Court declares PayPal Australia used an unfair contract term

The Federal Court has declared a term used by PayPal Australia Pty Limited (PayPal) in its standard form contracts with small businesses to be unfair.  

The contractual term in question provides that PayPal business account holders have 60 days to notify PayPal of any errors or discrepancies in fees that PayPal has charged them, or else accept those fees as accurate.

On 5 July 2024, the Court found that the term was unfair because its effect was to allow PayPal to retain fees that it had erroneously charged if the small business failed to notify PayPal of the error within 60 days of the fee appearing on its account statement. 

This serves as a timely reminder to business owners to review the terms of their standard form contracts to ensure that they do not include unfair contract terms. The key criteria for a contract term to be considered unfair are outlined in the Australian Consumer Law, which is part of the Competition and Consumer Act 2010 (Cth).

Generally, a contract term will be unfair if it satisfies the following criteria:

• Unfairness: The term must be unfair. A term can be considered unfair if it creates a significant imbalance in the parties’ rights and obligations and causes a detriment to one party. Determining unfairness involves considering the contract as a whole and the context in which it was entered into.
• Standard-Form Contract: The contract must be a standard-form contract. These are contracts that are not negotiated between the parties and are offered on a “take it or leave it” basis, with little to no opportunity for the consumer or small business to negotiate the terms.
• Consumer or Small Business Contract: Unfair contract terms provisions apply to contracts where at least one party is a consumer or a small business.

Depending on the type of contract, ASIC or the Australian Competition and Consumer Commission (ACCC) will be responsible for enforcing these provisions, and individuals or small businesses can lodge complaints with ASIC or ACCC (as applicable) if they believe they have been subject to unfair contract terms. Additionally, the courts can make orders declaring a term or terms in a contract to be unfair if the matter is taken to court.

If you are still in the process of undertaking a UCT review, it is advisable to prioritise your business' core contracts, contracts that regularly lead to disputes or complaints, and contracts that contain any 'high risk' terms.  We have set out below six practical tips small businesses can follow to manage unfair contract term risks:

• Consider both points of view: if you think a term is necessary to protect your business’s legitimate interest, consider the term from the other party’s point of view.
• Include counter-balancing terms: check that your contract has appropriate counter-balancing terms. For example, if you consider that your business reasonably needs the ability to unilaterally change the product or service being provided under the contract, does the contract also allow your customers to exit the contract without penalty when this occurs?
• Avoid broad terms: don’t have terms that are as broad as possible. Make sure terms are only as broad as reasonably necessary to protect your business’s legitimate interests.
• Meet your obligations under the Australian Consumer Law: don’t have terms that seek to avoid your business’s obligations under the Australian Consumer Law. For example, don’t include terms that seek to limit your customers’ consumer guarantees rights, or terms that seek to disclaim any representations your business may have made outside of the contract.
• Be clear: Use clear and simple language in your contracts.
• Be transparent: ensure key terms are clearly drawn to the attention of your customers during the sign-up process, and any renewal process.

Let us know if you would like any advice or assistance in reviewing your contracts. You can get in touch with our experienced team of contract lawyers at Winterkorn Legal Group on 1300 660 884, or by email at admin@winterkorngroup.com.au.