Federal Circuit Court strikes down ‘no refunds’ clause

In a recent judgment (Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384), the Federal Circuit Court held that a term of a cruise company’s standard conditions, which allowed the company to cancel a cruise for a wide range of reasons without giving any refunds to its passengers, was an ‘unfair term’ under the Australian Consumer Law (ACL) and therefore void.

The facts of Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCA 2384

The facts in this case were largely not in dispute.  A number of passengers had contracted with Kimberley Discovery Cruises Pty Ltd (KDC) for a 14 day cruise from Wyndham to Derby, Western Australia in March 2012. The passengers had each made payment in full of approximately $7,500 per person for the cruise several weeks beforehand. Due to the presence of a Category 4 severe tropical cyclone in the area, the cruise ‘was likely to be unsafe and was certain to be unpleasant’ and KDC cancelled the cruise.  No criticism was made of KDC’s decision to cancel the cruise.

KDC organised alternative on-land accommodation and entertainment for the affected passengers, until commercial airline flights resumed after the cyclone had passed.

KDC’s terms and conditions contained a provision that:

“[KDC] will endeavor [sic] 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.“

‘Unexpected Event’ was defined broadly, and included storms, rough seas and cyclones as well as some unusual items such as ‘unexpected increases in fuel costs’ as well as matters which would or may be within the control of KDC such as ‘faults or errors of navigation or management of the Ship’ or ‘any defect or unseaworthiness in hull, machinery or appurtenances’.

KDC relied on the above extract from their terms and conditions to refuse any refund to the affected passengers.  At the time of cancellation, KDC had incurred some costs in respect of the cancelled cruise, including fuelling the vessel, taking on perishable foodstuffs, and engaging crew for the trip.

The decision

KDC argued that the contracts in question were not ‘standard form contracts’ within the meaning of the ACL, because there was the potential for passengers to ask KDC to vary or to ‘waiver any clause in that contract.’  A director of KDC gave evidence that he ‘would have negotiated with the customer on a case by case basis’ if some objection to the terms and conditions had been made, although he gave no evidence of ever having done so in the past, nor did he give evidence that KDC’s alleged willingness to negotiate their terms and conditions was telegraphed to their passengers.  The court found KDC had not displaced the presumption that the contracts in question were ‘standard form contracts.’

KDC also argued that the no-refunds condition was not unfair based on a number of factors, including that alternative accommodation and entertainment arrangements were made by KDC for the affected passengers, and KDC had incurred costs in preparing for the cancelled cruise. Remarkably, KDC even argued that the no-refunds condition provided a benefit to the affected passengers, because it ‘saved lives’ and ‘provided a safe passage home.’

The court held that the unfairness of the no-refunds condition was to be assessed at the time the contract was entered into.  Although KDC had provided some level of alternative accommodation and entertainment for the affected passengers, albeit only for a few days, it was not contractually obliged to do so, and the question was whether the term of the contract was unfair, not whether KDC had behaved unfairly.

The court noted that the no-refunds condition operated in the wide variety of circumstances covered by the definition of ‘Unexpected Event.’  On its face, the no-refunds condition could allow KDC to cancel a cruise because of an ‘Unexpected Event’ which was within its control, where it had incurred no costs of preparation, had done nothing to assist affected passengers to make alternative arrangements, and keep the entire amount of the passenger’s fare.

By contrast, the provisions of the contract dealing with cancellation by the passengers were much more balanced, and provided for partial refunds, depending on the amount of notice given.  If, for example, the passengers cancelled more than thirty (30) days before departure, a ‘penalty’ of thirty (30) per cent applied (i.e. the passengers received a refund of seventy (70) per cent), but the amount of the ‘penalty’ could be applied to another cruise in the same season or next season.

The court concluded that the no-refunds condition:

• resulted in a significant imbalance in the rights and obligations of KDC and the passengers;
• was not reasonably necessary to protect the legitimate interests of KDC;
• caused detriment to the consumers; and
• was an ‘unfair term’ within the meaning of the ACL, with the result that it was void.

Because the no-refunds condition was void, the passengers were able to seek a refund of their fare.  The High Court of Australia’s judgment in the 1993 case Baltic Shipping Company v Dillon,[1] which involved the running aground and sinking of the cruise liner MS Mikhail Lermontov in New Zealand in 1986, held that where an innocent party pays money in advance under a contract in expectation of the other party performing its entire obligations (e.g. a passenger pays for a cruise in advance, expecting to go on an entire cruise), the innocent party could recover its money under an action for restitution if there has been a total failure of consideration.  If there is incomplete performance, but the innocent party nevertheless receives a ‘substantial part of the benefit expected under the contract’, there will not be a total failure of consideration.

In the Baltic Shipping case, the passenger ‘had the benefit of eight of fourteen days of an idyllic cruise’ – albeit before the vessel struck a rock and sank.  The Court distinguished the current facts from Baltic Shipping because the passengers had not even boarded the vessel, and although they had received some on-shore accommodation and entertainment organised by KDC, KDC was not obliged to provide these things and hence the passengers had not received any of the ‘benefit[s] expected under the contract.’

KDC was ordered to provide a full refund to the affected passengers.

Learning points

The no-refunds clause was found to be unfair because KDC could cancel cruises in a wide range of circumstances, did not have to give any refunds, and did not have to make alternative arrangements for passengers.  Although KDC voluntarily made alternative arrangements for the affected passengers, they were not obliged to under the contract and this did not bear on an assessment of the fairness of the contractual provision.  If KDC’s contract contained an obligation to make alternative arrangements of equivalent value for affected customers, or to give a partial refund, the result may well have been different.

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] [1993] HCA 4, (1993) 176 CLR 344.

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