Auto-renewals of consumer agreements: use with caution

On 23rd November 2012 the Supreme Court issued a judgment on the legality of an auto-renewal clause in a gym membership agreement. The principles set down in the judgment apply to most types of auto-renewal policies used in relation to consumers. Thus, the main principles stated by the Supreme Court will also be of relevance for IP-related agreements used in relation to consumers (eg, subscriptions to music or video services, book or magazine memberships and memberships of art, film or music societies).

A Swedish consumer signed an agreement for a 12-month gym membership on 6th August 2007. The agreement was a standardised contract prepared by the gym. According to the terms of the agreement, the agreement would be prolonged for another 12 months if not terminated with at least one month's notice. The gym membership was terminated by the consumer on 11th July 2008 (ie, with less than a one-month notice period), so the agreement was extended until 6th August 2009.

The consumer considered the auto-renewal clause to be unreasonable and questioned the obligation to pay for the renewed term. The district court rejected the consumer’s request and held the obligation to pay for the renewed term to be valid. The Court of Appeals agreed. However, the Supreme Court ruled in favour of the consumer, holding that the automatic renewal clause was unreasonable.

The consumer was assisted by the Swedish Consumer Ombudsman. For several years the ombudsman and the Consumer Agency have, in a number of different court cases, both in the ordinary court system and in the Market Court, tried to establish case law under which the auto-renewal of a consumer contract is considered unfair. However, previous case law gives no clear picture as there are both cases where the auto-renewal clause has been held valid and those where the clause has been considered unreasonable. The agency has also written to the Swedish government to request the introduction of legal provisions regulating the right to renew consumer contracts automatically.

Principles established by the Supreme Court
The Supreme Court stated the following in its judgment:

  • There are no general rules in Swedish law regulating how auto-renewals shall be assessed. Thus, what must be considered is whether the auto-renewal is unreasonable based on general contract law provisions (Article 36 of the Contract Act, under which unreasonable terms can be disregarded or modified). In this regard, consumers and others with an inferior position in the contractual relationship should be given particular consideration.
  • Auto-renewals are not as such unreasonable. Rather, it must be considered whether the consumer has an interest – and if so, what interest – in renewing in the contract. 
  • In the assessment of the auto-renewal clause, the length of the new contract period and the term of the original contract must be taken into consideration. A contract being renewed until further notice with a reasonable notice period does not, according to the Supreme Court, “entertain the same doubts” (roughly translated) as auto-renewals for a longer, fixed period.
  • It is of importance whether the consumer has been properly notified of the upcoming renewal and his or her right to terminate the contract in a reasonable period of time before the auto-renewal kicks in.

In the case at hand, the auto-renewal was held to be unreasonable as:

  • The consumer enjoyed no considerable benefits from the auto-renewal and it was primarily in the interest of the gym to auto-renew the contract.
  • The original contract term was 12 months, which entails that it can be difficult for the consumer to remember to terminate the agreement with the proper notice period.
  • The new contract term was also 12 months without the possibility of terminating the contract before the end of the new term.
  • The auto-renewal entailed a not insignificant economic burden on the consumer.
  • The consumer had not been properly informed of the upcoming renewal, that the contract could be terminated and the consequences of not terminating the contract.

An overall assessment must be made of each auto-renewal policy. Although auto-renewals are not illegal as such, provisions on auto-renewal should be used with caution. In particular, longer auto-renewal periods should be preceded by a prior notice to the consumer. It will be interesting to follow future case law to see how the principles set forth by the Supreme Court are interpreted, both in the general court system and by the Market Court, as earlier case law has given no clear guidance on how to assess auto-renewal provisions.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

Unlock unlimited access to all IAM content