Appellant v Respondent

Appellant v Respondent - [2008] VSC 539 - VSC 2008 case summary — Zoe

[20]

3 In my view, the appeal gives rise to two principal legal issues, together with a number of sub-issues. The two principal issues relate to the proper construction of s 32W. First, what is the role of the expression "contrary to the requirements of good faith" in s 32W? Does it, as VCAT held, merely identify a factor to be taken into account in determining whether a contractual term causes a "significant imbalance in the parties' rights and obligations arising under the contract"? Does it thus play a merely adjectival or subordinate role in the section? Does it play a merely adjectival or subordinate role in another sense, as suggested by the respondent[1]? Or, on the other hand, does it add an extra element to the concept of an unfair term beyond the element of "significant imbalance", as the appellant submits? In any event, what does it mean? Those questions in turn may raise a question about the meaning and effect of the word "significant" in the phrase "significant imbalance". Second, in determining whether "contrary to the requirements of good faith and in all the circumstances" a contractual term causes "a significant imbalance in the parties' rights and obligations arising under the contract" (within the meaning of s 32W), what kinds of matters are required or permitted to be taken into account? In particular, to what extent, if any, must or may regard be had to other terms of the contract (especially as to price), to the precontractual conduct of the parties, or to any alternative options available to the consumer at the time of the contract? Must the matter be assessed as at the time of the contract without regard to any subsequent actual events, or may it be assessed as at a later time taking into account any actual detriment to the consumer that has arisen as a result of the existence or operation of the term? As will be seen, I consider that s 32X throws considerable light on all of these issues. Other parts of the statutory scheme also need to be considered and I will refer to them in due course. The legislative history and local and overseas authorities are also relevant. In the end, I conclude that VCAT's decision in favour of the consumer in this case was affected by errors of construction of s 32W in relation to both of the principal issues just mentioned, and that the decision should be set aside accordingly and the matter remitted to VCAT for reconsideration. But first I turn to the basic facts of the case and to the course of the proceedings below.

[27]

In section 8 of her application form, Ms Free ticked several boxes, to answer the question on the form, 'what do you want VCAT to decide and order?'. One box was for 'Payment of money'. Another was for 'Unfair term(s) in a consumer contract entered into after 8/10/2003'. Another again was for 'Misleading or deceptive conduct, false representation and unconscionable conduct'.
1. The proceeding came on for hearing before me on 9 May 2007. Ms Free appeared in person and gave evidence. Her sister Sally Free gave some brief evidence. Jacqueline Skewes, Jetstar's manager for customer relationships, represented Jetstar and gave evidence.
2. As the hearing proceeded, it became clear that Ms Free was indeed alleging, as her application had indicated, that contractual terms on which Jetstar was relying were 'unfair' terms in a 'consumer contract' within the meaning of those expressions in Part 2B of the Fair Trading Act 1999 and were void for that reason, with the result that Jetstar was never entitled to demand the additional payment that she had made. It also became clear that she was alleging that in demanding the additional payment Jetstar had engaged in unconscionable conduct within the meaning of that phrase in section 8 of the Fair Trading Act.
3. A ruling that a term in a contract is an 'unfair term' and void for that reason can have momentous consequences for a respondent, and perhaps for other persons who supply goods or services in the same industry, if a standard form contract is involved, even if the amount claimed by the applicant is small. So it is VCAT's usual practice, whenever an applicant ticks the box on the application form to make an allegation of an 'unfair term', to list a directions hearing in the proceeding so that the Tribunal can ascertain whether it is really the applicant's intention to make the allegation of an 'unfair term' in the technical sense as defined in Part 2B of the Fair Trading Act, and, if that is the applicant's intention, that the respondent gets fair notice that the Tribunal is going to be asked to make a ruling which may have momentous consequences for that respondent. Unfortunately that usual practice was not followed in this case. The proceeding was listed for a final hearing without there first having been the directions hearing. So, at the end of the final hearing, I reserved my decision but also made orders that permitted Jetstar to file and serve any written submission of law on the 'unfair term' issue by 8 June 2007 and permitted Ms Free to file and serve any written submission in reply by 22 June 2007.
4. Jetstar did file a written submission by 8 June 2007. It was not really a submission of law. It did not attempt to explore the comparatively novel question of what constitutes an 'unfair term' for the purposes of the Act or to present any argument about whether the terms relied upon by Jetstar were 'unfair'. Nevertheless, it was a helpful summary of the facts of which evidence had been given during the hearing, none of which was really in dispute, and an equally helpful summary of Jetstar's contentions. Ms Free did not file any written submission in reply.

