Contracting Pitfalls Part Two: Automatic Renewal Provisions

Vendors are particularly keen on working in to their standard preprinted documents provisions that automatically renew contracts for additional period if neither party gives the other notice of cancellation. The obvious advantage to the vendor is that inertia is on its side relative to the extension of the agreement. The problem for the party buying the services is that they frequently lack a sufficient contract administration process to be sure that a conscious decision is made about whether or not they wish to renew the agreement or prevent renewal by sending the required notice. 

            Here is an illustration of the problem.  A purveyor of widgets to ACME Company enters into a three-year contract on terms that are generally favorable to both parties.  The contract provides that if neither party gives written notice at least six months in advance of the end of the current term, the contract will renew for an additional three-year period.  Three years and two months into the relationship, ACME management decides to review whether or not buying widgets from this vendor still makes sense.  They decide they do not wish to do this any longer and seek to terminate the agreement. The widget vendor at that point asks for two years and nine months’ worth of additional compensation to terminate the agreement.  

            This is a relatively common contracting problem that we see in our office. Some companies refused, as a matter of policy, to sign contracts that have automatic renewal features in order to eliminate the risk of forgetting to send the notice needed to prevent renewal of an agreement.  Others deal with this problem by having a good contract administration calendar which would provide for a tickler to see that this decision is reviewed well in advance of the notice date.  Unfortunately, sometimes the notice date is so far prior to the end of the current term that it is impossible to fully evaluate whether or not making a change is appropriate.  So, the time frame for the notice requires thought too.

            So, the bottom line is watch out for automatic renewals.  You may be trapped in a longer term if you are not paying attention.