Welcome to the second article in our ‘UCT 102‘ series, in which we explore some of the more nuanced questions relating to the unfair contract terms (UCT) regime under the Australian Consumer Law (ACL)1 and its application to different types of contracting arrangements. In this article, we explore whether the UCT regime applies to overseas suppliers of goods or services under contracts made outside of Australia, in light of a recent breaking judgement handed down by High Court.
Up until very recently, it was unclear whether the UCT regime had extraterritorial application. However, on 6 December 2023, the High Court of Australia in Karpik v Carnival plc [2023] HCA 39 (Karpik) handed down a judgment with enormous implications for both local companies and foreign companies carrying on business in Australia, finding that the UCT regime under the ACL does in fact have extraterritorial application.
In this article, we provide an overview of the findings of the High Court in Karpik, and break down the implications of those findings for both Australian businesses and foreign businesses operating in Australia.
The background of Karpik
Karpik was an appeal arising out of well-known proceedings brought through the Victorian courts following the COVID-19 pandemic. These proceedings relate to the passenger ship Ruby Princess, whose voyage was cut short due to an outbreak of the pandemic. A class action was brought by passengers and their relatives (represented by Mrs Karpik, a fellow passenger) against the owner and charterer of the Ruby Princess (together, Princess).
In Karpik, Princess brought an interlocutory application for a stay of the claims in the class action as they related to Mr Ho, a Canadian passenger of the voyage, whose contract with Princess was made outside of Australia and relevantly contained:
- a choice of law clause, applying general US maritime law (Choice of Law Clause);
- an exclusive jurisdiction clause, in favour of the US District Courts for the Central District of California in Los Angeles (Exclusive Jurisdiction Clause); and
- a clause prohibiting passengers from commencing any class or representative action in relation to disputes arising under the contract (Class Action Waiver).
Princess alleged that the claims should be stayed by reason of the Exclusive Jurisdiction Clause and the Class Action Waiver. In response, Mrs Karpik asserted that section 23 of the ACL (the key clause setting out the test for contravening the UCT regime) applied to Mr Ho’s contract, and that the Class Action Waiver was unfair in accordance with section 23 and thus void. The questions before the High Court were:
- Was section 23 capable of applying to Mr Ho’s contract? In other words, did section 23 have an extraterritorial application?
- If section 23 did apply to Mr Ho’s contract, was the Class Action Waiver unfair within the meaning of section 23?
We consider each question, and set out the applicable law in relation to each, in separate parts below.
Part 1 – Extraterritorial application of the ACL
Section 5(1) of the Competition and Consumer Act 2001 (Cth) (CCA) specifically provides that the ACL (other than Part 5-3) extends to the engaging in conduct outside Australia by bodies corporate incorporated or carrying on business within Australia. Put simply, in the words of the High Court, section 5(1) of the CCA provides that if a corporation is carrying on business in Australia, the ACL (other than Part 5-3) applies to the conduct it engages in outside of Australia, regardless of whether the corporation is a local or foreign corporation.2
In Karpik, Princess raised a number of arguments in support of its submission that section 23 should not have an extraterritorial application. In rejecting each of these arguments, the High Court focused on a strict interpretation of section 5(1) of the CCA when read with section 23 of the ACL.
The arguments raised by Princess, and the High Court’s response, provide a useful analysis of important legal principles. We draw out each of these in the questions below.
Can the UCT regime apply where the governing law is not Australia?
Yes, according to the High Court. In Karpik, Princess asserted that section 23 would only apply where the ‘proper law’ of the contract was Australian law. Considering the Choice of Law Clause, Princess sought to rely on the absence in the UCT regime of a section equivalent to section 67 of the ACL (applicable to consumer guarantees), which essentially deals with conflict in the ‘proper law’ of a contract.3 The High Court conceded that there was no such equivalent section, but found that this omission was no basis for construing the UCT regime as only applying where the ‘proper law’ of the contract was Australia.4 The High Court said that this construction was contrary to its interpretation of the CCA and ACL (discussed below), and that Princess’ construction on this point would mean that parties could essentially contract out of the UCT regime by including a foreign choice of law clause.
