By Aaron Zoanetti, Pointon Partners
- The following article was due to appear in Issue 5 of CATO's Ground Control Magazine which we anticipate will now be delayed until June.
- The article provides general guidance only and should not be considered legal advice, as an operator’s legal position will depend on its particular circumstances.
LIMITING EXPOSURE TO WORLD EVENTS THROUGH EFFECTIVE LEGAL DOCUMENTATION
No industry is more directly and broadly exposed to world events such as Coronavirus than the travel industry. Many businesses will experience challenging times in the coming months as forward bookings cancel and new bookings come to a halt.
There is not much within the control of tour operators to generate new bookings in this environment. But where customers are cancelling or where the tour operator has taken forward risk on inventory, what can be done at a practical level to mitigate exposure?
Cancellations – do I need to refund my customers?
Turning firstly to cancellations, customers may have rights at law (or potentially under booking conditions) to cancel their booking due to Coronavirus being considered an event of force majeure.
An event of ‘force majeure’ is an unexpected and extraordinary circumstance outside of the control of the parties which prevents the fulfilment of a contract. Usually the parties will be excused from performing their obligations in these circumstances.
Where a customer has the right to cancel or where the operator cancels because of an event of force majeure, a crucial question is whether the operator needs to refund the customer, even if the operator has already paid its suppliers.
This type of fact scenario was considered in the 2015 case of Ferme v Kimberley Discovery Cruises. In this case a cruise operator cancelled a cruise just prior to sailing because of cyclonic weather conditions and sought to rely on a provision in its booking conditions which stated that no refunds would be made if the cruise was cancelled due to ‘unexpected events’.
The court found the 100% cancellation fee provision to be an ‘unfair contract term’ and therefore void because it went further than necessary to protect the legitimate interests of the cruise operator. Because of this, customers were entitled to a full refund, even though the cruise operator had incurred costs that were not recoverable.
The court offered some guidance on a type of condition that would be less likely to be considered ‘unfair’ and would therefore be enforceable: In effect, a condition which limits cancellation fees to amounts which have not been expended or legally committed to be spent would likely be enforceable in a situation where travel is cancelled due to ‘unexpected events’.
Do my suppliers need to refund me?
Whether or not an operator’s suppliers need to refund payments made for future services depends on the agreement between the operator and the supplier.
A supplier agreement should contain a force majeure provision which gives a right to cancellation and refund where services are cancelled due to unexpected and extraordinary events. A useful tip is to ensure that the definition of ‘force majeure’ encompasses a ‘do not travel’ or ‘reconsider your need to travel’ advice issued by DFAT.
Properly drafted cancellation/refund terms should mitigate exposure to refund customers for existing bookings where funds have already been paid to suppliers (although profit and potentially administration costs may not be recoverable).
Properly drafted force majeure provisions in a supplier agreement should mitigate the risk associated with forward risk on inventory that is no longer required due to ‘unexpected and extraordinary events’.
CATO Members seeking further advice, please contact us for a direct introduction to Aaron Zoanetti.