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  • L Misthos and S Pettigrove

Federal Court declares PayPal fee error clause unfair

Updated: Jul 10

The Federal Court has declared a term in PayPal Australia Limited's (PayPal) standard form contracts with small businesses to be unfair. This decision affects small businesses that opened PayPal Business Accounts between 21 September 2021 and 7 November 2023.

The term would have permitted PayPal to retain fees it had erroneously charged unless the small business notified PayPal of the error within 60 days of the fee appearing on its account statement. The term appeared in PayPal’s Combined Financial Services Guide and Product Disclosure Statement and its User Agreement, one of several documents that form the contract between PayPal and its Australian business account holders

His Honour also found 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

According to an ASIC media release, the court found this term to be unfair, highlighting that small businesses were not in a position to manage the risk of incorrect overcharging.

Deputy Chair Sarah Court delivered a warning relating to unfair contract terms.

Today’s decision serves as a reminder to all businesses that unfair contract terms contained within standard form contracts with small businesses will not be tolerated

Justice Moshinsky, the judge presiding over the matter, delivered oral reasons shortly after the hearing and noted that the 60-day notification period was unreasonable. His written reasons are expected to follow in due course.

The declarations impact over 600,000 small businesses with PayPal Business Accounts. PayPal agreed that the term was unfair and removed it from its contracts on 8 November 2023. The court declared the term void from the start of the contracts and restrained PayPal from applying or enforcing it.

PayPal has been ordered to pay ASIC's litigation costs, despite having cooperated with ASIC during the investigation and in resolving the proceedings.

Given PayPal’s cooperation and the absence of consumer harm or any monetary penalty, ASIC decision to pursue the case to Court is curious in circumstances particularly where PayPal has already removed the term from its standard agreements. However, this decision is perhaps a forewarning of ASIC’s intentions to pursue further unfair contract term actions in the near future given the recent changes to the unfair contract terms regime.

Despite the conduct period being before the introduction of the new unfair contract term penalties on 9 November 2023, the decision underscores a renewed emphasis on protecting consumers and small businesses from onerous and one sided terms in standard form contracts. Had ASIC initiated the proceeding on or after 9 November 2023, PayPal would have been subject to new monetary penalties under the unfair contract terms regime. The amended regime covers a broader range of consumer and small business contracts, includes additional examples of potentially unfair terms, and imposes new civil penalties for parties imposing or relying on those terms. You can read more about the changes here. The decision is a timely reminder to all businesses that have not already done so to review their standard form contracts in light of the changes to the unfair contract terms regime and stricter penalties now in force.

By Steven Pettigrove, Jake Huang and Luke Misthos


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