Unfair contract terms 02: Automatic renewal clauses

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• Unfair contract terms 01: Getting ready for a big year of reforms

We have already said that 2021 will be a significant year for the unfair contract term (UCT) laws. For that reason, we're bringing you a series of articles on the UCT laws so that you can be thoroughly across them. In our first instalment, we gave you a general refresher. In this second instalment, we'll address a type of clause that has been the subject of several court proceedings: the automatic renewal clause. This instalment assumes a basic knowledge of the UCT laws, which you can gain from the first instalment.

What is an automatic renewal clause?

Many of us have encountered automatic renewal clauses in our day-to-day life. As the name suggests, an automatic renewal clause automatically renews the contract for another term unless one party gives notice of its wish to terminate prior to the expiry of the initial term. A business will often use these clauses when it has an automatic payment arrangement with its customer; for example, having an automatic debit from the customer's credit card or bank account. This guards against the risk of the business continuing to provide its goods or services for a further term and not being paid.

Some say automatic renewal clauses are harmful to consumers and small businesses because they result in them purchasing goods and services that they don't want. These clauses are often criticised when (i) the contract imposes liquidated damages if the customer or small business terminates early or (ii) does not require the supplier to provide notice of the impending automatic renewal. By way of illustration, imagine a consumer or small business enters into a contract (i) with a term of one year, (ii) which states that it will automatically renew for a further year unless the consumer or small business gives the supplier notice of their desire not to renew at least one month before the term expires, (iii) which does not require the supplier to give notice of the impending renewal and (iv) which states the consumer or small business must pay the balance of the fees for the renewed term if they terminate early. In these circumstances, the consumer or small business may be unaware of the automatic renewal and then be faced with paying for goods or services that they don't want for a further year.

On the other hand, some have acknowledged that automatic renewal clauses assist consumers and small businesses. This can occur if the goods or services are something they need on an ongoing basis and if they will be at risk of hardship if they do not receive them; for example, home and contents insurance.

Now that we know what an automatic renewal clause is, let's look at:

• the three court decisions concerning automatic renewal clauses to date;
• guidance from the ACCC on automatic renewal clauses;
• whether an automatic renewal clause really is unfair under the UCT laws; and
• what steps can be taken to reduce the risk of an automatic renewal clause being declared unfair.

The court decisions on automatic renewal clauses

Thus far, there have been three court decisions concerning automatic renewal decisions. All are in the Federal Court and were the result of ACCC regulatory action. However, only one was contested. The other two were resolved by the ACCC and the respondent agreeing to orders that the automatic renewal clause was unfair. When regulatory proceedings are resolved by consent, the Court must still be satisfied that the proposed orders are appropriate. It will not simply approve what's presented by the parties. Still, a judgment arising from a fully-contested hearing is likely to give a more detailed analysis of the application of the UCT laws. This is because (i) the parties were unable to agree on their application and (ii) when a Court makes orders that were proposed by the consent of the parties, "it should exercise a degree of restraint when scrutinising the[m] …., particularly where both parties are legally represented and able to understand and evaluate the desirability of the settlement" (ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405).

ACCC v Chrisco Hampers Australia Limited

At the time of writing, the only decision of a court addressing an automatic renewal clause that arose from a fully-contested hearing is ACCC v Chrisco Hampers Australia Limited [2015] FCA 1204. Chrisco sold Christmas hampers containing goods that were usually priced above retail prices. Customers paid for the hampers by instalments paid over a period of up to one year. Chrisco offered customers a "HeadStart Plan" which was embodied in the "HeadStart term". According to the plan, after a customer had paid off their order, Chrisco would continue to make deductions from their bank account or credit card which would go towards any order that the customer placed in the future. The customer might not make a further order, in which case the payments made under the plan were fully refundable. A customer could opt out of the HeadStart Plan by ticking a box in the order form for their hamper. The customer was automatically included in the Headstart Plan unless they opted out. The HeadStart Plan did not grant the customer a discount on a future order and any refund they received would not include interest on the money that Chrisco had debited from them.

Edelman J said the “essential issue” was whether the HeadStart term caused a significant imbalance in the parties’ rights and obligations arising under the contract. This is one of the elements of the definition of “unfair” contained in s 24(1) of the Australian Consumer Law. His Honour concluded that the HeadStart term did cause such an imbalance because the plan gave Chrisco the right to continue making debits from the customer “without any substantial corresponding right to the customer.” Chrisco submitted that the HeadStart Plan gave the customer the right to place an order or receive a full refund, but His Honour did not consider this amounted to granting the customer a right because the customer could place an order in the absence of the plan and the right to obtain a refund was not “substantial” because Chrisco would not provide interest on the refund and the refund assumed the continuing solvency of Chrisco.

His Honour concluded that the withdrawals from the customer’s account “involved a significant detriment to the consumer.” Edelman J appears to have placed particular emphasis on the fact there was no obligation on Chrisco to pay interest on any refund if the customer decided not to place an order, and no discount would be granted to a customer if they ultimately decided to place an order.

The "transparency" of the HeadStart term was one factor Edelman J was required to consider when determining whether the term was unfair. His Honour concluded that the HeadStart term was not “wholly lacking in any transparency” as it was not hidden and the option to opt out of the term was in a place “where it might be noticed.” However, Edelman J considered the following factors “reduced its transparency”: it did not clearly identify the amounts that would be debited or the means by which they would be determined; it was unclear whether Chrisco would write to a customer to confirm that it would proceed with the HeadStart Plan before doing so; it did not explain to the customer how they could cancel the plan and obtain a refund; it was unclear whether the debits continued after the customer had paid an amount that exceeded the value of the hamper they ordered in the previous year; it was unclear whether a customer would be charged a termination fee, which would be deducted from the refund of the debits, if they ultimately chose not to purchase a further hamper; the provision that payments made under the HeadStart term were fully refundable was not contained in Chrisco's catalogue but in the order form that the customer would send to Chrisco, so the customer would not have a record of this provision unless they retained a copy of the order form; and the Headstart Term “could have been presented in a manner which was far more legible, much clearer, and more readily available to the customer.” On the last point, his Honour noted that the font size for the term was less than half that of the main heading and there was nothing that particularly drew it to the customer’s attention, such as a larger font, italics, bold or different colours. These techniques had been employed by Chrisco elsewhere.

