In the recent decision of ASIC v PayPal Australia Pty Ltd [2024] FCA 762, the Federal Court found that a provision in PayPal Australia Pty Ltd’s (PayPal) standard form contracts constituted an unfair contract term (UCT). This ruling provides guidance on both the interpretation and enforcement of UCT provisions, and is of particular interest given the changes to the UCT regime which came into effect in November 2023.

Unfair contract terms 

Under the ASIC Act and the Australian Consumer Law (ACL), ‘standard form contracts’ with ‘consumers’ or ‘small businesses’ must not include terms that are ‘unfair.’ The relevant provisions of each provide that a term will be unfair if it:

• would cause 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 cause detriment to a party if it were to be relied on.

Background 

In September 2023, ASIC commenced proceedings against PayPal in the Federal Court, challenging a clause in PayPal’s standard contract with small businesses.

The clause in question was a ‘fee error term’ which, in essence, allowed PayPal to retain fees mistakenly deducted from a small business’ account, if that business fails to notify PayPal in writing within 60 days of the charge appearing on their statement.

Approximately 600,000 contracts between PayPal and small businesses included this term. There was no allegation that PayPal had retained any fees or charges pursuant to the term, nor did ASIC’s investigation reveal any instance of PayPal having done so. Instead, the inclusion of the term itself in PayPal’s standard form contracts gave rise to the breach.

Imbalance in the parties’ rights and duties 

The term was found to have created an imbalance in the parties’ rights and duties as:

• PayPal could retain fees it had erroneously collected, should a small business not notify PayPal in writing within the prescribed period
• the term restricted small businesses’ ability to correct or seek redress for incorrectly charged amounts
• PayPal was better placed than the small business to identify overcharges, as these were not easily visible on the small business’s statements, and the fee calculation method was not disclosed in the agreements, and
• there was no similar right for small businesses to benefit from any undercharging or missed fees by PayPal, nor a provision for offsetting such obligations.

Legitimate interest  

Notably, PayPal did not seek to refute the presumption established in section 12BG(4) of the ASIC Act which provides that a term is presumed not to be reasonably necessary to protect a party’s legitimate interests.

Detrimental reliance 

The harm to small businesses from the term’s reliance was identified as fee amounts retained by PayPal that the business did not actually owe. Additionally, small businesses had to make considerable efforts to verify the accuracy of the fees they were charged. This, combined with the requirement to notify PayPal within 60 days of the charge appearing on their statements, was deemed to constitute significant detriment.

Although PayPal was not aware of any instance of a small business having suffered any loss or damage in relying upon the term in question, the Court noted that there was ‘no requirement that there be proof of detriment actually caused – rather all that is required is that detriment would be caused if the term were to be applied or relied on’.

Additionally, having regard to the ‘nature of the term and complexity of the documents’, Justice Moshinsky found the term to be lacking in transparency, noting that although the term was in the same size and font as the remainder of the document, it was ‘not highlighted or otherwise drawn to the attention of the small business’.

Conclusion 

The Federal Court declared the term unfair and void ab initio and ordered PayPal to cover ASIC’s legal costs. Notably, the relevant period where the term was in effect ended just before 9 November 2023, when the major amendments to the UCT regime (including new penalties) took effect. Consequently, no penalties were imposed in this case.

Breaches of UCT provisions can now lead to substantial penalties, including:

• For corporations: up to $50 million or 30% of turnover (under the ACL) and $15.65 million or 10% of turnover (under the ASIC Act).
• For individuals: AU$2.5 million (under the ACL) and AU$1.565 million (under the ASIC Act).

This case undoubtedly signals the intent of regulators (both ASIC and the ACCC) to enforce the new penalties under the UCT regime.

Businesses should be aware of terms in their contracts to which the UCT regime may apply, particularly terms such which impose a time limit for the challenging of fees – as the relevant term in this case provided. Caution should be exercised when including such clauses in standard form contracts.