Automatic renewal clauses increasingly vulnerable under the Australian Consumer Law
An automatic renewal clause typically provides that a contract is automatically extended for a further term upon the occurrence or non-occurrence of certain events. For example, a contract may be automatically extended for a further one year period if the other party does not provide written notice terminating the contract at least 30 days before the contract’s expiry.
Automatic renewal clauses are generally used by businesses in low value, high volume transactions because the parties are not likely to renegotiate the terms of the contract and the renewal may not necessarily be significant enough to warrant formal consideration.
However, Australian Competition and Consumer (ACCC) action over the recent years have demonstrated that automatic renewal clauses are extremely vulnerable under Australian Consumer Law, in particular, the unfair contract terms regime and the prohibition against engaging in misleading or deceptive conduct.
This article analyses the ACCC actions over the recent years concerning automatic renewal clauses and will be of particular interest to businesses that include or are considering including automatic renewal clauses in their standard form contracts.
Overview of the relevant legislation
The consumer unfair contract terms regime set out in the Australian Consumer Lawi (and in the Australian Securities and Investments Commission Act 2001 with respect to contracts for financial products and services) has been in effect since 1 July 2010. From 12 November 2016, the regime was extended to cover “standard form contracts” involving “small businesses”, as defined in the legislation (B2B regime).
The effect under the regime is that a Court or relevant Tribunal can declare terms in standard form consumer contracts or small business contracts to be unfair and therefore unenforceable. A party to an eligible contract, the ACCC or the Australian Securities and Investments Commission (ASIC) has standing to seek a declaration that a term is unfair.
A term is unfair if:
- It would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
- It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
- It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.ii
Section 18 of the Australian Consumer Law prohibits conduct by corporations in trade or commerce which is misleading or deceptive or is likely to mislead or deceive. Misleading or deceptive conduct may lead to penalties as well as civil remedies such as injunctions, declarations, damages and compensatory orders. As at the date of this article, the maximum penalty for false or misleading conduct is $1.1m for corporations and $220,000 for individuals.
Federal Court judgment against Chrisco Hampersiii
The Federal Court’s judgment on the ACCC proceedings against Chrisco Hampers Australia Limited (Chrisco) was delivered on 10 November 2015. The proceedings concerned Chrisco’s standard form, consumer contract for its Christmas hampers and other goods. One of the arguments raised by the ACCC was that the automatic renewal clause in the standard form contract was an unfair contract term.
The automatic renewal clause was referred to as the “HeadStart term”. The HeadStart term applied unless the customer opted out of it and allowed Chrisco to continue withdrawing funds from the customer’s bank account even after the customer had made full payment for the goods on order. The money withdrawn from the customer’s bank account would be used for any future order made by the customer but the customer would not obtain any discount on a future order and if the customer did not place an order and requested a refund of the money paid, the money would be refunded without interest.
In finding that the HeadStart term was unfair:
- The Federal Court found that the HeadStart term gave Chrisco a right to withdraw money from the customer’s account without any substantial corresponding right to the customer. The Federal Court rejected Chrisco’s submissions that the customer’s corresponding right was a right to place an order and “receive their money fully back if they do not place that order” or a right to place an order “without having to pay the larger weekly or larger monthly contribution if the payments were made over a shorter period”;
- The Federal Court found that even if the sums of money lost as a result of the customer’s payments were likely to be small (a contention which the Federal Court also rejected), an imbalance in the parties’ rights and a significant detriment to the customer may still arise;
- The Federal Court found that certain matters reduced the transparency of the HeadStart term, including that:
- it was not plain language because it did not clearly identify the amounts that would be directly debited by Chrisco;
- a statement that Chrisco would write to the customer to “confirm your HeadStart plan payments prior to commencing direct debits” was ambiguous;
- it did not explain to the customer how the HeadStart plan could be cancelled and how a refund could be obtained;
- it could have been presented “in a manner which was far more legible, much clearer, and more readily available to the consumer”, the font size was very small and “there was
- nothing about this term that drew it to the consumer’s attention beyond any of the 20 other paragraphs on the same page”;
- in comparison with other elements of the contract where Chrisco had employed certain techniques to bring other matters specifically to the attention of the customer, the HeadStart Term “is in the same font as every other term on the densely packed page of small print terms and conditions”;
- although the HeadStart term and the opt-out provision were opposite each other in the four pages of the catalogue there was no reference in either to the other. The opt-out box to be ticked did not refer to the HeadStart term on the previous page nor did it explain what was involved in the HeadStart plan and the HeadStart term on the previous page did not refer to the possibility of opting out; and
- the statement that the HeadStart plan was fully refundable was not contained in the terms and conditions at all. Instead, the statement was contained in the opt-out box on the form which would be sent to Chrisco. Unless the consumer made a copy of the order form, the consumer who consulted the terms and conditions would not be aware that the HeadStart plan was fully refundable.
