Australia: Six points to keep in mind if your contracts contain automatic renewal terms

Automatic renewal terms are now in the sights of the ACCC under new laws which extend the unfair contract term provisions of the Australian Consumer Law (UCT provisions) to small business contracts. While automatic renewal terms may still be used, extra care must be taken in drafting them.

If you use standard form contracts to supply goods or services to small businesses and those contracts contain automatic renewal terms, here are six points to keep in mind:

  1. The ACCC has already taken action against a business that used an unfair automatic renewal term in a consumer contract.
  2. The terms of your contracts could be subject to the UCT provisions if they are used in standard form small business contracts.1
  3. If a term in a standard form small business contract is found to be unfair under the UCT provisions, it will be void (unenforceable).
  4. A void term in a standard form small business contract will be void in all versions of it, magnifying the consequences of the void term across the business and across multiple customers.
  5. Being unable to enforce an automatic renewal term could have significant implications for forward planning and resource allocation in some businesses.
  6. Generally, practical steps can be taken to address the risks posed by an unfair automatic renewal term (some of which we discuss in this article).

THE ACCC HAS ALREADY TAKEN ACTION ON AUTOMATIC RENEWAL TERMS

Late last year, the ACCC successfully took action against a business that used an unfair automatic renewal term in its contracts with consumers.

In this particular case, the ACCC brought Federal Court action against a supplier of Christmas hampers.2 The Court found the automatic renewal term used in the supplier's lay-by contract to be void under the UCT provisions of the ACL and was ordered to pay a percentage of the ACCC's costs. The relevant term required consumers to opt-out of the automatic renewal term and also suffered from a lack of transparency. You can read about this decision in more detail in a previous article we have authored here.

At the time of that decision, the UCT provisions only applied to consumer contracts (made with individuals), not standard form small business contracts.

Since then, the UCT provisions have been extended to apply to standard form small business contracts.3 This means that certain standard form contracts used in business-to-business transactions are now in the sights of the ACCC, and small business.

A RECENT ACCC REPORT HAS TARGETED AUTOMATIC RENEWAL TERMS

The ACCC has recently published a report on unfair contract terms used in standard form small business contracts across a range of industries. Among other unfair terms, the report considers the use of unfair automatic renewal terms.4

WHAT TYPE OF AUTOMATIC RENEWAL TERMS ARE AT RISK?

Automatic renewal terms used in standard form small business contracts are at risk if:

  • they are not reasonably necessary to protect legitimate business interests;
  • they are not transparent or adequately disclosed to the other party;
  • no notice is required to be given that a contract is about to renew;
  • only a short window of opportunity is provided to opt out of the term;
  • the term includes a right to change the date for cancellation of the renewal; or
  • the party affected by the term will incur additional fees if they cancel after the contract is automatically renewed.

WHAT CAN BE DONE TO REDUCE THE RISK ASSOCIATED WITH AUTOMATIC RENEWAL TERMS?

Practical steps can be taken to amend an automatic renewal term so that the risk of it being rendered unfair is reduced or eliminated.

Those steps may include one or more of the following:

  • avoiding unconditional or unconstrained automatic renewal terms;
  • making sure the term is prominent or drawn to the attention of the other party;
  • being able to demonstrate that the term is reasonably necessary to protect your legitimate business interests;
  • giving notice to the other party about when their opt-out rights (if any) have activated and when the contract will renew if they do not opt out;
  • providing a reasonable period for the other party to exercise any opt-out rights; and
  • avoiding obligations for the other party to pay excessive fees if they terminate after an automatic renewal.

In our experience, once the business drivers for the use of an automatic renewal term are determined and understood, relatively straight-forward amendments can usually be made to reduce or eliminate the risk of the term being found to be unfair.

MAKE SURE YOU THINK ABOUT OTHER TERMS THAT MAY BE UNFAIR

The UCT provisions are not limited to automatic renewal terms.

All terms of a standard form small business contract should be reviewed to assess whether they are at risk of being found to be void as unfair contract terms.5

Of the standard form small business contracts that it reviewed, the ACCC found that the most common problems were terms which allowed the person who prepared the contract:6

  • to unilaterally vary all terms, or significant terms, in an unconstrained manner;
  • broad and unreasonable powers to protect the person against loss or damage at the expense of the small business by imposing broad indemnities or excessive limitations of liabilities; and
  • an unreasonable ability to cancel or end an agreement.

If you use standard form contracts in business-to-business transactions and you have not had the terms of those contracts reviewed for compliance with the UCT provisions, all is not lost.

It may be that the UCT provisions do not apply to the standard form contract in question (advice should be sought to determine this).

If the UCT provisions do apply, practical steps can usually be taken to amend those terms to reduce or eliminate the risk of them being rendered void while retaining an appropriate automatic renewal mechanism.

Devoting attention to such terms now will help prevent unwanted attention down the track.

Footnotes

1 The UCT provisions apply to standard form business-to-business contracts entered into or renewed on or after 12 November 2016, where: (i) at least one of the parties is a 'small business' (ie. employs less than 20 people, including casual employees employed on a regular and systematic basis); and (ii) the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months; and (iii) it is for the supply of goods or services or the sale or grant of an interest in land (referred to in this article as 'standard form small business contracts'). The UCT provisions have also applied to consumer contracts since 2010.

2 ACCC v Chrisco Hampers Australia Pty Limited [2015] FCA 1204; ACCC v Chrisco Hampers Australia Limited (No. 3) [2016] FCA 206.

3 The extended laws came into effect on 12 November 2016. The UCT provisions were also extended to apply to the supply of financial products and financial services under the Australian Securities and Investments Commission Act 2001 (Cth) but do not apply to insurance contracts. Certain monetary thresholds are relevant to determine whether the UCT provisions apply.

4 ACCC, Unfair terms in small business contracts (10 November 2016), sections 1 and 5 of report.

5 Note: Terms that: (i) define the main subject matter of the contract; (ii) set the upfront price payable under the contract or (iii) are required or permitted by law of the Commonwealth, State or a Territory, are not subject to the UCT provisions.

6 ACCC, Unfair terms in small business contracts (10 November 2016), page 2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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