ASIC v PayPal Australia Pty Limited: Federal Court declares PayPal's standard form contracts contained an unfair contract term 

What you need to know

• On 4 July 2024, the Federal Court declared that a term contained in PayPal Australia Pty Limited's (PayPal) standard form contracts with small businesses to be an unfair contract term.
• The relevant clause (the Fee Error Term) permitted PayPal to retain any fees or charges that PayPal erroneously charged unless the account holder notified PayPal in writing of any errors or discrepancies within 60 days of the fee appearing on the account holder's account statement or account activity information.
• The parties submitted and Justice Moshinsky accepted that the Fee Error Term was an unfair contract term.
• Approximately 600,000 contracts between PayPal and small business customers contained the Fee Error Term.
• Importantly, it was the inclusion of the term in the contract that gave rise ot the breach. There was no allegation that PayPal in fact retained any fees or charges erroneously charged and ASIC's investigation did not uncover any instance of PayPal having done so.

What you need to do

• This case reinforces the risk with conclusive evidence clauses. Businesses should review their standard form contracts to identify similar clauses and consider whether they would cause a significant imbalance in the parties' rights and obligations arising under the contract; are not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Unfair contract terms regime

An unfair contract term is one which:

• 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 (whether financial or otherwise) to a party if it were to be relied on.

Proceedings against PayPal

On 6 September 2023, ASIC commenced proceedings against PayPal in the Federal Court, alleging that its standard form contracts with small business customers contained an unfair contract term.

The case involves a contract term that gave PayPal business account holders 60 days to notify PayPal of any errors or discrepancies in fees that PayPal had charged them, or else accept those fees as accurate. PayPal voluntarily removed the term from its contracts on 8 November 2023.

ASIC alleged that the term was unfair because the effect of the term was to permit PayPal to retain fees it had overcharged or wrongly charged if the small business did not notify PayPal of the error within 60 days of the fee appearing in its account statement.
The Court found the term as an unfair contract term. It declared the unfair term void from the start of the contracts and ordered that PayPal be restrained from applying, relying on, or enforcing, the term in its contracts with small businesses.

The Court found that:

Significant imbalance

• The Fee Error Term caused a significant imbalance in the parties' rights and obligations arising under each Small Business Contract having regard to the following matters of

1. The effect of the Fee Error term was that it permitted PayPal to retain fees or charges which it had erroneously deducted from the Small Business's Account unless the account holder notified PayPal in writing within the 60 day period. In doing so, the Fee Error Term: (a) permitted PayPal to retain fees which it had overcharged by reason of its own error and had not otherwise bargained for; and (b) limited the rights of Small Businesses to claim a correction of, or claim compensation for, amounts which had been overcharged to their accounts.
2.  The Fee Error Term imposed a de facto obligation on the Small Business to examine account statements and other account activity information to identify whether PayPal had overcharged or wrongly charged fees. It did so in circumstances where the account holder otherwise owed no such obligation to PayPal, and it may be inferred that PayPal possessed the requisite information to confirm whether the fee or charge was correctly charged and calculated.
3. The burden that the Fee Error Term imposed on the Small Business was not matched by a corresponding right for the benefit of the Small Business or a corresponding duty on PayPal.

Legitimate interest

• 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 seek to rebut the presumption and therefore it was found that the Fee Error Term was not reasonably necessary to protect the legitimate business interests of PayPal.

Detriment

• The Fee Error Term would have caused detriment to Small Businesses if PayPal had relied on the Fee Error term because, if the Small Businesses failed to notify PayPal in writing of any wrongly charged or overcharged fee within 60 days, the Fee Error Term permitted PayPal to retain any such fees. In this scenario, the Small Business would have lost the benefit of the amount which had been wrongly (through no fault of its own) charged to its account.
• Additionally, if Small Businesses wished to ensure they were not wrongly charged or overcharged fees by PayPal then they were obliged to examine account statements and other account activity information to identify whether PayPal had overcharged and/or wrongly charged fees, and notify PayPal of any errors in circumstances where it may be inferred that it was difficult for Small Businesses to determine if fees had been charged correctly.
• Whilst there was no evidence of PayPal relying on the clause to the detriment of the small business counterparty, there is no requirement for detriment to have in fact occurred – rather all that is required is that detriment would be caused if the term were to be applied or relied on.

Transparency

• Having regard to the nature of the term and the length and complexity of the documents, and the fact that the term was not highlighted or otherwise drawn to the attention of the User, Justice Moshinsky determined that it was, to some extent, lacking transparency.

Authors: Corey McHattan, Partner; Narelle Smythe, Partner; Jonathon Gordon, Partner and Caitlin Murphy (Associate).