[61]

It is apparent that a term in a consumer contract is to be regarded as unfair if it causes a significant imbalance in the parties' rights and obligations arising under the contract. It is apparent that the significant imbalance must be to the detriment of the consumer. And it is apparent that in determining whether a term causes a significant imbalance in the parties' rights and obligations one must have regard to all the circumstances. What is less apparent is: what is meant by a "significant" imbalance? And what is the role to be given to the words "contrary to the requirements of good faith"?
The word "significant" simply means "important" or "of consequence". It does not mean "substantial". It is not a word of fixed connotation and besides being elastic is somewhat indefinite.[14] However, in its context, it is designed to identify an imbalance, to the detriment of the consumer, which should be regarded as unfair. In this sense the definition is circular. But it is impossible to avoid the notion of fairness in determining whether a term causes a significant imbalance, even though this exercise is designed to ascertain whether a term is unfair.
The manner in which the Parliament has referred to the requirements of good faith is curious. The Parliament has not said that a term is to be regarded as unfair if the term is contrary to the requirements of good faith. Rather the manner of expression suggests that if a term causes a significant imbalance in the parties' rights and obligations arising under a consumer contract, to the detriment of the consumer, this would be contrary to the requirements of good faith. Thus the manner of expression suggests that the phrase is either surplusage or simply performs an adjectival role, designed to assist in the assessment of whether a term in a consumer contract causes an imbalance which is "significant". It is unlikely that the Parliament intended the words to be surplusage.[15] Hence it is likely that the Parliament intended that the reference to the requirements of good faith play a role in determining whether the nature, or extent, of an imbalance should be regarded as significant.
Insofar as the reference to the requirements of good faith performs a role (whether adjectival or substantive), it will be necessary to identify the content of these requirements. It is likely that it will have both a procedural and a substantive component. However I propose to defer this for the moment to see if the history of the provision, or any relevant authorities, suggest that a different meaning to that indicated by the language used. [sic]

[71]

"Three elements in the test in the Regulations of unfairness of a contractual term may be noted, viz.

(1) an absence of good faith;

(2) a significant imbalance in the parties' rights and obligations under the contract; and

(3) a detriment to the consumer.

Good faith has a special meaning in the Regulations, having its conceptual roots in civil law systems. The German Standard Contract Terms Act, providing for the avoidance of a term which is unreasonably disadvantageous to a party "contrary to the requirements of good faith" (see Markesinis: The German Law of Obligations Vol. 1 (1997) p.908), appears to have had a significant influence on the Directive (see Chitty on Contracts, 28th ed. (1999) para. 15-034)."

After referring to the comments of Bingham L.J. in Interfoto Library Ltd v Stiletto Ltd, Lord Justice Peter Gibson quoted from Professor Beale:[21]

"I suspect that good faith has a double operation. First, it has a procedural aspect. It will require the supplier to consider the consumer's interests. However, a clause which might be unfair if it came as a surprise may be upheld if the business took steps to bring it to the consumer's attention and to explain it. Secondly, it has a substantive content: some clauses may cause such an imbalance that they should always be treated as unfair."

Lord Justice Peter Gibson then said:

"As is aptly said in Anson's Law of Contracts, 27th ed. (1999), p.293, the good faith element seeks to promote fair and open dealing, and to prevent unfair surprise and the absence of real choice. A term to which the consumer's attention is not specifically drawn but which may operate in a way which the consumer might reasonably not expect and to his disadvantage may offend the requirement of good faith. Terms must be reasonably transparent and should not operate to defeat the reasonable expectations of the consumer. The consumer in choosing whether to enter into a contract should be put in a position where he can make an informed choice.

The element of significant imbalance would appear to overlap substantially with that of the absence of good faith. A term which gives a significant advantage to the seller or supplier without a countervailing benefit to the consumer (such as a price reduction) might fail to satisfy this part of the test of an unfair term.

Finally the element of detriment to the consumer must be present for the term to be found to be unfair."

The Director relied upon this decision.

