The perils of contracts that renew automically
Since November 12, 2016 there is legislation that deals with unfair contract terms in small business contracts. If you would like more information please see our article 5 things to Know about Unfair Contract Terms.
If you have a contract that you use for your business that has a set term (and by using the term ‘term’ we mean a ‘period of time’) of say 6 or 12 months, and that contract renews automatically, then you might be paddling a barb wire canoe upstream in a hurricane – getting nowhere and sinking fast.
Why? Because if a contract has a term, and the term of the contract renews automatically, then you run the risk that the clause governing the automatically renewal of the term may be found to be unfair.
These types of automatic renewal terms could be unfair?
Automatic renewal terms used in standard form small business contracts are at risk of being found to be unfair 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.
How can I make my potentially ‘unfair’ term ‘fair’?
Good question. If you have a suspect automatic renewal term in one of your standard business contracts you could take some of the following steps:
- redraft the clause so as to avoid unconditional or unconstrained automatic renewal terms;
- highlight the clause making sure the term is prominent or drawn to the attention of the other party;
- keep to hand evidence that can demonstrate that the term is reasonably necessary to protect your legitimate business interests – but remember if you ever have to go to court over your contract you will have to prove that the clause is reasonably necessary to protect your interests (that may be tough to do?!);
- give 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;
- provide a reasonable period for the other party to exercise any opt-out rights; and
- avoid requiring the other party to pay excessive fees if they terminate after an automatic renewal.
What happens to the contract if that clause is found unfair?
If a clause is found to be unfair then that clause is therefore deemed to unenforceable in all contracts that include that clause – i.e. if you run a waste management company and all your customers (825 of them) sign up to a contract that includes an automatic renewal of the term, and if one customer challenges the automatic renewal clause and wins then that clause is basically deemed to be deleted from every others customers contract as well (i.e. the other 824 people!)
You don’t want to muck around with this stuff.