Legal Angle - New unfair contracts legislation to affect airlines

The Federal Government introduced the Trade Practices Amendment (Australian Consumer Law) Bill 2009 to Parliament last month. Among other things, this Bill will introduce a national unfair contracts regime. At its simplest, this regime will provide that any term in a standard form contract with consumers that is ‘unfair’ will be void.

The legislation will affect any industry that requires the use of standard from contracts. For example, banks in Australia are reportedly concerned that over $1 billion worth of income from penalties and default charges will be lost because the charges will be found to be “unfair”. The proposed legislation has important implications for airlines because the conditions governing air travel and air waybills are almost invariably standard form contracts.

A term in a standard form contract may be found to be ‘unfair’ (and therefore void) if it:

(a) would cause a significant imbalance in the parties’ rights and obligations; and

(b) is not reasonably necessary to protect the airline’s legitimate interests.

The Bill gives examples of provisions that a court may consider to be unfair. These include provisions allowing one party greater rights than the other to terminate or change a contract or allowing one party to change the product that will be supplied under the contract.

Under similar Victorian legislation, the Victorian Civil and Administrative Tribunal recently found that a fare rule that allowed an airline to charge a substantial fee before allowing a passenger to transfer a ticket to a family member was ‘unfair’. The Tribunal accepted that the airline had a legitimate interest in preventing a secondary market for sale of its tickets, but considered that the relevant fare rule went beyond what was required for this and was therefore void.

This suggests that, for example, provisions in airlines’ conditions of carriage that prohibit all transfers of tickets could be challenged under the proposed new national regime. Similarly, almost all airlines include terms in their conditions of carriage allowing them to change or cancel flights at short notice or deny boarding in the case of overbooking.  These provisions and the compensation provided to passengers could be subject to review under the new legislation.

The proposed legislation includes a number of exemptions.

These include the following:

• terms expressly permitted by legislation are exempted. The terms of the 1999 Montréal Convention regarding airline liability for passengers are now adopted as law in Australia. As a result, provisions in airline agreements that restrict liability in accordance with the terms of the Montreal Convention or the equivalent laws concerning domestic carriage, will not be able liable to challenge under these proposed new laws.

• provided it is disclosed, the upfront price charged under a contract cannot be challenged as unfair. This means that customers cannot use this legislation to complain that, say, the cost of a fully flexible ticket is ‘unfair’; and

• strangely, an exemption applies to contracts for the carriage of goods by sea. No equivalent exemption, however, applies for contracts for carriage of goods by air.

There is no power under the proposed legislation for a court to ‘write down’ unfair provisions to save them. Accordingly, even if an airline has a legitimate interest to protect, a provision that goes beyond what is necessary to protect that interest is likely to be struck out completely. Careful drafting to avoid this will be required.

The Trade Practices Amendment (Australian Consumer Law) Bill has been passed in the House of Representatives but has now been referred by the Senate to the Senate Economics Committee for review. The Senate Economics Committee is due to report on the legislation by 7 September 2009.

If passed by the Senate, the Government has stated that the legislation is intended to come into effect as Federal law from 1 January 2010. It is then intended that each of the States will pass mirror legislation to adopt the rules as State legislation as well.

If the legislation is passed, it would be prudent for all airlines to review their ticket rules, conditions of carriage and any other standard form agreements that they use in their businesses to ensure they are ready in good time for the new regime.

Richard Westmoreland
Partner, HWL Ebsworth

For enquiries contact: simon.liddy@hwlebsworth.com.au