Australian Securities and Investments Commission v PayPal Australia Pty Limited [2024] FCA 762
Key takeaway points
- Standard contracts presented on a “take-it-or-leave-it” basis are prevalent in numerous industries and are common in any scenario where one party is dominant in the market and has more bargaining power than the other party.
- Following the strengthening of the Unfair Contract Terms (UCT) regime in 2023, it is paramount that these standard contracts (which, by definition, will not have been individually negotiated) are fair on both parties.
- The PayPal case is instructive for suppliers of all kinds of goods and services. Notably, it is also important for recipients of such goods and services whose position is strong enough to insist on the use of their own favourable standard-form contracts, such as government agencies.
- Recipients must also be mindful of the impact of the UCT regime when procuring under their standard template contracts.
Standard contracts with small business owners and consumers are widely employed by large internet- based service providers. Such providers often have the market power to simply deny the service if such standard contracts are not accepted, with end-users typically confronting a mandatory box ticking, mouse-clicking step on a website in order to proceed, thus conveying their acceptance.
In Australia, following the strengthening of the Unfair Contract Terms (UCT) regime in 2023, it is paramount that these standard contracts (which, by definition, will not have been individually negotiated) are fair on both parties. An oversight of this kind can have ramifications for the party seeking to implement and rely upon the terms of a standard contract. In a recent judgment, a term in a standard contract constituted an unfair contract term. In this article we set out the key facts of the case and the judicial reasoning that led to the decision.
ASIC sues PayPal
On 4 July 2024, the Federal Court handed down its judgment in the case of Australian Securities and Investments Commission v PayPal Australia Pty Limited [2024] FCA 762. The Court found that PayPal Australia Pty Limited (PayPal) used an unfair contract term within the meaning of section 12GB(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). That term was therefore void by reason of section 12BF(1) of the ASIC Act.
PayPal had used a “Fee Error Term” in its “Small Business Contracts” that allowed PayPal to retain fees it had erroneously charged if the small business failed to notify PayPal of the error within 60 days of the fee appearing on any of its account statements.
Justice Moshinsky found that small businesses were not in a position where they were able to manage the risk of incorrect charging or overcharging. The term was present in approximately 600,000 contracts between PayPal and small businesses.
It was submitted by both parties and accepted by Justice Moshinsky that the purpose of the UCT provisions of the ASIC Act is to protect consumers and small businesses from the misuse of standard form contracts in the supply of financial products and services. Justice Moshinsky further emphasised that the underlying policy of unfair contract term legislation respects true freedom of contract and seeks to prevent the abuse of standard form contracts which, by definition, will not have been individually negotiated.
In the case of Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50 it was recognised that the assessment of “unfairness” is to be carried out with a close attendance to the statutory provisions and is of a lower moral and ethical standard than unconscionability. This was cited with approval by Justice Moshinsky as part of His Honour’s statement of reasons and clearly influenced His Honour’s decision.
The detail of section 12BG(1) of the ASIC Act was considered in this case. That section provides that a term of a contract is unfair if each of the following elements is established in relation to the term:
- it would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
- it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
In accordance with Paciocco v Australia and New Zealand Banking Group, the following was considered by Justice Moshinsky in establishing the unfairness of the term:
- whether the party benefitted by the term is better placed to manage or mitigate the risk imposed by the term than the other party;
- whether the burden imposed on the other party is matched by a corresponding right for the benefit of that party; and
- whether a party could “opt-out” of an unfair contract term.
It was also considered whether the term had been written in reasonably plain language and was transparent enough for consumers and small business owners. It was the Court’s view that the term had to some extent been lacking in transparency and it was noted that the term had not been highlighted or otherwise drawn to the attention of the user.
There was no allegation in this case that PayPal had in fact retained any fees or charges erroneously levied under this UCT PayPal was not aware of any instance where it had caused a consumer to suffer loss or damage by relying on the Fee Error Term and ASIC’s investigation has not uncovered any instance of PayPal having done so.
In conclusion, it was held that the Fee Error Term was an unfair term within the meaning of s 12BG(1) of the ASIC Act and was therefore void by reason of s 12BF(1) of the ASIC Act.
Standard contracts presented on a “take-it-or-leave-it” basis are prevalent in numerous industries beyond the financial services and internet-based services markets. They are, in fact, common in any scenario where one party is dominant in the market and has more bargaining power than the other party.
The UCT regime is applicable across industries. Therefore, this case has relevance beyond the realm of internet-based financial services. It is instructive for suppliers of all kinds of goods and services. Notably, it is also important for recipients of such goods and services whose position is strong enough to insist on the use of their own favourable standard-form contracts, such as government agencies. Such recipients must also be mindful of the impact of the UCT regime when procuring under their standard template contracts.
The UCT provisions are found in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) for financial products and services and the Australian Consumer Law set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL) for other products and services.
If you need to review your standard contract terms, contact our Commercialisation, Supply and Projects experts to understand what risks you might run into and how to best protect your interests in light of this development and the UCT regime.
