Restrictions automatic renewal prolonged contracts

24 May 2006

Wienke Zwier

Contracts often contain clauses on automatic renewal. Such clauses typically stipulate that if customers fail to cancel their contracts in time, the contracts are automatically renewed for another term. Often, this implies a commitment for another calendar year. On 31 March 2006, however, the Dutch Council of Ministers approved a legislative proposal that might bring this situation to an end for contracts in the e-commerce and telecoms sector.

The Minister, in proposing the amendment, argued that automatic renewals unreasonably limit the consumer’s choice. In addition, he argued that innovative entrepreneurs, too, are put at a disadvantage since they have less options of canvassing customers if these customers are indefinitely bound by a contract. By restricting the possibilities for automatic renewal, the proposal is thus intended to stimulate both competition and innovation.

The proposal has been submitted to the Council of State for review. Although the exact text of the proposal will not be made public until it is submitted to the Lower House, a broad outline of its contents has already been disclosed by the Ministry of Economic Affairs, the department responsible for the proposal. First, the proposal is likely to provide that contracts in the e-commerce and telecoms sector may not contain notice periods of more than four weeks. A three-month notice period, often used in consumer contracts, will no longer be permissible. Secondly, fixed term contracts may not have a term of more than two years. Consumers, however, will have the right to terminate such an agreement after one year. In such event, the consumer may be obliged to pay reasonable costs to the provider; such costs may include outstanding subscription fees.

As the text of the proposal is not available yet, it is unclear at this moment which contracts will be caught by the proposal, if accepted. It is unclear, for example, whether notice periods of contracts that are already in place will be affected and whether current customers will be allowed to terminate an existing two year contract halfway through.

Automatic renewals in contexts other than the e-commerce and telecoms sector have come under pressure as well. In early April, several members of the Lower House submitted a private member’s bill that aims to amend the Dutch Civil Code in this respect. If the Civil Code is amended according to the proposal, contracts may no longer provide for automatic renewals of more than three months at a time. Any provision determining otherwise may consequently be annulled.

Both proposals are still subject to approval by the Dutch Parliament. Still, it would be advisable for both service providers and customers, and telecoms operators in particular, to keep a close eye on the ongoing events. Whether the proposals will actually become binding law remains to be seen but it is clear that the concept of automatic renewal is subject to ever increasing pressure.