Isn’t there a common law presumption against extraterritoriality?
Yes, but according to the High Court, this is an interpretive principle, not a fundamental common law right.5 The High Court said that “the application and force of the presumption depends upon the extent to which the provisions of a statute depart from common expectations that Parliament’s concern with the subject matter is limited to matters within its territory”.6 Thus, as can be seen from the rest of the High Court’s judgement, the application of the presumption will really come down to statutory interpretation.
Section 23 of the ACL doesn’t include the words “in trade or commerce”. Doesn’t that mean that the regime has no extraterritorial application?
Not necessarily, it seems. Following the above, Princess asserted that section 23 of the ACL, when read with section 5(1) of the CCA, lacked the additional territorial connection that was seen in most other sections of the ACL, and thus that the common law presumption should prevail. To illustrate this distinction with an example, there are other parts of the ACL (such as the consumer guarantee provisions) that refer to particular conduct, or the supply of goods or services, as arising “in trade or commerce”, with the term defined in the ACL as trade or commerce “within Australia” or “between Australia and places outside Australia”.
The High Court rejected this argument, stating that “the specificity of s5(1) of the [CCA] as to the extraterritorial reach of [the UCT regime] (which includes standard form contracts with consumers made outside Australia by those identified in [section 5(1)] cannot be ignored“. In other words, as the High Court explained, there was no need to identify a further territorial connection, (such as a reference to the supply of the services occurring “in trade or commerce”) whether by implication or statutory presumption.7
As such, this would suggest that both Australian bodies corporate, and foreign corporations that carry on business in Australia, will be subject to the UCT regime in respect of conduct engaged within or outside of Australia, where it is captured by section 23 of the ACL.
Does the contract need to be entered into in Australia, with an Australian, for the UCT regime to apply?
No. A curious outcome of Karpik is that section 23 was said to apply to the contract that was entered into between Mr Ho (a Canadian resident) and Princess (a foreign business that carried on operations in Australia), despite that neither party was an Australian resident and that the contract was made outside of Australia. While the High Court noted that the ‘giving effect to that contract’ (by Princess seeking to rely on the Exclusive Jurisdiction Clause and the Class Action Waiver) occurred in Australia, this was not relevant to its finding that section 5(1) of the CCA and section 23 of the ACL, when read together, had extraterritorial application.
The High Court’s reasoning was that if a corporation carries on business in Australia, then “a price of doing so” is that the corporation must comply with statutes that are intended to provide protection for consumers,8 irrespective of whether the terms of the relevant contract are made in Australia or made overseas.9 The High Court rejected an argument submitted by Princess that section 23 should be construed as only applying in relation to consumers in Australia, stating that in its view, that construction was contrary to the definition of ‘consumer’ under section 3 of the ACL and section 23(3) of the ACL (which defines a ‘consumer contract’), neither of which are limited to consumers or individuals “in Australia”.10
The High Court acknowledged the potential ramifications of this finding but said in its view that the “absurd and capricious results” that could result from section 23 applying to contracts made outside of Australia were “overstated”. An example of one such “absurd and capricious result” that was given to the High Court was:
A company which manufactures cars in Europe and sells them in Australia is subject to the operation of s 23 in relation to its sale of cars in other European countries.
In relation to this example, the High Court said that while its findings would open up the possibility for a consumer (which presumably could also extend to a European consumer, although this is not stated in the judgement) to take action against a European car manufacturer under section 23 in the Federal Court of Australia, this was “a very different question” to whether the consumer would take such action and whether such action would progress to judgement.11 The High Court also noted that it would be open, in that instance, for a party to assert that the Federal Court of Australia was an inappropriate forum, and that where the matter was heard in a foreign court, it would be a matter for that foreign court as to whether to apply section 23 or not.
