The Federal Court decision of ASIC v PayPal Australia Pty Ltd[1] further clarifies the evolving unfair contract term regime.

In this case, ASIC brought proceedings against PayPal alleging that its standard form contracts with small business customers contained an unfair contract term. Approximately 600,000 contracts between PayPal and small businesses included this term.

Term in Question

The term in question (the Fee Error Term) had the effect of allowing PayPal to retain fees that it had erroneously charged to small businesses if those business failed to notify PayPal of the error within 60 days of the fee appearing on its account statement.

Court Findings

The Federal Court declared the Fee Error Term to be unfair and void from the start of the contracts involved. The Court also ordered that PayPal be restrained from applying, relying on, or enforcing the term in its contracts with small businesses.

PayPal agreed that the term was unfair and consented to the declarations, voluntarily removing the term from its contracts on 8 November 2023.

The Court explained that an unfair contract term is one which:

Causes a significant imbalance in the parties' rights and obligations arising under the contract;
Is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and,
Would be disadvantageous to the consumer (whether financial or otherwise) if it were to be relied on.

In assessing whether a contract term is “unfair”, the Court must also consider the extent to which the term is transparent.

Significant Imbalance

The Court found that the Fee Error Term caused a significant imbalance in the parties’ rights and obligations arising under contract as the contracted small businesses were unable to self-manage the risk of incorrect charging or over charging on the part of PayPal and were only given a limited period to notify PayPal of any errors.

The Court found that the burden placed on small businesses to notify was not matched by any corresponding right for the benefit of the small business or a corresponding duty on PayPal.

Legitimate Interests

Section 12BG(4) of the ASIC Act provides a presumption that a term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it unless that party proves otherwise.

PayPal did not rebut this presumption.

Disadvantage

The Court found that the Fee Error Term would have caused detriment to small businesses if PayPal relied on it as the business would lose the benefit of the amount wrongly charged (through no fault of its own) to its account.

The Court noted that PayPal was not aware of any instance where it has caused a consumer to suffer loss or damage by relying on the Fee Error Term and ASIC’s investigation did not uncover any instance of PayPal having done so. However, the inclusion of the term in the contract gave rise to the breach, irrespective of whether it had been exercised.

Transparency

The parties are agreed that the Fee Error Term was legible, in the same font size as the rest of the document and had a heading in bold.

However, the Court, having regard to the nature of the term, the length and complexity of the documents, and the fact that the term was not drawn to the attention of the user, considered the Fee Error Term to be, to some extent, lacking in transparency.

Key Takeaways

The ACCC and ASIC have been undertaking a proactive review of business terms and conditions, across a variety of sectors, as a basis for future enforcement cases.

Contract terms found to be unfair may be ruled void from the start of the contracts involved, and subject businesses may also be restrained from applying, relying on, or enforcing, the term in contracts with small businesses.

Any businesses which have a similar fee error term in their standard form contracts, or a term that otherwise may be unfair, should review these contracts for compliance with the new UCT regime.

Over recent years, many cases have been brought before the Courts alleging unfair contract terms. The increasing numbers of decisions available are adding to the body of case law in this area. This is an area where further developments are expected.

For more information please contact:

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Ben Ponte
Law Clerk
E: bponte@sladen.com.au

[1] [2024] FCA 762