6 Things to Consider If Your Contracts Have Automatic Renewal Terms

The ACCC has its eyes on automatic renewal terms in contracts with the set of new laws that seek to extend the provisions of unfair contract terms in the Australian Consumer Law to small and medium businesses. This calls for careful examination of automatic renewal terms when using them in business contracts. If you supply services and goods to small businesses and the standard terms include automatic renewal terms, consider the points below:

1. The ACCC is taking action against businesses that use unfair automatic renewal terms in their consumer contracts.

2. The unfair contract terms law could be used to verify your contractual terms if they are used in the standard form contracts.

3. Any terms that are found unfair in a standard form business may still be unfair under unfair contract terms, thereby becoming null and void.

4. A contractual term declared void would be void in all versions similar to it. This expands the consequences of the void terms across several customers and businesses.

5. The inability to enforce an automatic renewal term may have negative implications for resource allocation and planning for the business.

6. There are practical steps that can address risks associated with unfair automatic renewal terms. Some are discussed in the article.

Towards the end of 2016, ACCC took action against a business that used unfair automatic renewal terms with its clients. ACCC brought the case against a Christmas hamper supplier who had an automatic renewal term in a Federal court. The automatic renewal term was found unfair and the supplier was ordered to pay some of the ACCC legal costs. Recently, the ACCC published a report detailing the unfair terms used in the standard form small business contracts.

Types of Automatic Renewal Terms at Risk

All automatic renewal terms used in standard form business contracts are deemed to be at a risk if:

• Deemed not reasonably vital in the protection of business interests that are legitimate

• Not adequately disclosed to the client by the supplier

• The supplier does not give notice that the contract is about to renew

• There is a very short window of opportunity provided for the client to opt out

• The term gives the supplier the right to change the date of when renewal can be cancelled

• The affected party can incur additional charges if it cancels the contract after it was automatically renewed

Steps for Reducing Risk that Comes with Automatic Renewal Terms

• Avoid unconstrained or unconditional renewal terms

• Ensure that the time is brought to the attention of the other party

• Demonstrate that the term is of necessity to protect your legitimate business interests

• Tell the other party when their opt-out rights will be activated and when the contract renews if they do not opt out

• Give a reasonable period for the party to opt out

• Avoid charging the other party excessively if it terminates the automatic renewal

Other terms that may be found unfair

ACCC also reviews other terms of the contract. Past reasons for unfair terms claims include:

• Giving one party all the powers to change significant terms or leaving all terms in the contract unconstrained

• Unreasonable powers to protect the supplier against loss at the expense of the small business

• Unreasonable ability to end the agreement or cancel a renewal

It is important that all standard form small business terms be reviewed to avoid the risk of them being declared unfair.

What should I do now?

Contact us if you would like to have more information on managing the legal risks involved in standard form contracts. Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.