to impose penalties in respect of overseas conduct, including for Australian companies with overseas operations and foreign companies, and for financial services licensees, other potential consequences. While regulators typically have a more domestic focus, this is a surprising consequence and one which requires careful consideration.

Class action waiver not contrary to the Federal class actions regime

The High Court found the waiver was not unenforceable by reason of the Federal class actions regime. That is, there is nothing inconsistent with the statutory framework in a potential claimant voluntarily waiving their right to join a class action / agreeing to opt out in advance, including through a standard form contract.

Application of the UCT

Given the finding that the UCT regime was capable of applying to the contract, the next question was whether the class action waiver clause was void for being an unfair contract term (pursuant to section 23 of the Australian Consumer Law). Class action waivers are contractual terms in which people agree not to participate in class actions, including to opt-out if an open class action is commenced.

The High Court overturned the Full Federal Court and found that the term was an unfair term.

It is important to note that this argument is available only for terms in standard form contracts entered into with consumers and certain small businesses, and so would not impact every potential class action scenario.

To be void as an unfair contract term, a contract term must:

• cause a significant imbalance in the parties' rights and obligations;
• not be reasonably necessary in order to protect the legitimate interests of the party advantaged by it; and
• cause detriment to the other party.

The High Court found that each of the requirements had been met, principally because the class action waiver had the effect of preventing or discouraging a passenger from bringing an individual claim where the cost to do so may be uneconomical. The Court had regard to the ticket price (approx. CAD $1,800) and the cost of commencing and prosecuting an individual proceeding and found the term had the effect of supressing the customer's ability to bring a claim in a way which caused a significant imbalance, and there was no countervailing legitimate interest.

The Court also noted that the clause was not transparent, including because it was not available to the customer until after the contract was formed and therefore not readily available to the customer. Transparency is a factor relevant to unfairness but is not a separate criterion under the UCT. The judgment did not consider whether, had the term been more transparent, it would or could have mitigated what the Court saw as a significant imbalance.

It will be interesting to see whether defendants seek to justify class action waivers in consumer or small business contracts, on the basis that they relate to more substantial claims (so there is less of a disincentive to individual action) and/or are more transparent. There may also be circumstances in which defendants can point to more specific legitimate interests in avoiding class actions (for example, defendants may seek to argue that there is a legitimate interest in providing efficient alternative dispute resolution mechanisms rather than litigation).

The Court declines to enforce the exclusive jurisdiction clause

While the class action waiver was held to be unfair under Australian law, the contract also contained a US exclusive jurisdiction clause, and the Court acknowledged that the US courts might well enforce the waiver. The Court declined to enforce the clause and stay the proceeding, on the basis that because the class action waiver was unfair it could not be relied on to support a stay, a stay would deny foreign group members access to justice through the class action proceeding, and fracture the proceeding given there was an existing class action in relation to Australian group members.

While particular to these circumstances, the case therefore highlights how the extraterritorial application of the UCT could lead to more foreign matters being drawn into Australian proceedings, particularly where there are also proceedings involving Australian group members.

Looking to the future

The extraterritorial application of the UCT raises potentially complex issues of international comity and public policy, and it will be interesting to see if there is any consideration of law reform.

Based on the High Court's decision:

• You should review consumer and small business standard form contracts for class action waiver clauses and consider whether, having regard to the circumstances of the contract, they are unfair contract terms.
• Conversely, for other contracts, the High Court has confirmed that waiver clauses are consistent with the Federal class actions regime and they may therefore be worth considering.
• You should also consider the risks posed to your business by the extraterritorial application of the UCT regime, and whether further action should be taken.

Authors: Mark Bradley, Partner; Lucinda Hill, Partner; Narelle Smythe, Partner; Melissa Fraser, Partner; Jessica White, Lawyer; Justin Ho, Lawyer; and Nathan Feiglin, Lawyer.

<sub>1. Under section 23 of the Australian Consumer Law a "consumer contract" is a contract for the supply of goods or services or a sale or grant of an interest in land, to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

2. Under section 23 of the Australian Consumer Law a "small business contract" (per the expanded definition the came into force on 9 November 2023) is a contract for the supply of goods or services or a sale or grant of an interest in land where at least one party satisfies either or both of the following conditions: (i) at the time of entering into the contract, the party employs fewer than 100 persons; or (ii) the party's turnover in the last income year (within the meaning of the Income Tax Assessment Act 1997) that ended at or before the time the contract was made is less than $10 million.A</sub>