It is increasingly common for consumer contracts to contain class action waiver clauses. Such clauses are similar in their operation to the choice of law and choice of forum clauses considered in our recent blog post here. However, they differ in some important respects — including, in particular, as to the risk they could amount to “unfair” contract terms under the Australian Consumer Law (ACL).
This post, which is the seventh in a series from the KWM Competition team, examines whether and, if so, when class action waiver clauses could be considered “unfair” under the ACL. The issue an important one given the regular occurrence of such clauses in modern consumer contracts, and the recent decision of the Full Court of the Federal Court and the appeal to the High Court in the Ruby Princess litigation.
When will a term of a standard form contract be unfair?
The ACL prohibits terms of standard form consumer or small business contracts that are “unfair”. A term will be unfair if the following three criteria are satisfied:
- the term would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- the term is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term; and
- the term would cause detriment (financial or otherwise) to a party if it were applied or relied on.
In assessing unfairness, it is necessary to consider the extent to which the term is transparent and the contract as a whole, as well as matters such as the parties’ respective bargaining power, whether the contract was pre-prepared by one party, and whether the parties had the opportunity to negotiate the terms.
For a detailed discussion of when a clause will be unfair under the ACL, see our previous post here.
Class action waiver clauses
What is a class action waiver clause?
A class action waiver clause stipulates that disputes arising under the contract must be pursued on an individual basis and not as part of any class action or representative proceeding. Such clauses are common in the US, particularly following the 2011 decision of AT&T Mobility LLC v Concepcion. There, the US Supreme Court upheld the validity of the following class action waiver clause:
You and A&AT agree that each may bring claims against the other only in your or its individual capacity, and not as plaintiff or class member in any purported class action or representative proceeding. [1]
Are class action waiver clauses unfair under the Australian Consumer Law?
In Australia, the question of whether a class action waiver clause could amount to an “unfair” contract term under the ACL was considered for the first time in the recent Ruby Princess litigation.
A detailed summary of the facts and primary judgment in Karpik v Carnival plc (The Ruby Princess) (Stay Application) is set out in this blog post. In short, approximately 700 passengers aboard the ill-fated Ruby Princess agreed to terms and conditions (US T&Cs) with Carnival plc and Princess Cruise Lines Ltd. In addition to an exclusive jurisdiction clause, the US T&Cs contained the following class action waiver clause:
WAIVER OF CLASS ACTION: 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. Even if the applicable law provides otherwise, you agree that any arbitration or 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.[2]
In 2020, a class action was commenced on behalf of passengers in the Federal Court against Carnival and Princess, alleging contraventions of the ACL and the tort of negligence. Following an application for a permanent stay by Carnival and Princess, group members subject to the US T&Cs (US Group Members) resisted the stay on the basis the class action waiver clause was void and unenforceable as an unfair contract term under the ACL.
At first instance, Stewart J was satisfied that the class action waiver clause was unfair under the ACL. His Honour was persuaded in particular by the following matters:
- the company had no legitimate interest in passengers who had agreed to the US T&Cs commencing individual proceedings against it;
- reliance on the clause would cause detriment to passengers seeking to commence individual proceedings against it;
- the term, waiving rights, was not transparent in the sense that it did not use reasonably plain language and was not readily available; and
- the clause would cause a significant imbalance in the parties’ rights and obligations under the contract because it would limit the practical ability of a passenger to pursue a claim which was otherwise “economically unviable” or “questionable to pursue” in an individual proceeding, with the effect that the clause would prevent a passenger from vindicating rights available under the contract and adversely affect their access to justice.[3]
On appeal, however, a majority of the Full Court (Allsop CJ and Derrington J) disagreed with Stewart J’s conclusion. Their Honours each took the view that the class action waiver clause was not unfair.