In concluding that the HeadStart term was unfair, his Honour noted that it did not fall within any of the examples of potentially unfair terms listed in s 25 of the ACL, which is known as the "grey list".

ACCC v Servcorp Limited 2018] FCA 1044

Servcorp supplied serviced offices and virtual office services such as secretarial services and IT services. Servcorp's standard form contracts provided that the agreement would renew for a further term unless the customer gave prior notice to Servcorp of its intention not to renew during the specified notice period. If the agreement automatically renewed, Servcorp was permitted to charge a "service fee which is appropriate at the time of such renewal as determined by Servcorp in its absolute discretion". Servcorp was not required to give notice to the customer of the impending end of the term.

By consent of the parties, the Court found that this term was unfair. The Court noted that Servcorp was "permitted to unilaterally vary the price … at its absolute discretion without providing the counterparty with a corresponding right to terminate at the time the new term commences"; Servcorp was not required to notify the client of any price increase prior to the automatic renewal of the contract; and Servcorp was "more likely to be aware of when contracts are due for renewal" than its customers so that customers "may unknowingly find themselves locked into a new term at a higher price".

ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224

This case concerned standard form contracts for the provision of waste management services by JJ Richards. The contracts automatically renewed for a further term if the customer did not give notice of cancellation at least 30 days prior to the end of the term. JJ Richards was not required to give notice of the impending end of the term. The contracts also gave JJ Richards the right to unilaterally vary the prices paid under the contract on 30 days' notice and required the customer to exclusively use JJ Richards for waste management services. By consent, the Court found the automatic renewal clause to be unfair. The Court noted that JJ Richards was more likely to be aware of when the contracts were due for renewal than its customers and that the automatic renewal clause was "exacerbated by the operation of certain of the other Impugned Terms", including the term that allowed JJ Richards to unilaterally vary prices and the exclusivity term.

Guidance from the ACCC on automatic renewal clauses

The ACCC can take action against potentially unfair terms without commencing court proceedings. For example, it may engage with a business and strike an agreement that it must provide a court-enforceable undertaking that it will not enforce a particular term or use it in the future. The ACCC has obtained undertakings in this way to prevent the use of automatic renewal clauses relating to advertising services and automatic-teller-machine services. Although these undertakings are not judicial decisions on the operation of the UCT laws, they indicate the ACCC's views on when automatic renewal clauses may be unfair. A clearer indication of the ACCC's views may be found in guidance that it has published on the UCT laws.

The ACCC has said that "[w]hile not necessarily unfair, automatic renewal clauses are concerning when":

• they are not adequately disclosed;
• no notice is provided that a contract is about to renew;
• the cut-off date for cancelling the automatic renewal can be changed; or
• the customer will incur large early termination charges if they cancel after the contract has automatically renewed.

By contrast, the ACCC has said that "an automatic renewal clause is less likely to raise concerns where a customer is provided with reasonable notice that the contract is about to renew; a reasonable period in which to give a notice stopping the renewal; and the ability to exit the renewed contract without penalty". The ACCC has also encouraged the use of clear and prominent statements about the existence of automatic renewal clauses, such as a tick box that allows the customer to accept or reject the term.

Is an automatic renewal clause really unfair?

The three decided cases on automatic renewal clauses do not clearly indicate whether an automatic renewal clause, by itself, is unfair. ACCC v Servcorp and ACCC v JJ Richards only considered an automatic renewal clause when it was coupled with an objectionable clause. ACCC v Chrisco Hampers did not consider a pure automatic renewal clause. In that case, the customer was continuing to pay money to Chrisco but not immediately receiving any goods or services from it. The Court viewed Chrisco as simply taking the customer's money, not paying any interest on it and giving the customer an opportunity to spend that money at a future date on one of Chrisco's products when the customer had that opportunity regardless of whether it let Chrisco appropriate its money. In short, Chrisco was appropriating the customer's money and giving nothing in return.

It is difficult to see how an automatic renewal clause, in a contract which is otherwise unobjectionable, would be unfair. To be unfair, a term must cause a significant imbalance in the parties' rights and obligations under the contract (among other things). If the contract automatically renews, the customer is still required to pay for the goods and services and the business is still required to provide them. Further, in many cases the automatic renewal may be mutually convenient as between the parties. There is no significant imbalance in that situation. It is precisely the same arrangement that existed before the automatic renewal. Still, one can understand how an automatic renewal may irritate some customers and small businesses. The customer or small business has lost the opportunity to obtain an alternative provider or simply not continue purchasing the good or service any more. By contrast, the supplier has not lost anything and has instead retained a customer that it might otherwise have lost. Although a customer or small business may be irritated by an automatic renewal clause, that is not the test for whether it is unfair. As Justice Beach of the Federal Court recently said, "there is no scope to interlard … feel good factors or niceties" into the test for whether a term is unfair: Dialogue Consulting Pty Ltd v Instagram, Inc [2020] FCA 1846.

Peter is an editor of the Australian Competition and Consumer Law Commentary provided by Wolters Kluwer Australia | CCH