- Chrisco made no submission to suggest that the term was reasonably necessary to protect its legitimate interests.
Enforceable undertaking given by Multimedia International Services
On 27 April 2016, Multimedia International Services Pty Ltd (Multimedia) gave an enforceable undertaking to the ACCC following legal proceedings instituted by the ACCC in respect of Multimedia allegedly engaging in unconscionable conduct, misleading or deceptive conduct, making false or misleading representations and wrongly accepting payments from small businesses.
In particular, the ACCC was concerned that Multimedia failed to adequately disclose the fine print that qualified the roll-over clause in its standard form contract to certain customers, and that this had the potential to be misleading or deceptive to potential customers. The automatic renewal clause provided that the contract would continue automatically after the initial two year term unless the customer provided 12 months’ notice, delivered in writing by registered post, that it did not wish the contract to roll over.
Among other things, Multimedia undertook that it would not include an automatic renewal clause in its standard form contracts unless:
- It drew the clause to the attention of potential customers;
- The contract permitted the customer to terminate the contract by giving written notice up to two months prior to the end of the renewal period; and
- For contracts entered into after 60 days from the commencement of the enforceable undertaking, it offered the customer an option not to have the automatic renewal clause.
Enforceable undertaking given by Sensis
On 11 May 2017, Sensis Pty Ltd (Sensis) gave an enforceable undertaking to the ACCC following an investigation into its automatic renewal and cancellation processes.
From at least January 2015 to August 2016, Sensis represented on its website that its Yellow Pages and White Pages bundled print directory and online packages had a monthly fee with a 12 month minimum contract period, but failed to adequately disclose that the packages would be automatically renewed for a further 12 months unless cancelled and that the customer may be charged a cancellation fee equal to the remaining cost of the contract if they tried to cancel the automatically renewed contract after a certain date (the Conduct).
The contracts in question were entered into prior to the effective date of the B2B UCT regime and therefore the regime did not apply. However, the ACCC’s concern was that the Conduct may have been misleading or deceptive, in breach of Sections 18 and 29(1)(i) of the Australian Consumer Law. In particular, the ACCC was concerned about the offending clauses not being disclosed on Sensis’ website.
ACCC Deputy Chair Dr Michael Schaper stated in media release dated 12 May 2017 “Automatic renewal terms must be prominently disclosed, along with all the steps customers can take to cancel a contract and any cancellation fees that may apply. This is particularly important for small business customers”.
Prior to entering into the enforceable undertaking, Sensis had:
- Revised its website to disclose the automatic renewal term, the consequences of failing to cancel the contract before a certain date and how the contract could be cancelled;
- Revised its contract to require it to take all reasonable steps to remind each customer at least four weeks before the automatic renewal would take effect;
- Updated its contracting process to disclose key terms in any written quotes, by sales people prior to entering into the contract and in documents provided after the contract;
- Updated its contracting process to require sales people to obtain the customer’s specific agreement to the automatic renewal term when entering into the contract by telephone and to draw the customer’s attention to the term when entering into the contract in person;
- Developed and implemented new training on contracting processes; and
- Introduced a new complaints page on its website with information about how to lodge a complaint with Sensis.
Sensis was not required to undertake to remove the automatic renewal term from its contracts, even though the B2B UCT regime would apply to contracts entered into by Sensis on and from 12 November 2016. This indicates that the proactive steps undertaken by Sensis (as summarised above) were sufficient to alleviate the ACCC’s concerns about the automatic renewal term.
Federal Court judgment against JJ Richardsiv
On 6 September 2017, the ACCC announced that it had instituted proceedings in the Federal Court against waste management services provider, JJ Richards & Sons Pty Ltd (JJ Richards), alleging that eight clauses in its standard form, small business contract were void under the B2B UCT regime and seeking declaratory and injunctive relief against JJ Richards.
On 13 October 2017, the Federal Court declared that all eight terms in JJ Richard’s standard form contracts were unfair and therefore void, including a term that automatically renewed the contract for a further term unless customers cancelled the contract 30 days before the end of the initial term or any renewed term.
