PayPal used unfair contract terms with small business, court finds

The Federal Court found that the company’s narrow terms of use agreement allowed it to retain unreported overcharges.

PayPal used an unfair contract clause in its contracts with small businesses that allowed it to keep high fees if customers didn’t challenge them, a federal court has ruled.

The decision, issued last week, affects PayPal’s user agreements with small businesses that opened a business account between September 2021 and November 2023.

The move comes after ASIC took PayPal to court over the contract term in September last year, challenging its financial services guide, product disclosure statement and user agreement.

ASIC Deputy Chair Sarah Court, commenting on the Federal Court decision, said the regulator was committed to protecting consumers and small businesses from unfair contract terms and ensuring all financial services providers use fair contract terms.

“Today’s decision is a reminder to all businesses that unfair contract terms in small business standard contracts will not be tolerated and ASIC will take decisive action where appropriate to protect the rights of consumers and small businesses,” she said.

Under the ASIC Act, standardised user agreements for financial products and services are prohibited from containing unfair contractual terms.

Justice Moshinsky found that PayPal’s small business users were at a disadvantage in managing the risk of incorrect or excessive fees compared to PayPal.

PayPal’s clause also allowed it to keep the erroneous charges if small businesses didn’t report the error within 60 days, he found.

It declared the unfair term void from the outset of the contracts and ordered that PayPal is not permitted to apply, rely on or enforce the term in its contracts with small businesses.

He also ordered PayPal to pay ASIC’s legal costs.

PayPal acknowledged that the clause was unfair and agreed to the court’s findings, after voluntarily removing the clause from its contracts in November.

PayPal will, however, escape civil penalties, with new civil penalties introduced for the unfair contract terms regime coming into force two months after ASIC began the trial.

ASIC said PayPal had cooperated and voluntarily assisted the regulator during its investigation and had also cooperated in the resolution of the proceedings.

According to the court, PayPal was not aware of any case where an unfair term had caused loss or damage to a consumer through reliance on it.

ASIC’s investigation also did not uncover any instances where PayPal had acted in this way, she said.