Automatic renewal clauses and the Australian Consumer Law

Chances are that you have entered into a contract which contains an automatic renewal clause at some point in the course of running your business. Indeed, you may have even tried to include them in your business contracts to secure the clients that you have worked so hard to obtain. The question is, are they enforceable?

Typically automatic renewal clauses, or ‘evergreen clauses’, provide that a contract term will roll over into a further term unless written notice is provided by one of the parties terminating the agreement. They are commonly contained within long term service contracts or business in low value, high volume transactions as the parties are unlikely to re-negotiate contract terms.

Current Position in Australia

Despite being subjected to scrutiny and criticism, automatic renewal clauses are not in fact prohibited in Australia, either by statute or common law. That being said, the Australian Consumer Law contains protections regarding unfair contract terms and misleading contract that impact upon automatic renewal clauses.

Despite these protections, businesses should still be careful about entering into contracts that contain automatic renewal clauses because the clauses may be valid and wrongful termination of a contract may result in a claim for damages for breach of contract.

Application of the Australian Consumer Law

There are two main protections in the Australian Consumer Law that would have bearing on the enforceability of automatic renewal clauses:

Section 18 prohibition on misleading or deceptive conduct; and
Unfair contract terms regime.

The Section 18 provisions prohibit conduct by corporations in trade or commerce that is misleading or deceptive or is likely to mislead or deceive. Breaching this provision may result in civil penalties and/or civil remedies such as injunctions, declarations, damages and compensatory orders.

In 2016, the unfair contract provisions of the Australian Consumer Law were extended to cover standard form contracts. The scope of the unfair contract protections was broadened to include small businesses, not just consumers.

Under the broadened unfair contract terms regime, standard form contracts used by businesses would be covered if:

one of the parties is a small business (i.e. a business with less than 20 employees); and
the upfront contract price payable is less than $300,000 or $1 million if the duration of the contract is more than 12 months.

Courts and Tribunals, upon application by a party to an eligible contract (or upon application by the ACCC or ASIC), can now review the terms of a standard form contract and determine whether they are unfair and/or unenforceable.

What is considered an ‘unfair term’

A contract term is considered to be ‘unfair’ if:

It would cause a significant imbalance in the parties’ rights and obligations under the contract; and
It is not reasonably necessary to protect the legitimate interest of the party who is or would be advantaged by the term; and
It would cause detriment (financial or otherwise) to a party if it would be enforced.

Enforceability of Automatic Renewal Clauses

As automatic renewal clauses are not prohibited, their enforceability must be assessed against the misleading conduct provisions and the unfair contract terms provisions of the Australian Consumer Law. Automatic renewal clauses which are unfair or misleading will be void and unenforceable.

There have been a number of cases brought before the courts regarding the enforceability of automatic renewal clauses.

In the matter of Chrisco Hampers[1] the Federal Court criticised the ‘Headstart’ term within the Chrisco contract that allowed Chrisco to continue withdrawing funds from the customer’s bank account even after the customer had made full payment of the goods on order. The clause stated that any surplus funds collected by Chrisco would be applied against future orders but the customer would not receive any discount or account for interest on the money if they did not make a further order. The Court suggested that the clause gave Chrisco rights to withdraw but gave no substantial right to the customer in return. Therefore, there was a significant imbalance in the parties’ rights. Also, the Court noted that the term was not prominent, was not written in plain language and did not explain to the customer how a refund could be obtained.

In the matter of JJ Richards[2], the Federal Court determined that eight clauses in JJ Richard’s standard form contracts were unfair and therefore void. One of the clauses was an automatic renewal clause which renewed the contract for a further term unless customers cancelled 30 days before the end of the term. The Court took particular issue with the fact that the notice period was limited, JJ Richards were not required, under the contract, to provide a reminder/notice of the automatic renewal clause and there was an exclusivity clause which limited the ability of the customer to seek alternate suppliers. The size and resources of JJ Richards meant that the Court considered they were better placed to have effective systems in place regarding the automatic renewals than their small business customers.

In light of the comments and decisions stemming from these cases, it would be prudent for businesses seeking to rely on an automatic renewal clause to ensure they have taken the following steps:

Make the relevant clause prominent and transparent within the contract;
Bring the consumer/customer’s attention to the clause at the time of entering into the contract and at a reasonable time before the notice period ends;
Give the customer/consumer the option to opt out of the automatic renewal;
Make the notice period before the automatic renewal reasonable – the longer the contract term, the longer the notice period should be;
Ensure the consequences of early termination after an automatic renewal are not excessive or unduly oppressive to the consumer.

If you are a business looking to incorporate an automatic renewal clause into your contract, or you are a small business and want to avoid an automatic renewal clause, contact us for advice.

This is meant as a guide only and should not be taken as legal advice.