In September 2023, the Australian Securities and Investments Commission (ASIC) challenged a clause in PayPal’s contracts allowing it to retain fees incorrectly charged unless the small business reported the error in writing within 60 days. This term impacted approximately 600,000 small business contracts between September 2021 and November 2023.
PayPal accepted the term as unfair, removed it from contracts in November 2023, and agreed to the court’s decision. The court found this term unfair as it restricted the right of small businesses to recover overcharged fees, creating an imbalance between the parties. Unlike PayPal, small businesses could not manage the risk of incorrect charges effectively, as the statements lacked transparency on fee types and calculations. Although no penalties were imposed in this case due to a lack of proven loss or damage, PayPal was ordered to cover ASIC’s legal costs.
Understanding Unfair Contract Terms and Avoiding Them
Both the Australian Consumer Law (ACL) and Australian Securities and Investments Commission Act 2001 (ASIC Act)regulate unfair contract terms in standard form contracts.
With recent legal changes and this case as a spotlight, it’s more important than ever for businesses to avoid unfair terms.
What Makes a Contract Term Unfair?
A term is deemed unfair if it:
- causes a significant imbalance in the rights and obligations of the parties under the contract,
- is not reasonably necessary to protect the legitimate interests of the party who gets an advantage from the term, and
- would cause financial or other harm to the other party if enforced.
Examples of unfair terms include:
- A term that effectively permits one party (but not another party) to avoid or limit performance of the contract
- A term that allows one party (but not another party) to terminate the contract
- A term that penalises one party (but not another party) for a breach or termination of the contract
- A term that allows one party to vary the upfront price payable under the contract without the right of another party to terminate the contract
- A term that allows one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, or the financial goods or services to be supplied under the contract
New Penalties for Unfair Terms
Recent amendments to the ACL and ASIC Act have introduced substantial penalties for businesses with unfair contract terms:
| Penalty Type | Under ACL | Under ASIC Act |
| For Companies | The greater of: – $50 million – 3x benefit gained – 30% of turnover during breach period | The greater of: – 50,000 penalty units ($13.75 million) – 3x benefit gained – 10% of annual turnover (capped at $555 million) |
| For Individuals | Up to $2.5 million | The greater of: – 5,000 penalty units ($1.375 million) – 3x benefit gained |
Best Practices for Businesses with Standard Form Contracts
For business who use standard form contracts, this case underscores ASIC’s focus on prosecuting unfair contract terms. To avoid breaches, follow these steps:
- Review Core Contracts Regularly: Prioritise key contracts for regular review to ensure compliance with unfair contract term regulations.
- Educate Your Team: Ensure all staff involved in drafting and negotiating contracts understand what constitutes an unfair term.
- Create a Risk Management Process: Set up a system to address risks and complaints about contract terms, ensuring swift responses to avoid potential penalties.
Conclusion
While PayPal avoided penalties due to a lack of proven harm, this case highlights the regulator’s resolve to act against unfair contract terms that disadvantage small businesses or consumers. Businesses should see this as a reminder to review and maintain fair, transparent contracts. For guidance on contract compliance, feel free to reach out to our team for support in aligning your practices with Australian Consumer Law.
Have further questions? Contact our commercial team today.
The information in this article is general in nature and is not intended as legal advice. You should not do or fail to do anything in reliance on information in it. We do not accept any responsibility for any loss that you suffer if you do. You should seek professional advice before you do anything about the issues set out in this article.
