High Court rules on intersection of unfair contract terms regime and choice of law

At common law, contracting parties generally have freedom to determine which country’s laws apply to a contract, as well as limiting the types of claims which may be brought and forums for disputes.

The recent, unanimous decision of the High Court in Karpik v Carnival plc [2023] HCA 39 provides clear guidance on the interaction between choice of law and exclusive jurisdiction clauses and the unfair contract terms regime (UCT Regime) in the Australian Consumer Law (ACL).

This is the first occasion where the High Court has considered the operation of the UCT Regime, and is particularly topical given the scope of the UCT Regime was recently expanded and substantial civil penalties were introduced with effect from 9 November 2023 (for further details, see our article ‘Unfair contract terms: it’s time to get your house in order’).

Key takeaways

Key takeaways from this case include that:

• the UCT Regime applies to standard form consumer contracts entered into outside of Australia by Australian companies and foreign companies carrying on a business in Australia, and there is no requirement for any additional territorial nexus with Australia. In other words, the UCT Regime will apply even where the contracts do not involve the acquisition of goods or services in Australia or by Australian consumers;
• choice of law or exclusive jurisdiction clauses will not remove contracts from the scope of the UCT Regime (where it otherwise applies);
• the more potentially unfair a clause is, the greater the need for transparency (not just in expression, but also access to the clause), but also the more transparent a clause is, the less likely it is to be considered unfair;
• class action waiver clauses are at high risk of being unfair; and
• exclusive jurisdiction clauses, while not being void or unenforceable under Part IVA of the Federal Court of Australia Act 1976 (Cth) (Representative Proceedings Regime) or necessarily unfair, may not be enforced by Australian courts and ground a stay of proceedings if there are strong countervailing reasons against a stay.

Background

The case involves the terms of a contract under which a consumer (Mr Ho, a Canadian resident) bought tickets for a cruise operated by Carnival through a Canadian travel agent (CruiseShipCenters). There was no dispute that the contract was made outside Australia.

Relevantly, the terms of this contract included:

• a choice of law clause applying the general maritime law of the United States, and to the extent not applicable, the laws of the State of California (U.S.A.);
• an exclusive jurisdiction clause in favour of the United States District Courts for the Central District of California in Los Angeles; and
• a class action waiver clause, which provided that any arbitration or lawsuit needed to be litigated individually and not as a member or part of a class or representative action, as well as expressly waiving any legal entitlement to participate in a class action.

The cruise which Mr Ho took was disrupted by the outbreak of COVID-19, and a number of passengers (including Mr Ho) commenced representative proceedings against Carnival in the Federal Court. For the substantive proceedings, see Karpik v Carnival plc (The Ruby Princess) (Initial Trial) [2023] FCA 1280.

Carnival sought a stay of the proceedings in respect of Mr Ho, as well as 695 other passengers who contracted on similar terms, on the basis of the exclusive jurisdiction clause and relying on the class action waiver clause.

The questions that arose in this case were:

• whether Mr Ho’s contract was subject to the UCT Regime, notwithstanding the choice of law clause;
• if so, whether the class action waiver clause was an unfair contract term and therefore void; and
• whether the exclusive jurisdiction clause was otherwise unenforceable, and if so, whether it should be enforced in the circumstances.

Extraterritorial application of the ACL and choice of law clauses

The Court considered section 5(1) of the Competition and Consumer Act 2010 (Cth) (CCA), which in terms extends the application of the ACL (other than Part 5-3) to conduct engaged in outside of Australia by a body corporate incorporated (whether Australian or foreign) or carrying on business in Australia.

The Court confirmed that the effect of s 5(1) is that where a corporation is carrying on business in Australia, the same norms of conduct under the ACL that apply to conduct in Australia also apply to conduct engaged in outside Australia. Importantly, the Court held that when s 23 of the UCT Regime (which provides that unfair terms in standard form consumer contracts are void) is read with s 5(1) of the CCA, there is no need for any additional or further territorial connection to be established before s 23 applies.

Principles enunciated by the Court include that:

• the so-called common law “presumption” against extraterritoriality is an interpretive principle only, and has no role to play in this case given the express contrary words in the ACL when read with s 5(1) of the CCA;
• a foreign choice of law clause does not displace the UCT Regime, otherwise this would enable parties to effectively contract out of compliance. That is, the Court did not consider that the UCT Regime will only apply where the proper law of the contract is Australian law;
• the contract does not need to have been entered into while a foreign company was engaged in business in Australia for the UCT Regime to apply;
• the UCT Regime is not confined to the acquisition of goods or services by consumers in Australia and the relevant services do not need to be performed in Australia;
• it is still open for a company to seek a stay of proceedings on the basis that an Australian court is an inappropriate forum, including in the absence of a connection beyond the extraterritorial application of the UCT Regime (noting the low likelihood of consumers bringing such claims); and
• merely because the UCT Regime applies does not mean that foreign courts will apply it, as it is a matter for those courts.

Class action waiver clause

The Court held that, in the context of the particular contract, the class action waiver clause was unfair, including having regard to the following matters:

• the ACL having been found to apply, there was no dispute that the contract was a consumer contract and a standard form contract;
• the clause caused a significant imbalance in the rights of the parties, as it was expressed as being for the benefit of the company and imposed limitations on the consumer but not the company – while it did not impede or affect the existence of the right to sue, it had the effect of preventing or discouraging consumers from vindicating their legal rights where the cost to do so individually may be uneconomical;
• the term was not necessary to protect the company’s legitimate interests. The Court considered there was no legitimate interest in seeking to prevent consumers from participating in a class action; and
• if the clause were relied upon, the consumer would suffer a detriment, being denied the benefits under the Representative Proceedings Regime.

More broadly, the Court said the following on 'transparency’:

“…the inquiry as to transparency is not an independent and separate inquiry from whether a term is unfair pursuant to s 24(1). The greater the imbalance or detriment inherent in the term, the greater the need for the term to be expressed and presented clearly; and conversely, where a term has been readily available to an affected party, and is clearly presented and plainly expressed, the imbalance and detriment it creates may need to be of a greater magnitude.

This position was contrasted with that in the US, where courts have held that class action waiver clauses are not fundamentally unfair, with the Court cautioning against reliance on such authorities given the differing contexts.

Exclusive jurisdiction clause

There was no dispute that the exclusive jurisdiction clause was valid and not an unfair term under the UCT Regime. However, the Court was required to consider whether i) the clause was otherwise unenforceable or ii) if not, whether in the exercise of discretion the proceedings should be stayed.

On the first issue, the Court held that the exclusive jurisdiction clause was not void or unenforceable by reason of the Representative Proceedings Regime, which accommodates and, in some cases, expressly provides for persons to remove themselves from that regime.

On the second issue, where there is a valid foreign exclusive jurisdiction clause, Australian courts retain a discretion as to whether to stay a proceeding in the absence of ‘strong countervailing reasons’.

In re-exercising the discretion, the Court found that there were strong countervailing reasons against a stay in this case, namely:

• the class action waiver clause was an unfair term and void under the ACL. There is therefore a strong juridical advantage in remaining part of the class action in Australia, where consumers may not able to participate in a class action in the US (especially since the class action waiver clause may be effective in that context); and
• that enforcement of the exclusive jurisdiction clause would fracture the litigation between Australia and US, which would waste resources and run the risk of producing conflicting outcomes in different courts, potentially bringing the administration of justice into disrepute.

Accordingly, the Court declined to stay the proceedings brought by Mr Ho and the 695 other consumers who contracted on similar terms.