On 9 November 2023, amendments to the unfair contract term laws (UCT laws) came into effect. These amendments introduced substantial penalties for the use of unfair terms. In light of this development, any court proceeding brought by a regulator concerning the UCT laws is of particular interest. It not only gives guidance on what terms may be unfair (and hence subject to penalties) but also indicates what kind of terms and industries may be of interest to a regulator. On 4 July 2024, Justice Moshinsky of the Federal Court gave judgment in such a proceeding: ASIC v PayPal Australia Pty Ltd [2024] FCA 762.
By consent, the Court concluded that a clause, which placed a time limit of 60 days for challenging fees that were incorrectly charged by a supplier, was unfair and void. Clauses limiting the time by which a party may bring a claim are common. They provide a means of managing risk. This recent decision shows that these clauses might be unfair, depending on the circumstances.
What are the UCT laws?
This article is not intended to analyse the operation of the UCT laws in detail, but a brief overview would assist. The UCT laws are found in the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (ASIC Act). The provisions in the ACL and ASIC Act are largely the same. The main difference is the ASIC Act applies to contracts which are "financial products" or contracts for the supply of "financial services" while the ACL does not.
The UCT laws apply to a “small business contract” or “consumer contract” that is also a “standard form contract”. A term is unfair if it fulfills all of the following requirements: (i) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; (ii) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and (iii) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. When determining whether a term is unfair, a court must consider the extent to which the term is “transparent”. A term is not necessarily unfair because it is not transparent and conversely, a term is not necessarily fair because it is transparent.
The UCT laws place the onus on the respondent to prove several important matters. First, a contract is presumed to be a standard form contract unless proven otherwise by the respondent. Second, a term is presumed not to be reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term unless that party proves otherwise.
What was the unfair term in this case?
In this case, the supplier provided payment services allowing consumers and businesses to send and receive payments online using linked credit cards, debit cards and bank accounts. For some of these services the supplier charged fees.
The impugned term was the “Fee Error Term”. It operated as follows. Once a customer had received an account statement from the supplier, the customer had 60 days to notify the supplier “in writing of any errors or discrepancies with respect to the pricing or other fees applied by” the supplier. If the customer did not do so, the Fee Error Term purported that the user had accepted “such information as accurate” and the supplier “shall have no obligation to make any corrections, unless otherwise required by applicable law”.
ASIC alleged the Fee Error Term was unfair according to the UCT laws contained in the ASIC Act. ASIC and the supplier agreed that the Fee Error Term was unfair and jointly proposed to Justice Moshinsky that his Honour declare the term to be unfair and restrain the supplier from relying on the term in the relevant contracts. His Honour made the proposed declaration and restraint. His Honour’s judgment was not the result of a contested hearing. This is worth noting. When regulatory proceedings are resolved by agreement, the Court must still be satisfied that the proposed orders are appropriate, but a judgment arising from a fully-contested hearing may contain a more detailed analysis of the application of the UCT laws. This is because where a court makes orders that were proposed by the consent of the parties, "it should exercise a degree of restraint when scrutinising the[m]… particularly where both parties are legally represented and able to understand and evaluate the desirability of the settlement": ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405. On this point, the supplier made no submissions that the Fee Error Term was reasonably necessary to protect one of its legitimate interests. Perhaps the supplier could have argued that the Fee Error Term was reasonably necessary to manage the risk of claims that were brought long after an account statement had been issued.
Why was the Fee Error Term unfair?
Justice Moshinsky declared the Fee Error Term to be unfair for several reasons, including:
- it permitted the supplier to retain fees that it had overcharged if the customer did not object to those fees within 60 days;
- it limited the rights of customers to claim compensation for amounts which had been overcharged to their accounts;
- there was no corresponding limitation on the supplier’s right to seek undercharged fees (i.e. the supplier was permitted to pursue the customer for undercharged fees even if 60 days had passed since the date of the account); and
- the supplier did not present any explanation for why the Fee Error Term protected one of its legitimate interests. Hence, the term was presumed not to protect a legitimate interest.
As for transparency of the Fee Error Term, the term was legible, was in the same size font as other terms and had a heading in bold, but it was not otherwise drawn to the attention of customers. Justice Moshinsky concluded that “having regard to the nature of the term and the length and complexity of the documents, and the fact that the term was not highlighted or otherwise drawn to the attention of the User, … it was, to some extent, lacking in transparency”.
Analysis: Time limits for claims and the unfair contract terms regime
Contracts often contain clauses placing time limits on a party bringing a claim. These clauses give parties certainty about how long the risk of a claim may continue and also encourage parties to bring claims to the attention of other parties promptly. The decision of ASIC v PayPal Australia Pty Ltd [2024] FCA 762 shows that such clauses might fall foul of the UCT laws and from 9 November 2023 onwards, create a risk of penalties. But it is worth noting several points.
First, the supplier in this case did not make any submission about whether the Fee Error Term was reasonably necessary to protect one of its reasonably legitimate interests. If the supplier had submitted that the Fee Error Term was reasonably necessary to protect a legitimate interest (say, managing the risk of claims and encouraging the swift resolution of disputes), perhaps the outcome might have been different. It is important to note that the onus is on the party, who is advantaged by the term, to prove that the term is reasonably necessary to protect one of its legitimate interests.
Second, the Fee Error Term set a short period of time for a customer to challenge an incorrect fee, being 60 days from receiving an account statement. This is far shorter than the usual statutory limitation period for contractual claims, which is 6 years. Had the period been longer, the Fee Error Term might have been fair.
Third, the Fee Error Term only worked one way: the customer could not challenge an incorrect fee after 60 days but the supplier could still challenge an incorrect fee after 60 days. Had there been reciprocal rights and obligations, the Fee Error Term might have been fair.
Fourth, the Fee Error Term lacked transparency “to some extent”. The term was no more prominent than any other term in the contract. Had it been more prominent, the outcome might have been different.
Fifth, the Fee Error Term only placed a time limit on challenging fees and not a time limit on all claims made by the customer against the supplier. Had the Fee Error Clause applied to all claims, it may have been more difficult to defend.
Finally, the UCT laws are not the only basis on which a term that limits the period for bringing a claim can be void. For example, clauses shortening the statutory six-year limitation period for a claim for damages for a contravention of the Australian Consumer Law may be invalid: see Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd (2018) 56 VR 557; [2018] VSC 246. However, under the UCT law, the clause may not only be unfair, but a penalty could be imposed for its use.
Overall, a term creating a time limit on bringing claims may be permissible under the UCT law depending on how it is drafted and the justification for the term. Businesses should be careful when using such clauses in standard form contracts and take note of the five points listed above.