Welcome to the fourth article in our ‘UCT 101’ series, designed to assist businesses in preparing for new reforms to the unfair contract terms regime under the Australian Consumer Law (ACL)1 introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act). The reforms to the UCT regime under the Act will take effect from 9 November 2023.
In our first three articles of the series (which can be found here), we discussed some of the preliminary foundational questions associated with the application of the unfair contract terms (UCT) regime, namely – what constitutes a ‘standard form contract’, a ‘small business contract’, and an ‘unfair contract term’ for the purposes of the UCT regime.
In this article, we begin looking at some of the ‘usual suspects’ when it comes to the UCT regime – that is, those terms that by their nature run a higher risk of being unfair – and provide some tips on how to avoid them (or work with them, if you can’t). Our first usual suspect is a clause that comes up again, and again, and again – the automatic renewal clause.
What is an automatic renewal clause?
An automatic renewal clause provides for the rollover of a contract term unless or until a party gives notice within a prescribed timeframe that it does not want the contract term to rollover for a subsequent term.
Example: “this Agreement will continue for consecutive periods of 6 months (Further Term(s)) after the initial term of 12 months (Initial Term) unless one party notifies the other party within 60 days prior to the end of the Initial Term or Further Term (as applicable) that it does not wish for the Agreement to renew for the Further Term”.
The structure of an automatic renewal clause generally means that if a party does not want the contract to rollover for a subsequent term, but forgets or omits to give notice within the required window, the contract will rollover nonetheless.
When is an automatic renewal clause unfair?
As detailed in our most recent article, there are three main limbs to consider when determining whether a contract term is unfair under the ACL (UCT Test):
- Does the term cause a significant imbalance in the parties’ rights and obligations arising under the contract?
- Is the term reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term?
- Does the term cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on?
In applying the UCT Test, a court may take into account such matters as it thinks relevant, but must take into account the extent to which the term is transparent and the contract as a whole.2
The range of matters that must be taken into account when determining whether a contract term is unfair makes the UCT Test a balancing act. Applying each part of the UCT Test to the general concept of an automatic renewal clause below, we can see how fact-dependant its application may be in practice:
Limb 1: Does the term cause a significant imbalance in the parties’ rights and obligations arising under the contract? | An automatic renewal clause may cause an imbalance between the parties where it places an obligation on one party to actively put a stop to the rollover of a contract term, but does not require the other party (who in most cases will stand to benefit from the clause) to do anything at all, except wait for the contract to tick over to a new term. |
| Limb 2: Is the term reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term? | This question is often the crux of the issue when considering the UCT Test – in this case, when is an automatic rollover term ‘reasonably necessary’ to protect the ‘legitimate interests’ of a party advantaged by the term? The resolution of this question is fact-dependent and often debatable – for example, it might be reasonably necessary for a supplier that enters into service contracts with hundreds of customers to include an automatic renewal clause in those contracts to avoid having to enter into new contracts each time one comes to an end. The legitimate interest being protected in this scenario may be that the supplier would otherwise be forced to incur significant administrative cost in issuing and managing new contracts. In contrast, it may not be reasonably necessary to have an automatic renewal clause in the case of a one-off transaction with a small business purchaser. |
| Limb 3: Does the term cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on? | A party could certainly suffer detriment if it were forced to see through a contract term that it did not know about or understand, or otherwise forgot to terminate. |
| Additional considerations: Transparency, the contract as a whole, and any other matters a court thinks relevant. | Transparency is an important consideration in determining whether an automatic renewal clause satisfies the limbs of the UCT Test. For example, an automatic renewal clause that is difficult to locate in voluminous contract documents, or hard to make out due to its front size, is more likely to be deemed unfair than an automatic renewal clause that is legible and clearly expressed. A court may also take into account the contract as a whole, or any other matters it sees fit, such as the size and bargaining power of the contracting parties, any pre-contractual conduct and the general nature and practical realities of the arrangement. |
How has the UCT Test been applied to automatic renewal clauses in practice?
