A recent Victorian Civil and Administrative Tribunal (VCAT) decision has provided welcome guidance on the right under Victorian law for tour operators to deduct overheads from amounts to be refunded to consumers for cancelled travel.

Background

Quinn v Hay Events Pty Ltd considered the obligation for an event organiser to refund an $11,013.71 deposit paid by a couple for their wedding reception which was unable to be held due to Covid-19 gathering restrictions.

The organiser offered to refund the couple $8,733.00 and to retain $3,191.00 from the deposit. The offer was not accepted, which resulted in the couple making an application to VCAT for relief.

  • Although the contract between the parties contained a force majeure clause, this was not relied upon by either party. Rather, VCAT found that Covid-19 and the consequential disruption was an unforeseen event which rendered performance of the contract radically different from what was intended by the parties. In other words, the contract was frustrated.

The law

At common law, frustration discharges a contract and prior payments cannot be recovered. This effectively means a customer is not entitled to any refund where a contract has been frustrated.

Legislation in Victoria, South Australia and New South Wales modifies the common law by making payments open to adjustment between the parties. Corresponding legislation does not exist in Queensland, Western Australia or Tasmania.

The relevant legislation modifying the common law position in Victoria is the Australian Consumer Law and Fair Trading Act 2012 (the Act), and particularly sections 36 – 39 of the Act.

Section 36 of the Act specifies that all amounts paid by a consumer before the time of discharge are recoverable. In other words, the operator would need to refund 100% of amounts paid by the consumer.

However, section 37 gives the court a discretion to allow a party "who has incurred expenses before the time of discharge in or for the purpose of the performance of the contract to retain ... an amount not exceeding the expenses incurred" if the court "considers it just to do so having regard to all the circumstances".

Further, section 39 operates such that in estimating the amount of expenses incurred, the court "may include an amount that appears reasonable for (a) overhead expenses; and (b) work or services performed personally by the [operator]".

How are sections 37 and 39 of the Act to be applied?

Are Covid-19 disruptions such that it would be just to allow recovery of expenses?

VCAT considered Covid-19 related disruptions to be such that it would be just to allow the event organiser to retain amounts not exceeding expenses incurred.

How are expenses to be calculated?

According to the VCAT decision, section 39 makes it plain that a tribunal or court is to estimate expenses that appear reasonable. VCAT said that this "is distinct from it only being empowered to award expenses and overheads that are strictly proved".

Application

In the case of the disrupted wedding, VCAT held that the event organiser was clearly entitled to third party expenses incurred.

As to overheads, VCAT found that it was reasonable to estimate expenses from items identified as overheads in the event organiser's financial accounts. This included items such as rent, IT, telephones, advertising, cleaning, taxes, consulting fees (presumably, wages would fall into this category), insurance, utilities, depreciation, and accounting.

Overheads amounted to 22.9% of the event organiser's revenue. However VCAT decided it was not reasonable to allow the organiser to retain 22.9% of the total booking value because the contract had only been in effect for 4 months prior to it being discharged.

Accordingly, VCAT allowed the organiser to retain 7.65% of the total booking value for overheads – i.e., [23.9% x (4/12 months)].

Upshots

Where Victorian-based operators are relying on frustration (as opposed to booking conditions) to determine obligations to refund, VCAT's decision suggests that the operator can retain the following amounts from payments made by consumers:

  • Third party expenses that can be quantified
  • Overheads as a general percentage of revenue (with an adjustment determined by the period the contract was in effect).

In other words: (a) there is no requirement to prove overheads were specifically incurred for a particular booking; and (b) it is reasonable to apply overheads across all bookings. However, an adjustment should be made to overhead expenses for a specific booking determined by how long the contract was in effect.

For example, if a booking was made on 1 July 2019 and the contract was considered discharged for frustration on 1 April 2020, then it would be reasonable for the operator to retain 9/12th of its general overheads as a percentage revenue.

Although VCAT is a lower-level jurisdiction and VCAT decisions do not hold significant weight in terms of setting precedent, the decision provides welcome guidance on how the courts may apply the Act to allow tour operators to deduct overhead expenses (in addition to quantified third party expenses) from refunds due to customers where travel has been disrupted due to Covid-19 restrictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.