Trade and Transport Bulletin - Ansett loses battle over Clearing House arrangements but wins Frequent Flyer case

In a 6:1 decision in the High Court of Australia on 6 February 2008, an appeal by the International Air Transport Association (IATA) in relation to a decision of the Court of Appeal of the Supreme Court of Victoria was allowed and the efficacy of the IATA Clearing House arrangements was confirmed. (Our Bulletins of 2 June 2005 and 7 December 2006 covered the previous decisions.)

Also on 28 February 2008 the Court of Appeal of the Supreme Court of Victoria unanimously found in Ansett's favour in relation to a dispute with Diners Club Pty Ltd over its Frequent Flyer program 'Global Rewards'. 

IATA Clearing House litigation

Background

IATA has for some time supported a co-operative arrangement between airlines which allowed for payments due to them to be settled by a 'Clearing House'. 

Following the financial demise of Ansett in 2001, the administrators determined that IATA was not a creditor of Ansett in respect of its Clearing House monthly clearances.  IATA successfully challenged that decision before Justice Mandie in the Supreme Court of Victoria. 

On appeal in the Victorian Court of Appeal that decision was overturned by a majority of 2:1. 

Not surprisingly IATA sought and obtained leave to appeal to the High Court of Australia.

The High Court hearing

The principal issue in the appeal was the construction of the contract, being the Multilateral Interline Traffic Agreement - Passenger of which the IATA Clearing House Regulations formed part. 

As with the previous hearings, Ansett relied on the authority of British Eagle International Airlines Limited v Compagnie Nationale Air France (1975) 1 WLR 758.  In the British Eagle case the application of the Clearing House Regulations to a company under administration was found to be contrary to public policy. 

IATA submitted that the agreement had been redrafted following the British Eagle decision for the purpose of overcoming the effect of that decision and that under the new agreement the airlines were not, as between themselves, debtors and creditors.  Rather, IATA, and IATA alone was a creditor of Ansett in respect of the relevant clearances.  The other airlines never became debtors or creditors of Ansett. 

A joint judgment was given by five judges in the High Court, Gummow, Hayne, Heydon, Crennan and Kiefel JJ.  Chief Justice Gleeson supported the majority findings but delivered a separate judgment. 

All judges, including Justice Kirby in his dissenting decision, expressed support for the IATA Clearing House arrangements. 

As Kirby J said:

The service so afforded…is obviously of great value and advantage to all participants.  Given the huge expansion of international civil aviation since 1945, with the vastly increased carriage of passengers and cargo, it is difficult to imagine that the efficiencies of multi-carrier transportation throughout the world could have been established, or could be maintained, without some international facility for the mutual settlement of debits and credits between airlines.  Even with contemporary information technology, the settlement of such obligations, individually and bilaterally, would be inefficient and inconvenient.  Moreover, the arrangements for mutual set offs and for the resulting net payments diminishes, as between the participating airlines, the aggregate costs, including the costs of foreign currency transactions that would otherwise be incurred.

Clearly the Ansett administrators had challenged the IATA arrangements in the hope that this would provide a potentially greater recovery for Ansett in its winding up by being able to proceed directly against individual airline creditors rather than accepting the effect of the clearing house regime which reduced the amount recoverable.  Indeed IATA was a creditor of Ansett rather than vice versa. 

Ansett argued that Australian courts should refuse to give effect to contractual provisions which purport to circumvent or dislocate the order of priorities which is set out in a deed of company arrangement and is given statutory force and effect by the Corporations Act 2001. 

