Navigating Unfairness on the High Seas: Class Action Waiver Clauses – Lexology

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:

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:

On appeal, however, a majority of the Full Court (Allsop CJ and Derrington J) disagreed with Stewart Js 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 clauses 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 applicant has since been granted special leave to appeal the Full Courts 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 Honours 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, its 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:

Importantly, the High Court appeal is likely to provide further clarity.

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Navigating Unfairness on the High Seas: Class Action Waiver Clauses - Lexology