[76]

The history of the FTA and the decisions of the House of Lords in the First National Bank case confirm my view that the expression "contrary to the requirements of good faith" in section 32W of the FTA performs an adjectival role and is designed to assist in the assessment of whether a term in a consumer contract causes an imbalance which is "significant". As I have indicated, the definition of an unfair term might be thought to be circular, as it is impossible to avoid the notion of fairness in determining whether a term causes a significant imbalance in the parties' rights and obligations. However, if the balance of the parties' rights and obligations is thought to be contrary to the requirements of good faith this would be indicative of a significant imbalance. There is no separate requirement of "good faith" in consumer contracts; rather "good faith" is a touchstone which might be employed in determining whether a term in a consumer contract is an unfair term.
It may be that, in practice, the concept of "good faith" provides limited assistance. If it is a principle of fair and open dealing, it provides direction; but it is not a roadmap to a destination. The same goes for the colloquialisms of "playing fair" and "coming clean". In the Interfoto case Bingham LJ also suggested that good faith was conveyed by the colloquialism of "putting one's cards face upward on the table"; but, frankly, I think this takes the concept too far.
In Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (Receivers and Managers Appointed) (Administrators Appointed)[28] the Victorian Court of Appeal was reluctant to conclude that commercial contracts were of a class that carried an implied term of good faith as a legal incident, although it observed that it may be sometimes appropriate to import such an obligation to protect a vulnerable party from exploitive conduct which subverts the original purpose for which the contract was made.[29] In this context Buchanan JA briefly touched on what might be the content of an implied contractual duty of good faith. This included acting reasonably, not acting capriciously, not seeking to prevent the performance of a contract or withholding its benefits, and not seeking to further an ulterior purpose for [sic] that which a contractual right or power is conferred. Frankly these examples of what might be the content of a duty to show good faith are of limited assistance. This is especially so in light of the detailed guidance provided by section 32X of the FTA, where a host of specific matters are set out which are designed to, and do, guide a court or the tribunal in determining whether a term of a consumer contract is unfair.
Sir Anthony Mason has said that he thought it probable that the "concept of good faith" embraced no less than three related notions:
1. An obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);
2. compliance with honest standards of conduct; and
3. compliance with standards of contract which are reasonable having regard to the interests of the parties.[30]

[81]

The terms which were to the effect set out in paragraph 17 above, and which Ms Free alleges is [sic] "unfair", were not individually negotiated. They were formulated by Jetstar and contained in information on its internet website. There was no opportunity for Ms Free to negotiate for their omission or for their modification. Her choice was only to make a booking in the way made available on the website, which involved incorporation of the terms into a contract, or not to make a booking.
That the terms were not individually negotiated is a matter that I have taken into account, as expressly permitted by section 32X, when considering whether they are unfair. Obviously, a term is less likely to be found to be unfair if it has been individually negotiated than if it has not been.
In two ways, the terms are indiscriminate. First, they are expressed to operate not only in a case when the customer is requesting a change to a different flight on another date or to a different flight at another time on the same date, but also in a case when the customer is requesting only a change to a passenger name on the flight originally booked. In each case, the terms operate to impose a requirement to pay not only the "change fee" of $75.00 per flight but also to pay the relevant fare difference. Secondly, in the second case when the requested change is to a passenger name only, the terms operate not only where the customer's proposed transfer of the ticket is part of a commercial transaction for financial gain but also when the customer's proposed transfer of the ticket is not part of any such transaction but is for personal reasons.
When a customer requests a change to a different flight, the customer is in effect requesting Jetstar to provide a different service: a seat on another flight. As at the date when the request was made, that seat was available to any purchaser at a particular price. Had there been no previous booking, the customer would have had to pay that price in order to secure the seat. Once Jetstar accedes to the request, the seat that the customer originally booked becomes vacant. Jetstar may or may not be able to re-sell it. In such a case, there is nothing potentially unfair about contractual terms requiring the customer to pay the difference between the fare for the seat originally booked and the fare for the seat secured on the different flight as at the date when the change is made.
But the terms are indiscriminate. When a customer does no more than request Jetstar to change the name in which a passenger's ticket has been booked, there is no change of the flight. The seat originally booked remains sold. There is no potential detriment to Jetstar when it accedes to the request; instead, there is a windfall for Jetstar because the contractual terms operate to entitle it to require the payment of a higher price than the price for which the seat was sold originally, and a detriment to the customer because the contractual terms operate to require the customer to pay a higher fare than the fare originally agreed upon. Such a state of affairs is, on the face of things, contrary to the requirements of good faith. Potentially, there is a significance imbalance in the parties' rights and obligations arising under the contract because, in the manner described, there is a windfall to Jetstar, to the detriment of the customer, the consumer.
I have said that "potentially" there is a significant imbalance because Jetstar, in its evidence at the hearing and in its written submission, asserted that there were good reasons for Jetstar requiring a customer who requested a passenger name change to pay the fare difference. The written submission described those reasons as being:

