From video streaming to food subscriptions to features embedded in our cars, we now live in a world where subscription services and automatic renewals have become the norm. But how do they really work? Are they appropriate in a business to business context?
In this article, we take a closer look at the automatic renewal of agreements, how they operate and what you need to know.
What does automatic renewal mean?
Automatic renewal is where a service provider automatically renews the provision of a service at the end of a specified period, without you having to do anything. Unless and until you cancel the service, you’ll continue to be charged for it, whether you use it or not.
As a consumer the chances are you’ve already encountered automatic renewals in services including:
- video or music streaming services, such as Netflix, Spotify and Kayo – the list in this category is endless;
- meal kits and food delivery services, such as YouFoodz, Hello Fresh or pet food;
- IT services, such as cloud storage providers (Dropbox) or programs like Microsoft Office or Adobe;
- gym memberships and fitness apps; and
- even in-car features can be used by subscription these days, such as some live traffic versions of maps.
In a business sense, there are also some circumstances where a business to business contract may include an automatic renewal clause, often requiring a business to ‘opt out’ a certain amount of time before the end of the current period.
Why do businesses use automatic renewals?
It’s simple – they work.
Automatic renewals create loyalty (and revenue) by relying on the receiving party to remember to cancel the service or contract before the due date for renewal (if there is one) or the current term expires.
What makes this even easier for businesses is that in many cases Australian law does not require them to send a reminder notice before the agreement renews. As a result, renewal can easily slide under the radar.
What does the law say?
The Competition and Consumer Law Act 2010 (Cth) prohibits businesses from engaging in misleading or deceptive conduct or making false or misleading representations. This means that they must:
- disclose automatic renewal terms to the other party (whether a consumer or other business) prior to entering into the arrangement;
- allow for straightforward and easy cancellation of a service, e.g. it must be clear what steps the receiving party is required to follow to cancel the service. Cancellation shouldn’t be buried somewhere difficult for the receiving party to locate; and
- notify the other party of any change to the terms of providing the service.
Business providing automatically renewed services, should also be aware of the unfair contract term regime to ensure that their contract terms are not unfair to the receiving party.
Is automatic renewal really necessary?
For many consumer products, automatic renewals make sense. Imagine being required to have to take action opt into your Netflix, Spotify, Amazon, Paramount, Kayo, Disney, Microsoft Office suite and gym membership (and anything else you’re signed up to!) every month. Who has the time for that?
For businesses, whether it is appropriate to have an automatic renewal will depend on the context of the relationship. For example, it may be beneficial to have an automatic renewal for IT or managed services to ensure that no service gaps arise. However, it may be less beneficial where there are specific performance obligations of a party, or where you have a contract that might require regular review or re-negotiation or you have the opportunity to do a better deal with another provider but end up inadvertently being locked into your current contract. For example, contracts with athletes, influencers, sponsors, consultants or certain suppliers.
Tips for businesses
If you’re considering entering into an agreement with another party that may be requesting an automatic renewal, consider:
- is an automatic renewal right for you?
- would an ‘opt in’ renewal be more appropriate? If so, who should have the right to ‘opt in’?
- if automatic renewal is right for you, what parameters should be set to ensure that the renewal is on terms you are comfortable with?
- Set a reminder before the auto renewal clause kicks in if you want the option to end it;
- what provision is there for the contract to be terminated early?
- how much notice do you need to provide to end a contract so that it doesn’t automatically renew?
Tips for consumers
If you’re thinking about signing up to another subscription service:
- check the fine print. While you may be offered a trail period, be sure to understand the terms of the renewal once the trial ends;
- set reminders to review your subscription before it renews; and
- don’t disregard emails that may come through regarding the service. Being aware of price increases or changes to terms is important.
Do you have any questions about automatic renewals and how they may impact your business? The KKI Commercial Team can help.
