PayPal used ‘abusive’ clause in SME contracts, court finds

Last year, the Australia Securities & Investments Commission (ASIC) launched proceedings against PayPal Australia Pty Limited (PayPal), alleging that its standard form contracts with small business customers contained an unfair contractual term.

The case involved a clause that would have allowed PayPal to keep fees it overcharged or charged incorrectly if the small business failed to notify the company of the error within 60 days after the charge appeared on its account statement.

The notice informed small businesses that if they did not alert PayPal of the discrepancies within 60 days, they “accepted the information as accurate and PayPal had no obligation to make corrections, except as required by applicable law.”

Following a hearing on Wednesday (July 4), the Federal Court found that the term “Fee Earner” in PayPal’s combined Financial Services Guide and Product Disclosure Statement was unfair to the more than 600,000 small businesses that held accounts between September 2021 and November 2023.

Judge Mark Moshinsky found that small businesses were unable to manage the risk of incorrect billing and were often unable to see how money was calculated, “in circumstances where account statements did not describe the various charges”.

However, ASIC did not find any loss or damage during its investigation and PayPal said it was not aware of any cases where a small business had suffered loss or damage as a result of the fee error clause.

However, in his order, Justice Moshinsky declared that the pricing clause error was an “unfair term” within the meaning of the ASIC Act and struck it down “ab initio” or from the outset.

The financial services company also agreed that the clause was unfair and voluntarily removed it from the contracts in November 2023.

PayPal is now “prevented from applying, relying on, or enforcing the fee duration fallacy” in its contracts with small businesses.

The court ordered PayPal to pay ASIC’s legal costs.

Shortly after the ruling, a spokesperson for PayPal Australia said: “PayPal Australia takes its responsibility to its customers very seriously and we have worked fully co-operatively with ASIC on this matter.”

ASIC Deputy Chair Sarah Court welcomed the decision, saying the regulator was “committed to protecting consumers and small businesses from unfair contract terms” and ensuring financial services providers like PayPal “use fair contractual terms”.

“(This) decision serves as 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,” the court said.

The ruling comes as ASIC faces intense scrutiny over its effectiveness, with a damning report released last week by the Senate Economic References Committee suggesting the regulator was overburdened, failing to fulfil its core function and in need of an overhaul.

Over the past three financial years, for example, the report found ASIC launched an average of 117 investigations per year, commencing 75 new civil actions and 52 new criminal actions in 2021-22, and referring just 41 matters to the Commonwealth Department of Prosecutions (CDPP).

As such, 11 recommendations were put forward to improve the capabilities of the financial services regulator, including separating its functions into a corporate regulator and a separate financial conduct authority, and reviewing its funding structure, among other changes.

(Related: Labour Party bill to ban unfair contract terms welcomed)