[83]

It is reasonable for Jetstar to seek to prevent re-sale, in the ways described in the written submission, of discounted tickets for financial gain. But the term in question does more than that. It is indiscriminate in the second way described above. It catches not only the person whose request for a name change is made with a view to achieving a financial gain but also the person who, like Ms Free, requests a name change for family or other personal reasons and with no view to achieving a financial gain.
Accordingly, in my opinion, the terms in question, to the extent that they require payment of a fare difference when a name change is requested, cause a significant imbalance, to the detriment of purchasers from Jetstar, in the rights and obligations of the parties under the contract of sale, are "unfair" within the meaning of that word in part 2B of the Act, and so are void by virtue of section 32Y(1).
On the other hand I see nothing unfair in Jetstar requiring payment of a "change fee" to compensate it for the administrative work involved in effecting a change in the booking, whether it be a change of flight date, change of flight time or change of passenger name. There was no evidence of how the "change fee" of $75.00 per flight segment was arrived at but there does not seem to be anything obviously unreasonable about the figure.
By virtue of section 32Y(3) the contract will otherwise be binding if it is capable of existing without an unfair term. It is. Deletion of the words "and name" from paragraph 2.2 of the "Jet Saver Fare Rules" and deletion of the word "or Passenger Name Change" from the first column on the "Fare Types" page would remove the unfair term and the parties would remain otherwise bound by the remaining terms of the contract.
What I have just written assumes that words or phrases in a contractual provision can be regarded as a "term" and can be evaluated as being unfair and therefore void without the whole contractual provision having to be regarded as unfair and therefore void. In the AAPT case (above) Justice Morris P pointed out that the Act does not define the word "term" and expressed the opinion (in paragraph 13) that in the context of Part 2B the word seemed to required "some element of integrity, that is an element that can stand alone or be identified as a separate part of a contract". While the words that I have said could be deleted from the contractual provision are meaningless if they stand alone, it would be possible to paraphrase the contractual provision so that there was a discrete part of it which imposed the requirement for payment of the fare difference when a passenger name change was requested. So I consider that the assumption is valid.[34]

[171]

(a) First, in substance, the appeal seeks merits review. It does not present a question of law, stated in precise terms, which the Court is required to answer;

(b) Jetstar adduced no evidence below to explain the purpose for and basis of the fare increment term or the non-refundability term. Accordingly, no basis exists for the conclusion that the requirements of good faith were met. Jetstar failed below on this ultimate question of fact, not on any pure question of law;

(c) Secondly, Jetstar now wishes to raise on appeal a matter concerning the meaning of section 32W that it did not raise below; namely that the clause "contrary to the requirements of good faith" in section 32W stands in a co-ordinate not subordinate relationship to the "significant imbalance" clause. As a matter of grammar, this is unorthodox. The clause "contrary to the requirements of good faith" appears to have a defining rather than a merely conjunctive operation; and "significant imbalance in the [parties'] rights and obligations" is the object of the sentence's finite verb "causes", suggesting that this is the principal clause;

(d) The language and structure of section 32W suggest that the clause "contrary to the requirements of good faith" is a subordinate adjective clause that qualifies the principal clause containing the "significant imbalance" test;

(e) However, be that as it may, it is an ultimate question of fact whether a term was contrary to the requirements of good faith. Added to this is the conjunctive phrase "and in all the circumstances", which mandates a wider inquiry;

(f) Alternatively, it is a mixed question of fact and law; in that a conclusion is to be reached on the facts and values attributed to the "requirements of good faith", and the inquiry entrusted by the expression "in all the circumstances"[77]; whatever the facts and "values" involved in this inquiry may be, Jetstar called no evidence below relevant to this inquiry;

(g) Thirdly, in the further alternative, as a matter of statutory construction of section 32W, there is no warrant in the language or statutory context of section 32W to conclude that its operation is restricted only to ensure procedural fairness in the formation of a consumer contract, and does not extend to the substantive content of the contract. The language of the provision permits it to operate in both fields: formation and performance. In VCAT Jetstar's case seemed to be directed only to formation and pre-contract disclosure of the "Jetsaver Fare Rules";

(h) However, it follows both from the language and structure of section 32W that it is the effect of the relevant term to which the overriding requirement of fairness is directed:

"A term in a consumer contract is to be regarded as unfair if, contrary to the requirements of good faith and in all the circumstances, it causes a significant imbalance in the [parties'] rights and obligations arising under the contract to the detriment of the consumer".[78]

[195]

Ground 2

This ground is addressed to the meaning of the relevant statutory description, ie, as to the semantic or grammatical sense of the clause of section 32W which contains the expression "contrary to the requirements of good faith and in all the circumstances".