Part 2 – Application of UCT to Class Action Waiver
The Karpik judgment not only provided some groundbreaking findings on extraterritoriality; it also gives us High Court authority on applying the UCT test under section 23. The High Court considered whether the Class Action Waiver (restated below) was an unfair contract term for the purposes of section 23.
”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…”
The court’s application of the UCT test in section 23 is summarised below.
1. Did the Class Action Waiver cause a significant imbalance in the parties’ rights and obligations arising under the contract?
Yes, according to the High Court. The clause, on its face, was for the benefit of Princess and not Mr Ho, and was “particularly one-way in its terms because it [operated] to impose limitations on passengers but in no way [restricted] the options of the carrier”.12 Importantly, the High Court said that while the Class Action Waiver did not impede Mr Ho’s individual right to sue, it had the effect of preventing or discouraging passengers from vindicating their legal rights where doing so individually was cost prohibitive.13
2. Was the Class Action Waiver reasonably necessary to protect Princess’ legitimate interests?
No, according to the High Court. Princess identified its interests as “facing a number of individual claims, rather than a class action, in particular on the basis that when claims are aggregated in a class action, faced with even a small chance of devastating loss, defendants may be pressured into settling questionable claims”.14 The High Court considered that this did not explain or provide evidence for why the Class Action Waiver was reasonably necessary to protect a legitimate interest of Princess.15
3. Did the Class Action Waiver cause detriment to Mr Ho?
The High Court was satisfied that Mr Ho would suffer a detriment by being denied the benefits of joining a class action proceeding.16
4. Was the Class Action Waiver transparent?
The High Court determined that it was not, and provided some useful commentary on application of the ‘transparency’ element of the UCT test. The High Court said that while the Class Action Waiver was plainly legible, it was the overall process that presented transparency issues. The High Court noted that Mr Ho was only able to view the Class Action Waiver once he received his booking confirmation email, and only then if he clicked on the link in that email, navigated into the resulting webpage (which had three different contracts on it), and signed into the webpage to determine the applicable contract. The High Court said that the Class Action Waiver was thus not presented clearly, nor was it readily available to Mr Ho.17
The High Court provided some interesting commentary on applying the transparency test, stating that “the greater the imbalance or detriment inherent in [a] 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“.
Where to from here?
The result of the judgment in Karpik is that companies that carry on business in Australia (whether local or foreign) can be subject to the UCT regime even in relation to customers or suppliers that are located outside of Australia, and even where the contract between the company and the customer or supplier was made outside of Australia. However, while the High Court recognised this as its interpretation of the CCA and the ACL, it also pointed out that there may be practical difficulties in successfully navigating a case where the nexus between the contract, its parties, and the Australian legal system, is too remote (as set out above in this article).
Local companies are likely already aware of the UCT regime and have addressed risks arising under the regime in their standard form consumer and small business contracts. Any local companies that have not yet done so, and any foreign companies that carry on business in Australia, should have their standard form consumer or small business contracts reviewed to ensure that they comply with the UCT regime. The potential penalties that businesses may face for contravening the UCT regime are significant, and we have discussed this point (and many others) in our broader UCT series which can be found here.
How can we help?
We have a dedicated contracting and consumer law team that can assist you with contract preparation and review and can provide you with advice on your rights and obligations under the ACL, particularly in light of recent reforms. We also routinely present to businesses on the Australian Consumer Law and the unfair contract terms regime. Please contact us if you would like more information about the services we provide.
This article was written by Teresa Torcasio, Partner and Zoe Vise, Associate.
1Competition and Consumer Act 2001 (Cth), Sch 2 (‘Australian Consumer Law‘ or ‘ACL‘).
2See Karpik at [38].
3Karpik at [46].
4Karpik at [47].
5Karpik at [19].
6Ibid.
7Karpik at [44].
8Karpik at [38].
9Karpik at [40].
10Karpik at [48].
11Karpik at [50].
12Karpik at [53].
13Karpik at [54].
14Karpik at [55].
15Ibid.
16Karpik at [57].
17Karpik at [58].
