Contracting out of class actions drops anchor in Australia

What you need to know

• There has been uncertainty about whether class action waiver clauses, in which a potential group member agrees to waive their right to participate in a class action when contracting with a potential defendant, are enforceable in Australia.  
• In Carnival plc v Karpik (The Ruby Princess) [2022] FCAFC 149, the Full Federal Court has held (Rares J dissenting) that class action waiver clauses are not inherently unlawful and not contrary to the statutory purpose of the Federal class action regime.  However, waivers may in some circumstances be void unfair contract terms when included in a standard form consumer or small business contract. The precise circumstances in which waivers would be void remain uncertain. 
• In this case the waiver was found to be enforceable.  The case concerned a class action waiver in terms and conditions applicable to contracts made governed by United States law and subject to a United States exclusive jurisdiction clause. Derrington J held that the waiver was not unfair principally because the clause did not prevent passengers bringing individual claims and, given the size and nature of the claims, there was no evidence that they would be stymied because of the waiver.  The defendant also had a legitimate interest in ensuring that all claims were brought in California and as individual claims.  Allsop CJ, by contrast, emphasised the international nature of the matter and suggested that the position might be different in contracts centrally concerning Australian consumers. 

What you need to do

Given the differing views of the judges, this is unlikely to be the last word on this issue.  However, companies should consider whether and in what circumstances a class action waiver should be included in contracts.

Class action waivers

Class action waivers are contractual terms in which people agree not to participate in class actions, including to opt-out if an open class action is commenced.

The United States has frequently enforced them, recognising the burden and risks class actions can place on defendants.  In Canada, class action waivers have been viewed as contrary to public policy at least in some circumstances.  The position in Australia has been unsettled, leaving potential defendants uncertain whether to include, or seek to enforce, such clauses.

The Full Federal Court has now given some guidance on when a class action waiver might be permissible.  The judgments suggest that such a clause could be enforced in some circumstances, so potential defendants should consider whether and in what circumstances a class action waiver should be included in contracts, noting the risk of unfair contract terms issues for standard form consumer contracts.  

The background

This case concerned a class action commenced against the time charter and the owner and operator respectively of the Ruby Princess, in respect of loss or damage allegedly suffered by passengers (and their relatives) when an outbreak of COVID-19 unfolded onboard the ship in March 2020.

For certain passengers (US group members), the terms and conditions contained an exclusive jurisdiction clause in favour of the United States District Courts in California and a "class action waiver" clause, which sought to waive any entitlement to participate in a class action.  Princess sought to stay the proceedings under the contract in respect of the US group members on the basis that their claims were being advanced contrary to the exclusive jurisdiction clause.

The primary judge refused the stay application on the basis that, on the facts, the US terms and conditions did not form a part of the carriage contract.  His Honour would alternatively have declined to enforce the exclusive jurisdiction clause and the class action waiver.

The appeal

The Full Court overturned the primary judge, finding that the US terms and conditions were incorporated into the contract.  The issues were then:

• whether the class action waiver clause was inconsistent with the public policy/purpose underlying the Federal class actions regime; and
• whether the class action waiver clause was an unfair contract term. 

The majority (Allsop CJ and Derrington J) permitted the waiver clause to be enforced in this instance, but for differing reasons.  Rares J dissented, holding that the waiver clause was inconsistent with the Federal class actions regime. 

The case also raised important issues about the extraterritorial effect of the Australian Consumer Law, including the unfair contract terms regime.  Those questions were not finally resolved, with the Court grappling with whether and how sensible limits could be placed on the jurisdiction.  They are beyond the scope of this update.  

Consistency with the Federal class actions regime?

The majority held that the Federal class actions regime is permissive and, even though it contemplates opt-out after proceedings are commenced and with detailed information about the case, there is nothing inconsistent with the statutory framework in a potential claimant voluntarily waiving their right to join a class action / agreeing to opt out in advance, including through a standard form contract.  The majority noted that, unlike in one Canadian case, no broader public policy argument concerning access to justice had been advanced, and in any event concerns about access to justice did not arise on the particular facts.  This leaves open the possibility that additional public policy issues might arise in future cases involving mass claims involving smaller individual losses. 

Rares J, on the other hand, concluded that the class action waiver clause was unenforceable on the basis that it would negate:

• the legislative intention to enhance access to justice by virtue of the class action regime and the efficiency of the exercise of the judicial power of the Commonwealth; and
• the right of a group member to decide whether to exercise the right to opt out of the proceeding after it had been commenced, and would undermine Parliament's choice of an opt out, rather than opt in, model.

The split decision, and the possibility of wider public policy arguments, mean that this issue is likely to be considered again in Australia, and it may ultimately require clarification by the High Court.  It is possible that the applicants will seek special leave to appeal the decision itself.  But the majority view is that, in principle, class action waivers are permissible in Australia – at least in some circumstances. 

Was the class action waiver clause unfair? 

The Court then considered whether the class action waiver clause was an unfair term in a consumer contract (assuming, without finally deciding, that the Australian Consumer Law applied to the contract).  It is important to note that this argument is available only for terms in standard form contracts entered with consumers and certain small businesses, and so would not impact every potential class action scenario.

The majority concluded that, in this particular case, the class action waiver clause was not unfair.

To be void as an unfair contract term, a contract term must:

• cause a significant imbalance in the parties' rights and obligations
• not be reasonably necessary in order to protect the legitimate interests of the party advantaged by it; and
• cause detriment to the other party.

Importantly, all three requirements must be satisfied before a term will be void.

Derrington J did not consider any of them to be satisfied, holding that:

• Significant imbalance: The class action waiver did not cause a significant imbalance because it did not impede the individual's substantive right to bring proceedings. It merely required such a claim to be brought individually.  There was no evidence to support the primary judge's finding that the clause would render it economically unviable for the individual to bring proceedings.  
• Legitimate interest: As an international corporation engaged in business across multiple jurisdictions, Princess had a legitimate interest in requiring actions brought against it to be conducted in the jurisdiction it operates and in which it is likely to be more familiar. It provided efficiencies by responding to similar claims in the same forum, on an individual (rather than group) basis and using the same lawyers, experts and process.  His Honour also considered, without deciding, a broader potential legitimate interest in reducing the risk exposure resulting from class actions, where a single decision can entrench an entity's liability to all impacted customers.
• Detriment: There was no evidence that showed any detriment as a result of the waiver. In addition, Princess did everything reasonably necessary to bring the class action waiver clause to the passenger's attention – the clause was prominent at the beginning of the terms and specifically mentioned the importance of carefully reading the clause.

These features may partly reflect the international character of the case, as well as the likelihood that it will be more viable for parties to bring individual claims in negligence/personal injury cases than mass consumer claims involving a small individual loss. 

Allsop CJ, in his concurring judgment, emphasised that international aspect and indicated 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 Pt IVA".  

Given the different emphases in the judgments and that all three elements must be satisfied for a contract term to be unfair, the judgment highlights potential arguments for defendants seeking to rely on class action waiver clauses in standard form consumer and small business contracts in Australia. 

Looking to the future 

It is likely that there will be further litigation around both the unfair contract terms and public policy issues, and the matter may ultimately need to be considered in the High Court.  

The case was an unusual one given its personal injury focus, and courts may perceive different issues in (for example) mass customer claims for individually small economic losses.  However, the case does indicate that, in some circumstances, class action waiver clauses could have a legitimate place in the management of companies' litigation exposure in Australia.  Companies should reflect on whether and when it might be appropriate to include a waiver as part of contracting arrangements.   

Authors: Mark Bradley, Partner; Lucinda Hill, Partner; and Jessica White, Lawyer.