There have been a significant number of court cases and regulatory actions over the past decade that illustrate the way in which courts and the ACCC will apply the UCT Test as it relates to automatic renewal clauses. These relevant actions include:
- ACCC v Servcorp Ltd [2018] FCA 1044 (Servcorp), in which 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.3 See this previous article for a full recap of the key takeaways of the Servcorp case.
- ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (JJ Richards), in which 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 remaining contracted to the business for extensive periods with no opportunity to switch suppliers. Similarly to Servcorp, the court also noted 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.4
- ACCC v Chrisco Hampers Australia Ltd (2015) 239 FCR 33 (Chrisco), in which the Federal Court found that an automatic renewal clause that 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.5 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 (ie no use of larger font, italics, bold or highlighting).6
- An ACCC investigation into UK-based audio branding company Please Hold (UK) Limited (Please Hold), prompting Please Hold to change its standard form contracts to address the ACCC’s concerns around the automatic renewal clauses, which caused the contracts to automatically renew for a further term on 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. Please Hold changed its contracts to include 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.
- An ACCC investigation into Maxgaming Qld Pty Ltd (a wholly-owned subsidiary of Tabcorp Ltd) (Maxgaming), prompting Maxgaming to give Court enforceable undertakings to the ACCC that it would not enforce, or rely on, the potentially offending terms in relation to any contracts still in force or enter into new contracts on terms with a similar effect. One of the offending clauses was an automatic renewal clause which would bind customers to subsequent contract terms, each equal to the initial contract term (which were in some cases up to 6 years), unless the customer terminated the contract in writing within a specified period. The ACCC noted that, in contrast, there was no countervailing obligation on Maxgaming to provide notice to the customer that the contract would rollover to a new term if the customer did not exercise its right to terminate the agreement.
So, how do I make my automatic renewal clause fair?
Ultimately, this will depend on the clause itself, the application of the UCT Test and the circumstances surrounding the particular transaction. What is unfair in one case may be fair in another, and often the analysis will require businesses to undertake an internal risk assessment, considering the potential UCT risks of including a clause versus the commercial risks of not including it. In saying that, these are our ‘best practice’ tips when it comes to including automatic renewal clauses in contracts:
- Make the fact that the contract contains an automatic renewal clause very clear. The clause should be expressed in reasonably plain language, legible, presented clearly, and readily available to the party affected by the clause. One way of achieving transparency is to require customers to tick a box acknowledging and agreeing to the automatic renewal clause, or to include a reference to it in big, bold letters at the beginning of the contract.
- Provide sufficient notification to counterparties to ensure they are aware of impending renewal dates well in advance, so that they can exercise their right to stop the rollover or terminate the contract. This process should be confirmed in the contract, rather than simply an internal business policy. Many businesses find ways to automate this process (eg an email automatically sent out to customers 60 days before their rollover date) to make this manageable from an operational perspective.
- Following on from the above, ensure that counterparties are provided with a reasonable period of time in which to stop the rollover or terminate the agreement. Again, this process should be confirmed in the contract itself. As a reminder, in JJ Richards, a 30-day window in which customers could stop the rollover prior to the automatic renewal was not considered enough time in the context of that particular contract.
- Ensure that the renewal period itself is a reasonable period, ideally shorter than the initial term of the contract. This is particularly important where the initial term is already a long period, as was the case in Maxgaming.
Next edition
In our next instalment of ‘UCT 101’, we will be back with another ‘usual suspect’ – the unilateral variation clause – once again providing some background and guidance on its application.
How can we help?
We have a dedicated contracting and consumer law team that can assist you with contract preparation and review and can provide you with advice on your rights and obligations under the ACL, particularly in light of recent reforms. We also routinely present to businesses on the Australian Consumer Law and the unfair contract terms regime. 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, Associate.
1Competition and Consumer Act 2001 (Cth), Schedule 2 (‘Australian Consumer Law’ or ‘ACL’).
2ACL, s24(2).
3Servcorp at [40].
4JJ Richards at [56].
5Chrisco at [70] – [101].
6Chrisco at [89] – [92].