This argument was rejected.  As stated by Chief Justice Gleeson:

The airline operators have agreed between themselves and with IATA upon the legal basis upon which they will provide services of the kind covered by the Agreement.  Public policy does not enable a court to rewrite their contract, and bind them to a different agreement.  Ansett's public policy argument appears to depend upon an assumption that, notwithstanding their agreement, the 'real' or 'underlying' legal relationship between the airline operators is that of debtors and creditors, and this legal relationship is ineradicable.  Yet, on the true construction of the Agreement that is not the basis upon which the operators agreed to provide the services in question.  As Lord Morris pointed out in British Eagle, the agreement contained no provision that was designed to come in effect or bring about a change in the event of insolvency, and there is no ground to surmise or assert that a different agreement would have been made but for an attempt to evade insolvency laws.  It is one thing to say, as was held in British Eagle (and in the Victorian Court of Appeal) that the airline operators, if they were debtors and creditors of each other, could not lawfully agree that those debts and rights of property would escape the effects of the insolvency laws.  It is another thing altogether to say that, although the airline operators agreed that they would not enter into relationships of debtors and creditors, the law would impose that relationship upon them, contrary to their agreement. 

Conclusion

This decision should provide comfort not only for IATA but also for its members in general.  It strongly supports IATA's objectives and allows for ongoing certainty following the amendments made after the British Eagle decision. 

Frequent Flyer program litigation

Background

For 10 years until its collapse in 2001 Ansett operated a Frequent Flyer program known as 'Global Rewards'.  The program's members earned reward points for flying with Ansett or one of its airline partners or by making purchases on a credit card or a Diners Club charge card. 

Ansett and Diners Club had a contract known as a 'Participation Agreement' under which Ansett agreed to credit Diners Club cardholders with 1.5 Global Rewards points for each dollar spent on the Diners Club card.  In turn, Diners Club agreed to pay Ansett an amount for each Global Rewards point credited. 

Ansett claimed to be owed AU$9,632,793 by Diners Club which it said was due to it under the Participation Agreement. 

Diners Club disputed the obligation to pay those monies maintaining that the suspension of the Global Rewards program following the Ansett collapse constituted a breach of the terms of the Participation Agreement.  In particular, the term that Ansett would operate the Global Rewards program for the five years of the Participation Agreement.  It said that suspension constituted a fundamental breach of the agreement entitling Diners Club to terminate the agreement and claim loss of bargain damages from Ansett.  A claim for AU$46,000,000 was made both as a set off and as a counterclaim on the basis that Diners Club entered into a less attractive arrangement with Qantas following Ansett's collapse and lost its competitive advantage over American Express and other card issuers as a result. 

At first instance the trial judge found that Ansett was not obliged to conduct a Frequent Flyer program for the life of the Participation Agreement.

Court of Appeal decision

President Maxwell delivered the lead judgment.  He expressed support for the trial judge's findings. 

He noted that the Global Rewards program rules entitled Ansett at its absolute discretion to suspend or terminate the program at any time and to change or vary the terms and conditions of the program at any time without notice. 

He also found that Ansett did not promise to maintain a Frequent Flyer program to which Diners Club cardholders could have access.  Rather it promised to give Diners Club cardholders special access to the existing Frequent Flyer program which Ansett operated according to its published terms and conditions.

There was a right of termination of the Participation Agreement by Ansett giving one month's notice.  Diners Club argued unsuccessfully that this was the only basis upon which the program could be terminated.  President Maxwell said that as Ansett had given no such notice its suspension of the program was a breach of the agreement.  President Maxwell noted that the clause relied upon did not oblige Ansett to terminate the agreement if it ceased to operate the Global Rewards program but it simply gave it the power to do so. 

There was an indemnity provision in the Participation Agreement but that provision was found only to be an indemnity for third party claims against Diners Club and not an indemnity for loss and damage that Diners Club might itself incur as a result of the conduct of Ansett. 

Conclusion

The decision is one based solely on the various contractual terms but will nevertheless be of some interest to other airlines which operate Frequent Flyer programs and have arrangements with other card issuers. 

It is a demonstration of the importance of the underlying agreement with customers regarding the Frequent Flyer program and the relevance of that underlying agreement upon the subsequent agreements with other participants in the program.

For more information please contact:
Andrew Tulloch, partner
Tel +61 2 9274 5825
andrew.tulloch@dlaphillipsfox.com