Jetstar seeks to express this ground as raising a question of law, by contending that this clause in section 32W imposes a separate element in addition to that requiring "significant imbalance" in the parties' rights and obligations.

It is apparent from Jetstar's written submissions that the error alleged in the application of section 32W is said to have proceeded from the wrong construction given to section 32W. It is stated:

"Jetstar submits that Vassie SM's construction of section 32W is wrong in law, and that the phrase "contrary to the requirements of good faith" is a separate element of the definition of unfair term in section 32W of the FTA which must be given an independent operation".[91]

The reasons for this submission are then set out in paragraphs 27 to 42 of Jetstar's written submissions.

However, even if Jetstar's point of statutory construction is upheld, this ground can lead to no different result unless error is identified in the application of s 32W, in its preferred meaning, to the circumstances of the case, and this is a question of fact.

When Vassie SM stated his conclusion as to whether the requirements of good faith were met, correctly, it is submitted, he stated this by reference to the factual "state of affairs" which, "on the face of things" led him to this conclusion. That state of affairs was based on findings of fact that were clearly open to be made. When Vassie SM referred to "such a state of affairs" as being, "on the face of things, contrary to the requirements of good faith", he was making a finding or reaching a conclusion of secondary fact based on findings of primary fact. Self-evidently, the reason he drew the conclusion or inference of secondary fact was because Jetstar adduced no evidence to rebut it.

In any event, the statutory construction contended for by Jetstar is contrary to the ordinary and grammatical meaning of section 32W, as indicated by the language and context of the provision: see above. Further, Vassie SM correctly understood and applied the decision of Justice Morris P in Director of Consumer Affairs Victoria v AAPT Ltd[92]. The AAPT case was not "clearly wrong", so that Vassie SM did not misdirect himself by following its authorities.

[197]

The object of Part 2B, in which section 32W appears, is to provide for unfair terms in consumer contracts to be void: ss.1(bb), 32Y(1). The specific purpose of section 32W is to describe criteria by which the field of inquiry into "unfairness" is marked out, without unnecessarily restricting the factual and evaluative aspects of that inquiry.
- Ascertainment of the facts and values to be attributed to the stated criteria in section 32W has been deliberately entrusted to the courts (more particularly VCAT) for determination.
It is the effect of a term in a consumer contract to which the description provided by section 32W is directed.
- The subject of the provision is "a term in a consumer contract" not, for example, the circumstances by which a term is incorporated into a consumer contract.
- The language and structure of the provision, in particular the phrase "if ... it [the term] causes a significant imbalance ..." signifies as much.
- Further, the illustrative instances provided by sub-paragraphs (a) - (m) of section 32X are concerned with "the object or effect" of a term in a consumer contract.
The principal clause of section 32W is the sentence "(a) term in a consumer contract is to be regarded as unfair if ... it causes a significant imbalance ... ".
- As a matter of grammar, the object of the sentence's finite verb "causes" is "significant imbalance in the parties' rights and obligations", suggesting that this is the principal clause.
- As a matter of logic, this follows from the fact that the evaluation of "unfairness" under section 32W is concerned with the effect of a term in a consumer contract.
The clause "contrary to the requirements of good faith and in all the circumstances" is a subordinate adjective clause that qualifies the principal clause containing the "significant imbalance" test.
- The grammar and structure of section 32W do not suggest that the "significant imbalance" must be caused by the absence of good faith.
- However, the absence of "good faith" and "all the circumstances" qualify the test of whether the relevant term "causes" a significant imbalance in the parties' rights and obligations.
The conjunctive phrase "and in all the circumstances", which mandates a wider inquiry than the requirements of "good faith", qualifies or modifies the evaluation of the effect of a term in a consumer contract in the context of the "significant imbalance" test.
The conjunctive phrase "and in all the circumstances" mandates an inquiry into the circumstances of the consumer contract in which the relevant term is contained.
- The "significant imbalance" test applies to "the parties' rights and obligations arising under the contract to the detriment of the consumer".
Alternatively to the proposition stated in paragraph 4 above, if it is considered that the clause "contrary to the requirements of good faith" in section 32W stands in a coordinate not subordinate relationship to the "significant imbalance" clause, it nevertheless has a double operation:

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