In finding that the automatic renewal clause was an unfair contract term, the Federal Court considered the following factorsv:
- The limited period of time within which a customer could terminate the contract and the lack of requirement in the contract for JJ Richards to provide notice to a customer that the contract was about to expire and that the automatic renewal will otherwise occur, may result in customers inadvertently missing the opportunity to terminate the contract;
- Where customers were bound to a further term due to inadvertently missing the opportunity to terminate, they would have no opportunity to change to an alternative supplier due to the operation of an exclusivity clause prohibiting the customer from engaging other waste management providers, which was also found to be unfair; and
- JJ Richards is more likely to be aware of when customer’s contracts are coming up for renewal than small business customers, who have limited resources and competing demands that mean they may not have effective systems in place to identify the termination period for their waste management contract.
ACCC action against Servcorp
On 15 September 2017, the ACCC announced that it had instituted proceedings in the Federal Court against office services provider Servcorp Ltd and two of its subsidiaries (Servcorp), alleging that certain terms in Servcorp’s purportedly standard form, small business contracts were unfair. One of the terms the ACCC alleged was unfair was a term automatically renewing a customer’s contract and allowing Servcorp to unilaterally increase the contract price after the automatic renewal without prior notice to the customer.
The proceedings are still before the Federal Court, however on 7 December 2017, Servcorp issued an ASX announcement stating that it would roll out new serviced office agreements to its clients in Australia and that it believes its new terms are fair and comply with the new unfair contract terms regime. Interestingly, in the announcement, Servcorp also states that the three individual contracts referred to in the ACCC’s action were negotiated before the B2B regime commenced, indicating that Servcorp may be arguing that the contracts were not standard form and therefore not subject to the B2B regime.
Enforceable undertaking given by Cardtronics
On 26 March 2018, ATM provider Cardtronics Australasia Pty Ltd (Cardtronics) gave an enforceable undertaking to the ACCC regarding potentially unfair contract terms in its ATM contracts, including a term which automatically renewed the contract for up to six years unless the customer provided six months’ notice before the end of the contract.
On 9 October 2017, in consideration of the ACCC’s concerns, Cardtronics wrote to existing customers informing them, among other things, that if their ATM contract included an automatic renewal clause, Cardtronics would:
- Write to the customer to remind them of the approaching end of the contract and their ability to notify Cardtronics if they wished to end the contract; and
- Give customers at least 60 days to notify Cardtronics if they wished to end the contract.
In addition to the voluntary action described above, Cardtronics undertook, among other things, that from the date of the enforceable undertaking, if its existing and future ATM contracts included an automatic renewal clause, Cardtronics would:
- Provide at least five months’ written notice to the customer prior to the end of the term of the contract; and
- Accept a notice of non-renewal given by the customer three months or more prior to the end of the term of the contract.
It should be noted that Cardtronics did not have a presence in Australia prior to 6 January 2017. Through the acquisition of DirectCash Payments Inc and DC Payments Australasia Pty Ltd (DC Payments), Cardtronics became the owner of the “Cashcard” ATM business, which was only recently acquired by DC Payments on 30 September 2016. Despite DC Payments having reviewed and amended the ATM contracts in the lead up to the commencement of the B2B regime, the ACCC still had concerns with the contract. This is an important lesson for acquiring businesses to consider the effect of the UCT regime as part of conducting due diligence on a target entity’s operations.
Key takeaways for businesses
The ACCC actions discussed above show that automatic renewal clauses should be included in contracts with caution and only after a thorough legal analysis. Where a contract is not subject to the unfair contract terms regime, a failure to adequately disclose the automatic renewal term may expose a business to a misleading or deceptive conduct claim. Misleading or deceptive conduct, unlike the inclusion of an unfair term in a contract, can attract significant penalties.
When drafting an automatic renewal clause, you should consider whether:
- You should be required to notify the other party of the upcoming automatic renewal;
- The other party should have an opportunity to opt out of the automatic renewal altogether;
- The other party has been given a reasonable period to exercise its right to not renew the contract;
- The other party will suffer a detriment if the contract were to automatically renew itself (which may be exacerbated by other unfair terms in the contract); and
- The automatic renewal clause is transparent and its effect in ancillary documentation and sales processes is transparent.
This article was written by Teresa Torcasio, Partner and Marian Ngo, Senior Associate in our Melbourne office.
P: +61 3 8644 3623
i Schedule 2 of the Competition and Consumer Act 2010 (Cth)
ii Section 24(1) of the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)
iii Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited  FCA 1204
iv Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd  FCA 1224
v Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd  FCA 1224 at 56
Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.