With pals like these…who needs fair contract terms?

PayPal is no friend of small business, according to the Federal Court, having included an unfair term in more than 600,000 small business contracts.

On 5 July 2024, the Court declared a term of PayPal Australia’s standard form contract for business customers ‘unfair’ in a landmark case on unfair contract term protections.

The unfair term allowed PayPal to retain fees erroneously charged where the small business customer did not dispute the fees within 60 days.

Justice Moshinsky’s ruling is hardly surprising:

• where PayPal had admitted the term in question was ‘unfair’; and
• in a context where the customers involved had no genuine prospect of determining the accuracy of charges due to PayPal’s vague fee and invoicing structure.

Nonetheless, the finding makes a high-profile example of an unfair contract term found in more than 600,000 small business contracts.

This action came before the much-publicised 2023 reforms giving enforcement greater teeth. Similar action initiated now for a breach occurring today would expose PayPal to potential maximum penalties of $16,500,000 (or more in some cases) for each contravention in each of the contracts with customers who were ‘small businesses’, equating to a theoretical maximum aggregate penalty would be almost $10 trillion for one mistake, repeated 600,000 times.

ASIC has demonstrated an appetite to enforce unfair contract term protections and all businesses using standard form contracts should be wary and proactive in reviewing their standard form contracts. ASIC brought the action against PayPal under the Australian Securities and Investments Commission Act because it involved a financial product.

Equivalent provisions outlaw unfair terms in standard form contracts with consumers and small businesses in relation to other goods and services, under the Australian Consumer Law. The penalties are larger under the Australian Consumer Law, with a headline maximum of $50 million per contravention (and more in some cases).

The ACCC is responsible for enforcing the Australian Consumer Law and it has also successfully brought proceedings before the Federal Court and undertaken industry-based investigations. Despite that, regulator action to date has barely scratched the surface of the large body of unfair standard form contracts that remain in circulation, with many businesses likely unaware of their potential exposure to a finding that standard contracts they have used for years contain unfair terms.

One lurking trap is the broad scope of the concept of ‘small businesses’ that are protected by the unfair contract term provisions. They now capture contracts with any small business defined as a party having:

• less than 100 employees; or
• an annual turnover of less than $10 million.

This ‘small business’ test is applied entity by entity, and not aggregated across entity groups, meaning a business could be caught out contracting with one trading entity with less than 100 employees which forms part of a very large business group with hundreds or thousands of employees overall.

Another peril is that the mere existence of an ‘unfair’ term may attract the massive penalties, regardless of whether the offending party to the contract seeks to rely on or enforce the term. So, it will be no defence for a business to say it had no intention of ever taking advantage of a particular ‘unfair’ term.

Fortuitously for PayPal, ASIC acted on its contravention before the new civil penalties came into play (with PayPal removing the offending term on 8 November 2023 – the day before the new penalties commenced). So, PayPal’s financial exposure is limited to paying its own and ASIC’s legal fees.

But for other businesses trading in Australia, it’s a timely prompt to ensure ‘unfair’ terms are banished from standard form contracts.

The unfair contract term regime now applies broadly across the market and the next contravention may be a very expensive reminder to keep your terms fair (if not friendly).

This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.

Not sure whether the changes to the Unfair Contract Term Regime will impact your business?

Most businesses use standard form contracts in one form or another. For example, if your business has a set of terms and conditions of trade or for the provision of credit, it uses standard form contracts. If your business uses any kind of standard form contracts (it is likely that it does), then the changes may impact you and your business.

Find out more via our article "Major changes to the Unfair Contract Terms Regime: Time to act".

Our expert team would be pleased to work with you to ensure that your business is protected and compliant.

Contact any of our experts listed below for assistance with or more information on the Unfair Contract Terms Regime and its potential impact on your business.