If you’re a small business or if you deal with small businesses as contractors or as suppliers, you should really be thinking about how this new legislation might apply in your business situations and what the legislation means for you and your organisation in the approach that you’re taking to your contracts.
- What is this all about?
- What are roll over clauses?
- What did Sensis do wrong?
- What were the consequences for Sensis?
- What does this mean for you in your business?
- Some action steps
- Quick recap
Hi, it’s Joanna Oakey here and welcome back to Talking Law!
Today we are talking about a very interesting case which is the first case that has come before the courts in relation to the Small Business Unfair Contracts legislation. So I thought it was really timely for us to have a look at what’s actually making it to the court in relation to this Small Business Unfair Contracts legislation and what it means for businesses, either businesses that are small businesses or businesses that deal with small businesses as contracts or as suppliers.
What is this all about?
So let’s start off with what are we talking about here. What was the case?
This case related to Sensis, that you might remember as the yellow pages and white pages, that company that used to provide us with those bricks of paper that have a bit of a different business model these days. But they have now found themselves in front of the courts in relation to terms that they included in their contracts that allowed their contracts to automatically renew at the end of the initial contract term.
So what Sensis did was it had a notification on its website that its yellow pages and white pages bundled print directory and online packages had a monthly fee. So they disclosed that they had a 12 month minimum contract period. But what they didn’t do was disclose that the bundled packages automatically renewed for a further 12 month period at the end of that initial 12 month period.
What are roll over clauses?
Now I’m not sure whether or not you have had any connection with these sorts of clauses in business, and we call them roll over clauses or evergreen clauses, essentially clauses that a contract will continue to renew after the end of the term.
If a customer doesn’t take action, and sometimes it can be quite difficult for a customer to comply with the requirements of terminating, sometimes it will be required that they will need to terminate or give notice of termination within a fixed period of time before the end date of the contract otherwise the contract will automatically renew. And this of course is particularly bad if you have long term contracts or contracts that are for a high value of money. And often waste disposal and those sorts of areas, printing contracts, these sorts of areas are rife for having renewal clauses and automatic contract renewals within their agreements.
The issue for businesses is that often when they realise a contract has renewed it’s too late for them to then terminate. So this new legislation – the Small Business Unfair Contracts legislation – is a new legislation that can be used by businesses who find themselves in this predicament to argue that the clause is invalid or that discussions about the agreement have been misleading, which were the two elements that Sensis was found to be lacking in relation to this matter.
What did Sensis do wrong?
As I said before Sensis on its website marketed the online packages and directory packages and they were clear about the 12 month contract period. But they weren’t clear about the automatic renewal. And in fact the fine terms, the conditions had a provision that said automatically renewal occurred unless the customer cancelled and if the customer tried to cancel after the contract had renewed then they would be charged a cancellation fee that was equal to the remaining cost of the contract if they cancelled after a certain date, effectively after the date that the new contract had rolled over and taken effect.
So the ACCC have said in relation to this case that automatic renewal terms must be prominently disclosed along with all of the other steps that customers can take to cancel a contract and any cancellation fees that must apply. So the ACCC said that in this instance it would be misleading, (and Sensis was misleading for failing to adequately disclose key terms in their contract) that then had the effect of misleading their customers. And they also said not only is this misleading but it may also be seen as an unfair term which under the new Unfair Contracts legislation then means that the term is deemed to be void.
What were the consequences for Sensis?
So Sensis has now signed an enforceable undertaking which has required that it refunds affected customers and that it maintains improvements to its processes so that it ensures that its automatic renewal and cancellation processes are clearly disclosed to customers and they also have to publish a corrective notice on their website. And Sensis now also is required to remind customers of the pending automatic renewal of their contracts before the contract renews.
So the ACCC have said it’s no longer good enough for organisations to have clauses that allow for automatic renewal within their contracts. They have to also now notify the customers, in this case so Sensis is now required to notify its customers before that contract renews.
What does this mean for you in your business?
Firstly, for me if you are a small business you should really be thinking about how these Unfair Contracts legislation applies to contracts that you have signed after the 12th of November last year, which is when the new legislation took effect.
So if you’re in the position now where you were subject to an automatic renewal in an agreement that you have signed you might now find that you’re able to use this legislation as a way to help you get out of the contracts or deem void the clauses that created that automatic renewal. But just be aware that this won’t always be the case. The legislation isn’t clear that it’s absolutely disallowed rollover clauses. It just said this is one area that might be deemed as unfair.
So it’s really important if you’re in the situation where you have signed an agreement already, after the period that the new legislation came into effect, that has an automatic renewal clause, and that clause renews, you might possibly have a way of terminating that agreement. And indeed, even if you had a contract that you entered into prior to the date of the commencement of the legislation you might still have a right of argument after the contract renews.
Some action steps
So the first step is to seek advice if you have a dispute with another organisation where they are claiming that a contract that you have signed has now automatically renewed. Seek advice because there might be a way that you can get out of that contract.
The second action item to think about is when you are reviewing contracts, try and ensure that you avoid the issue from occurring in the first place. When you’re reviewing contracts, look at that termination clause and see what it says and make sure you clearly identify if a contract you are signing has a clause that allows the contract to automatically renew at the end of the term. If so, and if this is not to your benefit so that might be detrimental to your business, then ensure that this clause is removed.
And I think the last element that this demonstrates to us is the risks for all businesses large and small that may have small businesses as clients in having clauses that might be considered unfair in light of this new Unfair Contracts legislation. So it’s super important that you review the terms or have reviewed the terms that you’re using with businesses that may possibly be small businesses so that you ensure that any of these clauses are dealt with so that there is not the argument that can be raised that any of your clauses are or would be deemed invalid under the Unfair Contracts legislation; because if you don’t take the steps to make sure your clauses aren’t contrary to this legislation then you’re risking the case that the entire clause will be struck out. So you’re much better off to make sure that you have clauses that you can control and that you aren’t at risk of being completely removed because they’re seen to be contrary to the Unfair Contracts legislation.
So if you have any questions about any of these items (because it is a very technical area) just head over to our website at talkinglaw.com.au. There you will find a link to speak to our lawyers at Aspect Legal who would be only too happy to chat to you about how the Small Business Unfair Contract legislation might apply in your business situations and what the legislation means for you and your organisation in the approach that you’re taking to your contracts.
Great! Well look, thanks a lot for listening in! Just as a quick recap in this episode:
- the very first case under the small business Unfair Contract legislation
- that sticky concept of automatic renewal clauses (or evergreen clauses as they’re sometimes known) and ways that businesses may now use legislation to get out of those contracts
- the concept of misleading and deceptive conduct, which was the other area that the ACCC looked at in relation to this issue of automatic renewal clauses
If you’d like information about this topic head over to our website at talkinglaw.com.au for a free download of the transcript of everything that I talked about today. Thanks a lot for listening in! You’ve been listening to Joanna Oakey here Talking Law. We hope to have you back next time!