The Chief Justice focused on the fact that the assessment of unfairness is to proceed by reference to the whole of the contract, as required by s 24(2)(b) of the ACL. Accordingly, it was necessary to consider the class action waiver clause together with the whole of the contract including the exclusive jurisdiction clause, which the primary judge had found to be enforceable (which finding was not challenged on appeal, as explained in our post here). Doing so highlighted the limited significance of the class action waiver clause’s restriction on participating in an Australian class action, because the exclusive jurisdiction clause — which was not unfair — already had that effect. As his Honour observed:
Why should the loss of a capacity to participate in an Australian class action, by the class action waiver clause, cause any significant imbalance when the exclusive jurisdiction clause requires, if enforced, the claim to be stayed anyway?[4]
It was also relevant that the passenger was not an Australian consumer and had entered a contract with an exclusive jurisdiction clause, a proper law clause, and a class action waiver clause valid and enforceable under the proper law. Allsop CJ observed that there was no apparent attempt in the making of the contract, or in the choice of the proper law or in the exclusive jurisdiction clause, to circumvent the operation of Federal Court of Australia class actions regime:
When the whole contract is looked at, the parties bargained in a transparent way for the United States courts to have exclusive jurisdiction (by a clause that is not unfair under s 23) and also agreed that there would be a waiver of class action participation (a clause which, if effectively communicated, as it was, at least by the standard of transparency for s 24(3)), would be enforced in the United States. [5]
Justice Derrington (with whom Allsop CJ agreed) was similarly persuaded that the class action waiver clause in question was not unfair, having regard to the following:
- the clause was not unfair merely because of the reference in s 25(k) of the ACL to the example of an unfair term as one which limits one party’s right to sue another party, because the examples in s 25 are not presumed to be unfair; rather, they “may be” unfair;
- the clause did not cause a significant imbalance because it did not:
- impede a passenger’s substantive right to bring a proceeding; it only limited the method by which a claim could be brought (i.e. individually rather than through a class action);
- limit liability to the passenger in respect of any wrong committed against them. For example, it was not suggested that damages which might be recoverable in a class action in the Federal Court of Australia would be greater than those recoverable in the District Court of California; and
- there was no evidence that the clause would cause a significant imbalance (e.g. by rendering it economically unviable or questionable for a passenger to commence a proceeding), nor that it would cause any the passenger detriment (e.g. no evidence regarding the passenger’s means to bring proceedings in California);
- there was a legitimate interest in requiring actions brought against the company to be conducted in the jurisdiction from which it carried on its business and to be brought on an individual rather than a group basis;
- the passenger’s right to seek redress remained unaffected, albeit they were required to do so individually and in the place from where the the company mainly carried on its business (which is a legitimate interest). Therefore, the clause would not cause the passenger any detriment.[6]
The applicant has since been granted special leave to appeal the Full Court’s decision to the High Court, including in relation to the question of whether the class action waiver clause is unfair under the ACL. Accordingly, it remains to be seen how the High Court will navigate the question of unfairness.
However, as Allsop CJ noted, it is to be borne in mind that, whatever the result, his Honour’s findings in relation to the class action waiver clause “says nothing about another contract with an Australian consumer whereby it might be sought in a standard form contract to deprive a person of access to Pt IVA”. In other words, while it might be permissible for a clause to deprive a foreign consumer of the ability to participate in an Australian class action (at least in this case where the consumer would be precluded from doing so pursuant to an enforceable foreign exclusive jurisdiction clause and having regard to the evidence before the court), a clause which deprives an Australian consumer of the ability to participate in an Australian class action in circumstances where the consumer could otherwise do so, may well be unfair under the ACL. In the case of the latter, the Chief Justice observed that “there might be little doubt in many cases of Australian consumer contracts it would be unfair and unjust for standard form contracts … to seek to impose a waiver of the operation of” the class actions regime in Pt IVA of the Federal Court of Australia Act 1976 (Cth).
Or, to put it another way, it’s necessary to look at the contract as a whole and the particular facts of the case.
We will revisit the topic of class action waiver clauses, following the decision of the High Court.
Key takeaways
As the first in Australia to consider the validity of class action waiver clauses, the decision in the Ruby Princess litigation provides useful guidance to both businesses and consumers in relation to the risk such clauses could be “unfair” under the ACL. In particular, the decision highlights:
- the need to adduce sufficient evidence of detriment and the extent of any imbalance in rights, particularly given the onus in relation to these elements is borne by the party seeking to establish unfairness;
- seeking to avoid the prospect of class action litigation and litigation in multiple jurisdictions may be legitimate interests worthy of protection. In the Princess’s case, “it must necessarily be of substantial benefit to it to rationalise all litigation against it in the location from which it carries on business, in highly experienced Courts with which it is likely to be familiar, and in a manner which excludes the bringing of class actions”;[7]
- the unfairness of a class action waiver clause that prevents an Australian consumer from participating in an Australian class action is a question that is, as yet, untested — but comments from Allsop CJ suggest that such a clause is likely to be higher risk than clauses that prevent a foreign consumer from participating in an Australian class action; and
- where a class action waiver clause is being reviewed for unfairness, it must be not assessed in isolation; rather, it must be assessed by reference to the whole of the contract including, in particular, any accompanying exclusive jurisdiction clause.
Importantly, the High Court appeal is likely to provide further clarity.
[1] AT&T Mobility LLC v Concepcion 563 US 333 (2011).
[2] Karpik v Carnival plc (The Ruby Princess) (Stay Application) [2021] FCA 1082 at [27].
[3] Karpik v Carnival plc (The Ruby Princess) (Stay Application) [2021] FCA 1082 at [141]-[145].
[4] Carnival plc v Karpik (The Ruby Princess) [2022] FCAFC 149 at [6] per Allsop CJ.
[5] Carnival plc v Karpik (The Ruby Princess) [2022] FCAFC 149 at [5]-[6], [13] per Allsop CJ.
[6] Carnival plc v Karpik (The Ruby Princess) [2022] FCAFC 149 at [254], [255], [269], [272] per Derrington J.
[7] Carnival plc v Karpik (The Ruby Princess) [2022] FCAFC 149 at [262].
Image credit: “The Ship – Ruby Princess” by Taylor Burnes is licensed under CC BY-SA 2.0./ Remixed to B&W and resized.
