Is Your Automatic Renewal Clause Legal?

Blog, Business Contracts, Business Structures, Start Ups / Business Contracts, Protect Your Business / October 15, 2017

Is Your Automatic Renewal Clause Legal?

Automatic Renewal Clauses (“ARCs”) can be golden for business. But for all their perks, ARCs are notoriously problematic. They may irritate customers who’ve missed the termination window, trap businesses in undesirable ongoing agreements and undermine the validity of entire contracts. And the ACCC is increasingly vigilant about their terms.

Whether your company uses or subscribes to ARCs, understanding their limitations – and legality – will keep you out of trouble. Read on for our comprehensive (and comprehensible) ARC summary.

 

Automatic Renewal Clauses (“ARCs”) can be golden for business. Otherwise known as evergreen clauses, they act to perpetually renew a contract when no notice has been given to terminate it. Saving time and money, removing human energy from the equation and treating customers to unparalleled convenience makes them a boon for modern business. But for all their perks, ARCs are notoriously problematic. They may irritate customers who’ve missed the termination window, trap businesses in undesirable ongoing agreements and undermine the validity of entire contracts.

And the ACCC is increasingly vigilant about their terms.

Whether your company uses or subscribes to ARCs, understanding their limitations – and legality – will keep you out of trouble. Read on for our comprehensive (and comprehensible) ARC summary.

THE ACCC IS WATCHING

Nothing gets past the hawk-eyed Australian Competition & Consumer Commission (“ACCC”). On numerous occasions they’ve challenged the validity of ARCs – and won – labelling them as ‘unfair terms’ under Australian Consumer Law. Here’s what you can learn from Sensis and Chrisco.

SENSIS: A CAUTIONARY CASE STUDY

In May 2017, Sensis Pty Ltd agreed to an enforceable undertaking following an ACCC investigation into its Product Contract Terms. These contained provisions to automatically renew the contract for another 12 months unless cancelled by the customer.

To add insult to irritation, a fee equal to the balance of the contract was charged if the customer cancelled after a certain date.

The clincher? Unclear marketing claims.

The ACCC disapproved of claims on Sensis’ website (and in associated communications) which pitched the contract as a monthly fee plus a minimum 12 month term – yet failed to disclose the ARCs and cancellation fees.

To the ACCC, this amounted to misleading and deceptive conduct – which saw Sensis refunding affected parties, amending its Product Contract Terms and ensuring customers were clearly reminded of pending ARCs.

CHRISCO: WHEN GOOD HAMPERS GO BAD

In 2016, Chrisco, known for their Christmas hampers, received a not-so-merry gift from the ACCC: a harsh reprimand.

The issue? Lay-by contracts that included a term allowing ongoing withdrawals from customers’ bank accounts – after they’d paid for their hamper. These payments went towards the following year’s hamper; in other words, an (unofficial) automatic renewal plan.

Customers could opt-out of the term upon entering the contract, cancelling the payments to receive a full refund. However, the term didn’t offer a discount for the early savings plan, and any refund would not include interest.

The Federal Court found that there was a “significant imbalance” in the rights and obligations of the parties arising under the contract, and “unfair” because it may cause detriment to the customer. The terms were labelled unfair, and therefore void.

WORRIED? OBEY THESE RULES TO AVOID ACCC SCRUTINY

If you’re using ARCs and want to avoid attention from the ACCC, meet these requirements (note: by no means conclusive):

● Ensure the client/customer is informed of, and understands, the term. Be transparent!
● Provide clear notice when the contract is about to renew.
● Give both parties the ability to change the cut-off date for renewal cancellation.
● Ensure any early termination fees are fair.
● Include an opt-out notice (although this alone will not be adequate).

AND FINALLY, EXPECT THE LAW TO CHANGE!

The law is constantly changing.

What might have been acceptable and legal during the last term of the contract may now be questionable, or even illegal.

For instance, the law surrounding unfair terms was recently extended to apply to small businesses that came into operation in November 2016 (see our previous article on the new law here).

As such, if you’re a small business with a standard form contract set to automatically renew after November 2016 (and the contract also contains an unfair clause), then you’re at risk of having your whole contract invalidated. Yes, that’s as unpleasant as it sounds.

It all boils down to transparency.

Keep your customers informed and up-to-date with the details of their contract, and practice vigilance when entering into an ARC yourself.

As always, reach out to us if you’re seeking comprehensible legal advice re. clauses to please the ACCC.

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