Missed Part 1 on early termination fees? Catch up here: Sierra Series: Unfair Contract Terms Under the Microscope (Part 1 - Early Termination Fee Clauses)

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Welcome to Part 2 of the Sierra Series: Unfair Contract Terms Under the Microscope - our ongoing look at common contract terms that continue to raise red flags under the Australian Consumer Law’s (ACL) unfair contract terms (UCT) regime.

This week, we’re examining automatic renewal clauses - a familiar feature in many standard form contracts.  These clauses are widely used across industries and, when implemented transparently and proportionately, can offer genuine commercial benefits such as convenience, continuity, and reduced administrative burden.

But not all automatic renewal clauses are created equal.  When they’re buried in fine print, lack clear notice, or impose penalties for opting out, they risk breaching the UCT regime and attracting significant penalties.

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1. Automatic Renewal Clauses: What Are They and Why They Matter

Automatic renewal clauses allow a contract to roll over for a new term unless one party (usually the customer) actively opts out before a specified deadline.  These clauses are common in industries such as software subscriptions, cleaning services, fitness memberships, and utilities - where continuity of service is often expected.

When used fairly, automatic renewal clauses can reduce administrative burden, support uninterrupted service, and provide commercial certainty.  But when used unfairly - for example, without notice, with excessive lock-in periods, or with penalties for cancellation - they can create imbalance and expose businesses to legal risk under the ACL.

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2. When is an Automatic Renewal Clause “Unfair”?

Automatic renewal clauses are not inherently unfair.  Under section 24 of the ACL, a term will only be considered unfair if it:

• causes a significant imbalance in the parties’ rights and obligations;
• is not reasonably necessary to protect the legitimate interests of the advantaged party; and
• would cause detriment to the other party if enforced.

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The ACCC’s 2016 report on unfair terms in small business contracts identified automatic renewal clauses as a common area of concern, particularly where:

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

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Whether a clause is unfair depends on the contract type, industry context, and how the clause operates in practice - not just how it’s worded.

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3. Case Spotlight: ACCC v Chrisco Hampers Australia Ltd

Note: This case was decided before the 2023 reforms, which now make it illegal to include or rely on unfair terms in standard form contracts.  Today, similar conduct could attract significant penalties.

a. What was the issue?

Chrisco Hampers Australia Ltd (Chrisco) included a clause in its standard form contracts that automatically enrolled customers into a “HeadStart Plan” for the following year’s Christmas hamper unless they opted out.  The clause allowed Chrisco to continue debiting customers’ accounts after their current order was paid in full - even if no new order had been placed.

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b. Why was the clause found to be unfair?

The Federal Court applied the three-limb test under section 24 of the ACL and found the HeadStart Plan clause to be unfair for the following reasons:

The Federal Court found the clause unfair under section 24 of the ACL because:

• It created a significant imbalance - Chrisco could continue charging customers without active agreement.
• It was not reasonably necessary to protect Chrisco’s interests - the company could have sought fresh consent each year.
• It caused detriment - customers were charged for products they didn’t intend to purchase.

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1. Significant imbalance

The clause gave Chrisco the right to withdraw money from customers’ accounts without any corresponding obligation or benefit to the customer.  Customers were required to save with Chrisco - interest-free - for goods they might never order.

The Federal Court noted that the clause lacked clarity, was not presented in plain language, and created confusion about how payments would be calculated and how the plan could be cancelled.

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2. Not reasonably necessary to protect legitimate interests

Chrisco did not argue that the clause was necessary to protect its legitimate interests. The Court accepted the statutory presumption that the clause was not reasonably necessary.

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3. Detriment

The clause caused financial detriment by requiring interest-free payments and creating the risk of auto-renewal without consent.  The Federal Court found that consumers could incur costs - such as credit card interest - without any guaranteed benefit.

As a result, the HeadStart Plan clause was declared void under section 23(1) of the ACL.

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4. Key Lessons and Takeaways

- Provide clear and timely notice before renewal

Customers must be given adequate time and information to decide whether to continue.  Hidden or last-minute notices are likely to be considered unfair.

