High Court provides guidance on class action waiver clauses

Unfair and unenforceable 5 min read

The High Court of Australia has unanimously found that a class action waiver clause sought to be invoked in the Ruby Princess class action was an unfair term under the Australian Consumer Law (ACL).

The Court's decision in Karpik v Carnival plc provides important guidance on the application of Australia's unfair contract terms regime, class action waiver clauses and exclusive jurisdiction clauses.

In this Insight, we examine the reasoning behind the decision and assess its implications for class action defendants.

Background

The appellant, Ms Karpik, commenced class action proceedings against Carnival plc and its subsidiary, Princess Cruise Lines, in connection with an outbreak of COVID-19 on the Ruby Princess cruise ship in March 2020.

A significant number of passengers on the voyage had entered into contracts for the cruise in the United States (the US Passengers). Those contracts contained:

• a class action waiver clause; and
• an exclusive jurisdiction clause (in favour of the United States District Courts for the Central District of California).

Relying on both terms, Carnival applied to stay the claims of the US Passengers. Although this application was refused at first instance, the Full Court of the Federal Court declared that the US Passengers' claims should be stayed, on the basis that the terms of the US contracts were enforceable. Ms Karpik appealed this decision to the High Court and was granted special leave.

There were four issues before the High Court:¹

• Extraterritoriality: whether section 23 of the ACL, which prohibits unfair contract terms in standard form consumer and small business contracts, applied to the contracts of the US Passengers;
• Unfair contract terms: whether the class action waiver clause was void under s23 as an unfair contract term;
• Enforceability of class action waiver clauses: whether the class action waiver clause was otherwise unenforceable by reason of Part IVA of the Federal Court of Australia Act 1976 (Cth) (the Act); and
• Exclusive jurisdiction clauses: whether there were strong reasons for not enforcing the exclusive jurisdiction clause in the contracts of the US Passengers.

Extraterritorial application of the ACL

In its unanimous decision, the High Court held that section 23 of the ACL applied to the US Passengers' contracts. The Court explained that, having regard to the ordinary rules of statutory construction, the ACL's application was not limited to the conduct of entities incorporated in Australia. Rather, the express words of the statute and object of the legislation supported the view that the application of the ACL extended to the conduct of foreign entities carrying on business within Australia. This was described by the Court as a price of doing business in Australia.

In reaching this view, and rejecting Carnival's characterisation of this approach as 'absurd', the Court confirmed that the unfair contract terms regime:

• can apply to contracts governed by foreign law;²
• is not limited to contracts entered into 'while' the foreign company was engaged in business in Australia;³
• is not limited to contract terms affecting the acquisition of goods and services in Australia;⁴ and
• is not limited to conduct engaged in predominately inside Australia.⁵

Unfair contract terms and the class action waiver clause

Once the Court had established the application of the ACL to the US Passengers, it was open for it to conclude that the class action waiver clause was void (and therefore unenforceable) under s23 as an unfair term.

By reference to the criteria set out in s24 of the ACL regarding the meaning of 'unfair', the Court explained that the class action waiver clause:

• caused a significant imbalance in the parties' rights under the contract, given it was solely for Carnival's benefit and imposed limitations on US Passengers without restricting Carnival's options;
• the clause was not reasonably necessary to protect the legitimate interests of Carnival;
• would have caused detriment to US Passengers because it would have denied them the benefits of the class action regime under the Act; and
• was not transparent, or in other words, was not sufficiently available to be reviewed by, or brought to the attention of, US Passengers.

Enforceability of class action waiver clauses

The appellant's argument that the class action waiver clause was inconsistent with the class actions regime, and therefore unenforceable, was rejected by the High Court. The Court emphasised that the waiver of class action rights does not frustrate the purposes of the Act, highlighting that group members may take steps to remove themselves from a class action, including through opting out of a representative proceeding.

Exclusive jurisdiction clauses

Carnival sought for the Court to determine whether the exclusive jurisdiction clause contained in the contracts of the US Passengers warranted a stay of the US Passengers' claims. The High Court determined there were strong reasons for not enforcing the exclusive jurisdiction clause, given that:

• it was advantageous for the US Passengers' claims to be determined in the Federal Court, given that: (i) the class action waiver clause may be enforceable in the US; and (ii) the US Passengers may otherwise be denied the efficiencies and benefits of participating in a class action.
• enforcing the exclusive jurisdiction clause would 'fracture the litigation'. Identical proceedings in the United States and Australia would result in an inefficient use of parties' resources and facilitate the possibility of inconsistent outcomes across various courts—with the attendant risk of bringing the administration of justice into disrepute.

Key takeaways for class action defendants

The High Court's reasons in Karpik provide helpful guidance regarding several issues that are likely to become increasingly relevant having regard to the Court's broad interpretation of the ACL and the growth in consumer class actions. In particular:

• Karpik clarifies the Court's view of the extraterritorial application of the ACL to companies carrying on business in Australia more generally.
• The decision highlights that there are significant barriers for defendants seeking to rely on class action waiver clauses. While those clauses are not themselves incompatible with Australia's class action regime, based on the Court's reasoning it will be difficult to establish that a class action waiver clause does not fall foul of the unfair contract terms regime.
• Karpik suggests that courts will be reticent to enforce exclusive jurisdiction clauses if they will affect the ability of parties to participate in representative proceedings. This reiterates the Court's longstanding position that duplicate proceedings in different jurisdictions are an undesirable outcome and will weigh heavily against the enforcement of an exclusive jurisdiction clause.