Regulation of Automatic Renewal Clauses: A Behavioural Law and Economics Approach

Abstract

Many consumer contracts, such as magazine subscriptions, mobile phone contracts, or fitness club subscriptions, are fixed-term contracts containing an automatic renewal clause. This paper provides the rationale of why such contracts are signed and what are the economic and legislative impacts of such clauses. Article seeks to offer a genesis of behavioural and traditional law and economics’ arguments to regulate inefficient limitations upon the consumer’s authority to terminate. The main findings are as follows: (1) In principle, obscure terms shrouding information on where and how to cancel should be regulated. (2) Formal requirements that impose a heavier burden upon the consumer to terminate (or to switch) than to subscribe with no offsetting economic benefit should be banned. (3) Legislator should intervene in to the formal requirements that increase switching costs imposed upon final consumers. (4) Legislator should intervene in cancellation deadlines that are set very early with no offsetting economic benefit. (5) Regulation mandating sellers to clearly and conspicuously ex ante notify consumers on automatic renewal in writing should be approached with cautiousness. (6) Provisions of Belgium and German law that fix the maximum duration of automatically renewed contracts and convert them into indefinite term contracts should be open to criticism.