- Avoid “opt-out” mechanisms that shift the burden to the customer

Requiring customers to actively cancel - especially without a reminder -creates imbalance and risks detriment.

- Ensure renewal terms are proportionate and easy to exit

Long renewal periods or complex exit procedures increase the risk of unfairness.

- Do not impose penalties for opting out of renewal

Termination fees or forfeiture of payments for cancelling a renewed term may be considered unfair unless they reflect actual loss.

- Transparency matters - but it’s not enough on its own

Even if the clause is disclosed, it must still meet the fairness test under section 24.

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5. Industries and Contract Types: When Automatic Renewal Clauses May Be Fair or Unfair

Whether an automatic renewal clause is fair under the ACL depends heavily on the nature of the contract and the commercial context. Below are examples of industries and contract types where automatic renewal clauses may be more or less likely to be considered fair.

✓ Fair in Context

• Recurring Service Contracts (e.g. cleaning, maintenance, security):  Where a supplier enters into hundreds of similar service contracts, automatic renewal may be reasonably necessary to avoid the administrative burden of renegotiating each contract individually.  If customers are given clear notice and a simple opt-out mechanism, the clause is likely to be fair.
• Software-as-a-Service (SaaS) / Digital Subscriptions: Businesses offering monthly or annual subscriptions often rely on automatic renewal to ensure uninterrupted access and predictable billing.  These clauses are generally fair where renewal terms are transparent and cancellation is easy.
• Telecommunications and Utilities: These industries rely on ongoing service provision.  Automatic renewal is standard practice, but fairness depends on whether customers are informed, can exit without penalty, and are not locked into excessive renewal periods.
• Fitness and Health Memberships: Monthly memberships often renew automatically.  Fairness depends on whether customers are given clear information about cancellation rights and renewal terms.

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✕ Unfair in Context

• One-Off Product Supply Agreements: In the case of a single, non-recurring purchase - such as a one-time bulk order - automatic renewal is unlikely to be reasonably necessary.  The clause may simply serve to lock the customer into further purchases and is more likely to be unfair.
• Professional Services (e.g. legal, consulting, accounting): These services are often tailored and project-based.  Automatic renewal without fresh engagement may misrepresent the parties’ intentions and create imbalance.
• Commercial Leasing and Real Estate Contracts: Automatic renewal clauses in non-residential leases may disadvantage tenants, especially if the renewal period is long and the tenant is not given adequate notice or opportunity to exit.
• Education and Training Services: Where a course or program is completed, automatic renewal into a new term may not reflect the customer’s intent.  If renewal occurs without clear consent or notice, the clause may be unfair.

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6. What Should Businesses Do? Practical Steps Forward

Automatic renewal clauses are common - and can be fair - in many industries. That said, under the ACL’s unfair contract terms regime, businesses must ensure these clauses are used appropriately and transparently. Practical steps include:

• Review your standard form contracts - especially those involving recurring services, subscriptions, or long-term engagements.
• Assess the commercial context - consider whether automatic renewal is reasonably necessary for your business model (e.g. high-volume service contracts vs one-off transactions).
• Ensure renewal clauses are transparent and easy to understand - use plain language and avoid ambiguity around renewal dates, payment amounts, and cancellation rights.
• Provide clear and timely notice before renewal - ideally via direct communication such as email or SMS, well in advance of the renewal date.
• Avoid passive opt-out mechanisms - consider requiring active consent to renew, particularly for longer renewal periods or higher-value contracts.
• Document your legitimate interests - and be prepared to show why the renewal clause is necessary to protect those interests if challenged.

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7. Wrapping Up

Automatic renewal clauses can offer genuine commercial benefits - but only when used fairly. Under the strengthened UCT regime, businesses must ensure these clauses are transparent, balanced, and do not cause detriment. While automatic renewal is common in many industries, it must be justified by the nature of the contract and the interests it protects.

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Next week, we put our third and final usual suspect under the microscope: liability and indemnity clauses.  Stay tuned.

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