Beware the automatic renewal clause: unfair contract terms examined

This year, the Australian Competition and Consumer Commission (ACCC) made it a priority to advocate for law reform to address deficiencies in the unfair contract terms regime (UCT Regime) under the Australian Consumer Law¹ (ACL). (see our article outlining the newly-proposed changes here).

In parallel, the ACCC continues to take compliance and enforcement action in response to the alleged use of unfair contract terms. The ACCC recently announced by way of a media release that it had investigated certain terms of the standard form consumer contracts of UK-based audio branding company Please Hold (UK) Limited (Please Hold), prompting Please Hold to amend its contracts to address the ACCC’s concerns.

This media release serves as an important reminder to businesses to ensure that their standard form consumer or small business contracts comply with the UCT Regime, particularly before the introduction of any new (more stringent) laws in 2022. In this article, we provide an overview of the ACCC’s findings on Please Hold, and give businesses some general tips on managing their compliance with the UCT Regime.

What were the terms of the Please Hold contracts?

Please Hold’s standard form consumer contracts contained an ‘automatic renewal’ clause, which caused the contracts to automatically renew for a further term upon the expiry of the initial term. The initial term of these contracts generally ran for a period of between 24 to 36 months, and would automatically renew for another full contract term if the customer did not terminate the contract in writing at least 42 days before the end of the initial term. If a customer did not terminate in time, the contract would be extended for the further term without notice and the customer could only terminate by paying termination charges equivalent to the price payable for the further term less 3%.

The ACCC considered that the automatic renewal clause was unfair, as it had the potential to cause significant financial detriment to customers who, in effect, had to pay for a service they may no longer have needed, under a contract that they may have thought had expired or that they had tried to cancel. While Please Hold did not accept that its contract terms were unfair or constituted a breach of the ACL, it cooperated with the ACCC’s investigation and agreed to amend its contract terms to address the ACCC’s concerns.

These changes included the introduction of a rolling month-by-month contract term after the end of the initial term, allowing for cancellation of the contract at any time on 30 days’ notice, and an express term noting customers’ consumer guarantee rights under the ACL. Additionally, Please Hold undertook to notify customers whose contracts included one or more of the clauses of concern of the amendments.

When is a contract term unfair?

A contract term in a standard form consumer or small business contract will be unfair if it:²

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The ACL provides a comprehensive list of terms which may be unfair under section 25 of the ACL. However, despite the examples listed in section 25, whether a term is unfair or not is a question to be determined on the facts of each case. In determining whether a term is unfair, a court may take into account any matters it considers relevant, but must take into account the extent to which the term is transparent, and the contract as a whole.³ A term is transparent if it is legible, presented clearly, expressed in reasonably plain language and readily available to any party affected by the term.⁴

As set out in more detail in a previous article, Australian courts have found automatic renewal clauses to be unfair on a number of occasions:

• In ACCC v Servcorp Ltd [2018] FCA 1044 (Servcorp), the Federal Court found that an automatic renewal clause created a significant imbalance in the rights and obligations of the parties in circumstances where the business was not required to notify the customer of the impending renewal date. The Federal Court said that the business was more likely to be aware of when contracts were due for renewal than its small business customers, who may unknowingly find themselves locked into a new term at a higher price.⁵ See this previous article for a full recap of the key takeaways of the Servcorp case.
• In ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (JJ Richards), the Federal Court found that an automatic renewal clause created a significant imbalance in the rights and obligations of the parties in circumstances where the business was not required to notify the customer of the impending renewal date and the customer had only a 30-day window to cancel the contract before the term automatically renewed. The Federal Court accepted the ACCC’s submissions that this clause could result in customers inadvertently missing the opportunity to terminate the contract and therefore remain contracted to the business for extensive periods with no opportunity to switch suppliers, and similarly to Servcorp, that the business was more likely to be aware of when contracts were due for renewal than its small business customers, who may not have effective systems in place to identify the relevant termination periods.6
• In ACCC v Chrisco Hampers Australia Ltd (2015) 239 FCR 33 (Chrisco), the Federal Court found that an automatic renewal clause which allowed the business to make continued deductions from customers’ bank accounts (without any corresponding right being granted to customers) created a significant imbalance in the rights and obligations of the parties, particularly due to the lack of transparency of the clause.⁷ The Federal Court noted that the relevant terms ‘could have been presented in a manner which was far more legible, much clearer, and more readily available to the customer’, pointing to the small font size of the term and the lack of distinguishing features in the formatting of the document (i.e. no use of larger font, italics, bold or highlighting).⁸

How can I avoid breaching the UCT Regime?

The findings of the Federal Court in the cases referred to in this article indicate that if businesses choose to use an automatic renewal clause in their contracts, they should:

• notify customers of the impending renewal date before the relevant term expires so that customers may exercise their right to terminate the agreement (and this process should be confirmed in the contract itself);
• ensure that the contract provides customers with a reasonable period of time to terminate the agreement before the renewal date, noting that in JJ Richards 30 days was not considered enough time; and
• ensure that the relevant renewal clauses are made sufficiently transparent to the customer by use of clear, legible drafting. One way of achieving transparency would be to require customers to tick a box acknowledging and agreeing to the automatic renewal clause.

How can we help?

We have a dedicated consumer law team that can review your contracts to ensure that they comply with the UCT Regime and can provide you with related advice on contract and consumer law. Please contact us if you would like more information about the services we provide.

This article was written by Teresa Torcasio, Partner and Zoe Vise, Solicitor.

¹Competition and Consumer Act 2010 (Cth) sch 2 (‘Australian Consumer Law’ or ‘ACL’).
²ACL, s 24(1).
³ACL, s 24(2).
⁴ACL, s 24(3).
⁵Servcorp at [40].
⁶JJ Richards at [56].
⁷Chrisco at [70] – [101].
⁸Chrisco at [89] – [92].