Services

HG Litigation Alert: Beware of the automatic renewal clause! Tips to avoid the perpetual renewal of your service contracts - 10 June 2015

An automatic renewal clause typically looks something like this:

This agreement will automatically renew at the end of each term for a further term of 10 years unless either party gives the other written notice of termination at least 30 days prior to the end of the relevant term.

Also known as a self-renewal or evergreen clause, it acts to perpetually renew a contract if notice to terminate is not provided within a generally specific and relatively small window of time (for example, 30 days prior to the end of the term).

The issue with these clauses is that they are often found in long term service contracts.  Due to the longevity of these contracts and intentions of the parties to forge good business relationships, the clause often goes unnoticed, or is forgotten about, until an attempt is made to terminate the contract. 

As a result, businesses can find themselves locked into an unsatisfactory service arrangement.  

In this Alert, Partner Richard Gardiner, Senior Associate Tim Scanlan, and Solicitor Jessica Carroll discuss further. 

Are they enforceable?

While there has been public scrutiny of automatic renewal clauses in a consumer context (and such clauses may be considered unfair contract terms by virtue of the Australian Consumer Law (ACL)), the operation of an automatic renewal clause in the commercial world is not in itself prohibited by statute or common law. 

Businesses should be mindful when entering into contracts that contain automatic renewal clauses, as wrongful termination of the contract during a renewed term could give rise to a claim for damages for breach of contract. 

The position in Australia

In some international jurisdictions, the legislature has seen fit to prevent businesses from relying on these types of clauses unless notice is provided by the service provider of the:

  • presence of the automatic renewal clause in the contract; and
  • notice requirements to terminate the contract.

There is currently no equivalent Australian legislation (with the exception of the unfair contract term provisions in the ACL[1]) and the common law does not prevent the operation of an automatic renewal clause in commercial contracts. 

However, the Federal Government has recently released draft legislation which is intended to extend the consumer unfair terms protections to small business contracts that are in a standard form and which relate to a monetary amount less than a prescribed threshold.  Contract terms that permit one party to unilaterally renew a contract have been identified by the Government as an unfair term experienced by small businesses, particularly in the waste management sector.

If the draft legislation is passed, the unfair contract terms protections will provide enforcement action to small businesses in respect of any “unfair” terms in standard form contracts and it appears likely that such protection will extend to automatic renewal clauses.  These amendments are expected to be in effect by early 2016.

How to avoid an automatic renewal clause

It is obvious to say that the best way to avoid an automatic renewal clause is not to enter into a contract that contains an automatic renewal clause.  If an automatic renewal clause is part of a standard contract, seek to have the clause removed.

If you cannot reach agreement to remove the automatic renewal clause and there is good reason to enter into the contract, you should:

  • consider whether the renewal term is commercially sensible having regard to the possibility that, at some point in the future, you may want to terminate the contract for unsatisfactory performance or to pursue a better service arrangement.  If it is not commercially sensible, ask for the renewal term to be reduced;
  • request the insertion of a condition in the contract which makes the automatic renewal clause subject to written notification by the service provider of the upcoming termination window; and
  • ensure you diarise the termination window and, if necessary, provide notice of termination of the contract within this period.

Tips to take away

Termination of a service contract during a renewed term can be both difficult and costly.

Accordingly, businesses should be mindful of the presence of automatic renewal clauses in existing and new service contracts and – if service contracts do in fact contain these clauses - ensure that appropriate notification processes are in place to remind you of key renewal dates.

Once a service contract automatically renews, however, not all is lost.  Depending on the circumstances surrounding the entry into the service contract, there may be remedies at common law could give rise to a separate right to terminate the service contract.

Alternatively, the parties may enter into negotiations to vary the service contract for the remainder of the renewed term.

For more information or discussion, contact HopgoodGanim’s Litigation & Dispute Resolution Team. 

HopgoodGanim is a legal firm of trusted experts. Founded 40 years ago, the HopgoodGanim of today remains fiercely independent and proud of our sustained growth and ongoing success. We deliver exceptional commercially-focused legal advice to clients throughout Australia and internationally and in addition to our corporate and commercial teams, we also house one of Australia’s most highly regarded family law practices.

 

[1] Part 2-3 of the ACL provides protection to consumers from unfair contract terms in ‘consumer contracts’.  A consumer contract is defined in s23 of the ACL to be ‘a contract for the supply of goods or services to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or house use or consumption’.