A timely reminder when drafting contracts containing ‘automatic renewal terms’

As set out in our update “Small Businesses Offered Long Awaited Protection from Unfair Contract Terms”, unfair contract term provisions under the Australian Consumer Law (ACL) have been extended to not only protect consumers from unfair terms, but also parties to a small business contract.

A report into unfair terms in small business contracts published by the ACCC identified automatic renewal clauses as problematic. Automatic renewal clauses that may be considered unfair include:

•    Where the clause is not prominent or drawn to the attention of the other party; 
•    Where the party is not notified that the contract is about to automatically renew;
•    Where the creator of the contract can change the deadline for cancelling automatic renewal;
•    Where a party will incur large termination costs if the contract is cancelled after the date of automatic renewal. 

A recent decision by the Federal Court has found Chrisco Hampers Australia Ltd, providers of Christmas consumables across Australia, guilty of including an unfair contract term in its 2014 standard contract, lay-by agreements. The term allowed Chrisco to automatically take payments by direct debit from consumers after they had paid their full lay-by order amount. In order to stop the automatic debit, consumers were required to opt-out. The court found the automatic renewal term to be unfair as it was not adequately communicated to customers, was ambiguous and provided detriment to the customer. 

Importantly, the Chrisco decision was made on the basis of a consumer contract rather than a standard form small business contract, however, the same principles would apply.

In light of the ACCC report and the Chrisco decision, the following are important considerations to be made when drafting automatic renewal clauses:

•    Making sure the clause is clear and drawn to the attention of the party;
•    Making sure the clause is reasonably necessary to protect the legitimate interests of the business;
•    Providing notice of an opt-out clause; 
•    Making sure a breach of the clause is not associated with large termination costs.

If an automatic renewal clause is found to be unfair by the ACCC, it may become void and inoperable. 

If you have concerns about any clauses in your contracts, please contact:

Nicole Stornebrink
Associate
T  03 5225 5209
E  nstornebrink@ha.legal

or

Dan Simmonds
Managing Principal
M  0417 310 614
T   03 5226 8513
E   dsimmonds@ha.legal