Are Non-refund Cancellation and Force Majeure Clauses “Unfair”?

May, 2017

By Stuart Walter, Partner

It is becoming increasingly apparent that the onus is now on the party denying the refund to prove the clause is necessary to protect its legitimate interests.  If it can’t then the clause may well be deemed void, with potentially significant commercial ramifications.

Non-refunds on cancellations or force majeure events have been seen as a somewhat frustrating but accepted part of commercial transactions for many years.

Normally, it might be the forfeiture of a deposit or part-payment but, depending on when the cancellation took place (and/or who cancelled), they could result in complete forfeiture of the purchase price.

These penalties were often seen by the market as an acknowledged risk and, in some instances insurance has been available to cover such risk.  For example, travel insurance where a customer fell ill and could no longer take a pre-booked trip or a weather event made travel unsafe.

The clauses are common commercial practice in a wide range of contracts involving the supply of goods and services.

The introduction of the “unfair terms” provisions as part of the consolidation and unification of consumer laws into the Competition and Consumer Act 2010 – Sch 2 – Australian Consumer Law (ACL) in July 2010 has cast some doubt as to whether such clauses are, in fact, valid.

There is relatively recent authority that has found such non-refund clauses to be void (see Ferme & Ors v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384).

It appears that the onus will fall on the party seeking to rely on the non-refund clause to establish that the clause is necessary to protect its legitimate commercial interests.  If that party fails to prove the legitimate need, then the clause will likely be deemed void.

The test for legitimacy also appears to be whether the clause appeared necessary at the time the contract was entered, not at the time the event occurred.  Further, amounts spent to accommodate customers or mitigate their losses after the event will also likely be irrelevant to the question of whether the clause was fair (see Ferme).

It also seems that the Courts are open to allowing a potential applicant to explore the legitimacy of the clause through preliminary discovery before committing to commencing proceedings.  This places an early burden on the prospective respondent to effectively prove its defence before a statement of claim is even filed (see Poole v Australian Pacific Touring Pty Ltd [2017] FCA 424).

The issue is likely to cause significant concern where contracts involve significant sums of money or where the force majeure event means that a large number of contracts are unable to be performed.  In both cases, the risks may be heightened where an insurer is involved and seeks to enforce its rights of subrogation in recovering amounts paid out.

In the latter case, the quantum involved may be very significant (for example, if a trip with 500 passengers, who have each paid $40,000 for the package, is cancelled due to a flood event or earthquake, then the quantum is likely to be in the vicinity of $20 million) and potentially ‘ripe’ for a class action (or, at the very least, significant litigation in a Federal or Superior Court).  The class action risk essentially being realised in the recent “Scenic Tours” class action which involved claims arising from mass cancellations due to flooding.  The writer understands judgment in that case is currently reserved.[1]

There is no doubt that certain non-refund clauses are legitimate and necessary.

Ideally, the thought process in establishing the legitimacy of the clause is recorded in documentation and easily accessible when required.

Care should also be taken in relation to governing law provisions (noting certain States have particular legislation in relation to frustrated contracts – see for example Part 3.2 of the Australian Consumer Law and Fair Trading Act  (Vic) 2012).

These risks are not limited to travel providers and are likely to extend to any “standard” contracts that include non-refund clauses.

The issue has not yet been the subject of full scrutiny by a Superior or Federal Court (or obviously Appellate Court) and, as such, the views and issues outlined above should be taken in that context.    However, it appears that reckless abandon (or even a relaxed approach) in relation to the inclusion of what many see as ‘traditional’ or ‘standard’ clauses is likely to be fraught with danger.

Contact Mills Oakley

For further information, please do not hesitate to contact:

 

Stuart Walter | Partner
T: +61 3 8568 9524
E: swalter@millsoakley.com.au

 

[1] The writer understands the proceeding did not involve claims pursuant to section 24 of the ACL but did involve mass cancellations arising from flood events.

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