Unfair contract terms – automatic renewal clauses

9 November 2023 was a crucial date for Australian businesses because from that date significant penalties can now be imposed on businesses found to have unfair contract terms (UCT) in their contracts.  The Federal Government had introduced significant changes to laws relating to UCT on 10 November 2022.

To allow businesses time to respond, financial penalties associated with the new laws began the following year on 9 November 2023.  The laws also widened the definition of a small business, to capture the majority of Australian businesses.  Consideration needs to be given to situations where a business has a standard form contract that previously existed and has clauses to automatically renew on or after 9 November 2023.

What is an automatic renewal clause?

An automatic renewal clause is a clause in an existing contract that renews and rolls the contract over for a new period, unless either party gives notice (within a notice period specified in the contract) that it does not want to renew the contract.  Notice periods vary between contracts and the effect is that unless a party provides notice in the specified period the contract automatically renews.

Meaning, if either party does not want to renew and forgets to give notice according to the terms of the agreement, the contract will automatically renew.  For example:

“This Agreement will continue for a further period of  three (3) years (Further Period(s)) after the initial period of three (3) years (Initial Period), unless one party notifies the other party at least forty (40) days prior to the end of the Initial Period or each Further Period (as applicable) that it does not wish for the Agreement to renew for a Further Period.”

Are all automatic renewal causes unfair?

Not all automatic renewal clauses are unfair.  The Australian Consumer Law (ACL) sets three main considerations as to whether a contract term is unfair:

• Are there significant imbalances in the parties’ rights and obligations under the contract?
• Is the contract term reasonably necessary to protect the legitimate interests of the party who benefits from it?
• Does the contract term cause detriment (financial or otherwise) to a party if it were to be applied or relied on?

A Court must also consider the transparency of the contract clause, the contract as a whole and any other matters it finds relevant.

What is a small business for purposes of unfair contract terms.

The changes greatly expand what was previously considered a small business in relation to UCT.  A small business is now defined as having either:

• less than 100 staff; or
• a turnover of less than $10 million dollars.

The changes to the law

The law was changed by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) (Amending Act).  The Amending Act amended legislation including the Competition and Consumer Act 2010 (Cth), ACL, and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

Penalties

Businesses found to have included an unfair contract term in a contract that they sought to enforce against the other party will have committed an offence.  The maximum penalty for the business is either:

• $50 million;
• three (3) times the “reasonably attributable” benefit obtained by UTC; or
• 30% of the business’s annual turnover for the related period.  Individuals involved in the contravention may face a maximum penalty of $2.5 million.

Examples

The companies below were found to have UCT in their standard form contracts before the new laws came into play.  Whilst they escaped the new financial penalties they may not have done so if their conduct had occurred after 9 November 2023.

Court Case – JJ Richards & Sons

In the case of Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (13 October 2017) (JJ Richards) the Federal Court found that waste management company JJ Richards and Sons Pty Ltd had multiple UCTs in its consumer contracts including an automatic renewal clause.  While the company had court orders issued against it in 2017, the penalties were not as extreme as they would be today.  Our full article on that case can be found here.

ACCC Investigation – Maxgaming

After an Australian Competition and Consumer Commission (ACCC) investigation of potential unfair contract terms by Maxgaming Qld Pty Ltd (Maxgaming), Maxgaming provided a Court enforceable undertaking in September 2022.  Maxgaming contracts previously contained clauses that automatically renewed contracts without notifying customers.  Some renewed contracts had a duration of six (6) years.  Automatic renewal terms were not the only contract conditions the ACCC found were potentially unfair.  While Maxgaming denied that the clauses were unfair contract terms it agreed to amend its standard contract clauses.  The ACCC alleged other clauses to be unfair and Maxgaming agreed to also amend clauses that:

• allowed fee increases to equipment without obtaining customers consent; and
• excluded Maxgaming from liability for negligent or wilful acts.

As a result, Maxgaming provided a Court enforceable undertaking, that it would:

• amend potential unfair contract clauses in its current standard form consumer contracts;
• not include those clauses, or similar ones in future contracts; and
• implement a compliance programme (including staff training and internal review).

Takeaways

Larger businesses may be subject to high monetary penalties under the new laws (despite not being a small business themselves) if the other contracting party is a small business.  Data from the Australian Bureau of Statistics (ABS) indicates most Australian businesses are likely to be affected.  ABS data estimates 92.6% of Australian businesses had an annual turnover less than two million dollars ($2,000,000) in 2021 to 2022, meaning they fall within the UTC regime.  If they have not already done so, businesses should consider obtaining advice on whether their standard consumer contracts contain potential UTC’s that could create problems when examined closely.

Links and further references

Legislation

Australian Consumer Law (ACL)

Australian Securities and Investments Commission Act 2001 (Cth)

Competition And Consumer Act 2010 (Cth)

Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth)

Cases

Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 (13 October 2017)

Further information about unfair contract terms

If your business needs its standard form contracts reviewed, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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