Contracting out of class actions? Federal Court says no in an Australian first

Introduction

‘Class action waiver’ clauses are clauses under which a party waives their right to participate in a class action. Sometimes found in consumer agreements (particularly in the United States) such clauses are controversial because they may stifle claims which are small and only economically viable in a class action context.  

The enforceability of class action waiver clauses in Australia has been an unresolved question. However, recently, and in an Australian first, the Federal Court of Australia has held that such a clause was void and unenforceable as an unfair contract term in contravention of section 23 of the Australian Consumer Law.

The decision, Karpik v Carnival plc,[1] has wide potential implications given the frequent use of class action waiver clauses in the standard terms and conditions for a variety of consumer contracts, especially in the terms offered to Australian consumers by international providers. It also represents a departure from the jurisprudence of overseas jurisdictions like the United States where such clauses are commonly in use and have been upheld by the US Supreme Court in a range of contexts, including in employment agreements.[2]

Background

Class action proceedings were commenced by the passengers on-board the Ruby Princess vessel, which departed on its fateful voyage from Sydney in early 2020 as the global COVID-19 pandemic was rapidly spreading across the world.  The group members advanced claims for negligence and various breaches of the Australian Consumer Law (ACL) against Carnival plc, the time charterer of the vessel, and Princess Cruise Lines Ltd, the owner and operator of the vessel.

Each passenger on-board the vessel was subject to one or other of three contractual terms and conditions that applied to their booking.  Approximately 25% of all passengers were subject to the “US terms and conditions”, which automatically applied to all bookings made by passengers from any country other than Australia, New Zealand or Great Britain.  The US terms and conditions contained a class action waiver clause, which relevantly provided:

This passage contract provides for the exclusive resolution of disputes through individual legal action on your own behalf instead of through any class or representative action.  … you agree that any … lawsuit against carrier whatsoever shall be litigated by you individually and not as a member of any class or as part of a class or representative action, and you expressly agree to waive any law entitling you to participate in a class action.

(Class Action Waiver Clause)

Relying on the Class Action Waiver Clause, the Respondents sought to permanently stay the claims being advanced by the passengers who were subject to the US terms and conditions on the basis that those passengers had waived their right to commence or participate in the class action. 

Was the Class Action Waiver Clause Enforceable?

In opposing the stay application, the Applicants argued that the Class Action Waiver Clause was void and unenforceable because the clause:

(a) was an unfair contract term, with the meaning of Pt 2-3 of the ACL;

(b) was unjust in the circumstances relating to the contract at the time that it was made, in contravention of the Contracts Review Act 1980 (NSW);

(c) was contrary to Part IVA of the Federal Court of Australia Act 1976 (Cth); and/or

(d) amounted to unconscionable conduct under section 21 of the ACL.

As a preliminary point, which ultimately obviated the need to determine the above questions, his Honour found that the Class Action Waiver Clause had not been incorporated into the US terms and conditions.[3]  Therefore, it was not strictly necessary for his Honour to determine whether the Class Action Waiver Clause was void or unenforceable.  Notwithstanding this, his Honour took the opportunity to be the first Australian court to consider whether such a clause is effective.

The Applicants contended that the Class Action Waiver Clause was an unfair term within the meaning of section 24 of the ACL and, as such, was void under section 23 of the ACL.  His Honour accepted the Applicants’ argument, finding that the clause was unfair and therefore void.  In support of this finding, his Honour noted that:

(a) the Respondents had no legitimate interest in the passengers who contracted using the US terms and conditions commencing individual proceedings against it.  Rather, reliance on this clause would cause detriment to those passengers by preventing them from obtaining the benefit of funded representative proceedings and forcing them to commence their own individual proceeding where the cost of doing so would likely exceed the value of their claim;

(b) the nature of the contract was such that there were thousands of consumer contracts for a particular cruise on-board a vessel, and in prohibiting class action participation the clause created a significant imbalance in the parties’ rights and obligations.  This imbalance would prevent individual passengers from accessing justice and vindicating their legal rights, as passengers would not have the resources to commence individual proceedings; and 

(c) the clause was not sufficiently “transparent”, in the sense that it did not use reasonably plain language and it was not readily available to the passenger at the time of entering into the contract.

On this basis, his Honour held that if the Class Action Waiver Clause had been incorporated into the passenger’s contract, that clause would have been an unfair contract term and therefore void under section 23 of the ACL.

His Honour’s decision was a departure from the approach taken by the Court’s in the United States of America, where class action waiver clauses continue to be upheld and enforced on the grounds that they are not substantively unfair as they do not affect a party’s right to bring proceedings, they simply limit the procedural vehicles available to bring a claim.  Central to the US Court’s approach is the notion that plaintiffs do not have a fundamental right to being a class action lawsuit, and therefore waiver clauses are not unfair, unreasonable or contrary to public policy.[4]  Instead, Justice Stewart’s decision more closely reflects the recent approach taken by the British Columbia Court of Appeal, where it was held that a contractual term purporting to limit a party’s access to a class action or representative proceedings would be unconscionable and contrary to public policy, and therefore unenforceable.[5]

Discussion – mandatory arbitration clauses

Recognising the similarities between class action waiver clauses and compulsory arbitration clauses, both of which are common in the terms and conditions of consumer contracts and impact on the procedural manner in which disputes are resolved, Justice Stewart also provided useful guidance on the circumstances in which an arbitration clause may amount to unconscionable conduct.  His Honour cited the Supreme Court of Canada’s decision in Uber Technologies Inc v Heller,[6] where Uber’s standard terms and conditions were found to be unconscionable in so far as they required disputes to be resolved through mediation and arbitration in the Netherlands.  The upfront cost to commence an arbitration was equivalent to the annual income of the applicant and was disproportionate the size of any potential arbitration award, such that the arbitration clause effectively modified all other substantive rights under the contract making those rights illusory.  Justice Stewart noted that reliance on an arbitration clause would constitute unconscionable conduct contrary to section 21 of the ACL if the clause operated to render a party’s substantive contractual rights illusory and deny them access to justice,[7] as was the case in Uber Technologies Inc v Heller.

Key Takeaways

For plaintiffs - while the particular circumstances and the balance of power between contracting parties will be important, this decision provides class action lawyers and litigation funders with a powerful precedent which may be able to be applied in a range of consumer contexts.  If followed, in a lot of consumer contexts, such a clause may now not prevent class action proceedings from being commenced, nor will it result in group members (including those residing overseas) being excluded from participating in those proceeding.

For defendants and corporations - the decision highlights the need to review standard terms and conditions (especially those based heavily on international precedents) in light of the provisions of the ACL.  The terms of any class action waiver should be reviewed, as should any similar terms which seek to limit the litigation options open to consumers in the case of breach of contract or contraventions of the consumer guarantees under the ACL.  In particular, clauses obligating arbitration via international jurisdictions should be carefully considered for enforceability.

 

[1]   Karpik v Carnival plc (The Ruby Princess) (Stay Application) [2021] FCA 1082.

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