During 2019 we received many enquiries from small businesses looking to get out of contracts with “automatic rollover” provisions.
An automatic rollover provision is a clause in a contract which provides that the contract will automatically renew for an additional term unless one of the parties opts out by giving notice to the other party of its intention not to renew. These clauses raise concerns for small businesses as:
- often the party is not aware of the automatic rollover provision when they sign the contract
- the further term may be exceedingly long (eg, 3-5 years)
- the notice period in order to opt out of the renewal may also be exceedingly long (eg, no less than 12 months before the expiry of the current term of the contract)
The good news is that a small business may have a remedy under the Australian Consumer Law’s unfair contract terms provisions if the following conditions are satisfied:
- the contract was entered into or renewed on or after 12 November 2016 (ie, when the provisions commenced)
- the contract is a ‘standard form’ contract (ie, a contract prepared by the other party on a ‘take-it-or-leave-it’ basis, where there was little opportunity to negotiate)
- at the time of entering into the contract at least one of the parties was a small business employing fewer than 20 persons
- the upfront price payable under the contract does not exceed $300,000 (if the term is less than 12 months) or $1 million (if the term is more than 12 months)
- the automatic rollover term is ‘unfair’ in the circumstances because it would cause a significant imbalance in the rights and obligations of the parties under the contract, is not reasonably necessary to protect the legitimate interests of the party which would be advantaged by the term, and would cause detriment (whether financial or otherwise) to a party if it were applied or relied on
It is important to note that the Court will look at all the circumstances in deciding whether an automatic rollover provision is unfair – for example, the Court will consider whether the term is “transparent” in the context of:
- was it expressed in reasonably plain language?
- was the term legible?
- was it presented clearly?
- was the term readily available to a party affected by it?
If the term is buried in the fine print of the document, it is more likely to be unfair, and if a term of a small business contract is found to be unfair then the term is void ie, unenforceable.
Action:
We strongly recommend all contracts containing such terms be checked and appropriate action in response be taken.
