Automatic Renewal: Everything you need to know
The automatic renewal clause implies that the contract will automatically renew if one of the parties has not terminated the contract or the party does not wish to terminate the contract. In this case, the terms of the agreement get revived after a fixed period. To stop this succession of renewal, one of the signing parties has to give prior legal notice before terminating the contract.
Automatic renewal clauses, or evergreen terms, are commonly found in commercial agreements, supply agreements, purchase agreements, software license agreements, consulting agreements, equipment rental agreements, and office leases.
- Importance of automatic renewal
- Points to never forget
- Key issues for automatic renewal
- Termination of contract at special conditions
- Ending the breach of contract
- Concept and application of renegotiation
- Remolding the terms
- Examples of automatic renewal
Importance of automatic renewal
Automatic renewal provision allows the parties to continue their relationship easily without getting involved in unnecessary paper works and avoiding the term-end conditions in some agreements; when the payment-making party is not reminded to renew the contract, the regularities in payment increase, which results in the smooth flow of transactions and healthy relations between the parties.
Automatic renewable contracts provide flexibility to the contract period.
Automatic renewal clauses are mainly enforceable. The only exception is if there is a statute in the state whose law is governing the agreement restricting evergreen clauses or case law is considered in such a state that refuses to apply it. This clause can prove beneficial to both parties, but it's important to understand all the details of the contract before getting into an agreement.
Points to never forget
You might have valid business reasons for signing a contract with an automatic renewal provision, but be sure to consider these keys as important points to remember before making a decision.
- Do not agree to evergreen contract clauses blindly or without awareness.
- Examine all the risks, rewards, and make a wise decision based on reasoning and information.
- Be careful while signing the contract with lengthy or exclusive automatic renewal clauses.
- Apply policies and procedures in advance to manage evergreen contract approvals and non-renewals. Form a strategy before signing the contract.
- Take legal advice, or approach for a suggestion on enforceability and contract drafting with evergreen clauses.
- Enforcement of automatic renewal changes according to law and change in state.
Since an automatic renewal clause is a risky clause, be prepared with the procedures beforehand to manage the contract. Organize recurring reminders in advance to multiple individuals of the deadline for delivering the required non-renewal notice. Try to provide enough time to decide whether to follow the agreement under its current provisions, renegotiate, or terminate before delivering the notice of non-renewal.
Beware of the automatic renewal clause.
Key issues for automatic renewal
Mentioned below are some key issues that every party experiences during the activation or termination of automatic renewal clauses.
If a party decides to discontinue the agreement, such party must make sure that the notice contains all the required statements and reasons. This also includes the awareness of the recipient, receiver, timing, and source through which the notice would transmit. It helps to avoid confusion and arguments between the signing parties.
For conveying the notice, a certain method is followed, which enables the sender to indicate a legal notice of terminating the contract, such as a certified mail or legal letter that requires a return receipt of confirmation.
Timeline of notice
The time required to send the notice of termination of the contract before the actual agreement is not fixed. The timeline for advance notice of a non-renewing party differs. It depends on many factors, including the terms of the previous and ongoing contract, relations between the party, and the circumstances of the agreement.
It is expected from both parties to negotiate this issue carefully as short notice would not always seem to be practically advantageous. Most of the time, the parties have to unwind their agreement to prepare for termination, which sometimes happens rapidly in which many risks are involved. It also affects profit and loss in the agreement.
Termination of contract at special conditions
Some parties might desire to terminate the contract at certain conditions of the agreement. Concerning the request of a party, it is expected that both parties should negotiate the period of advancement notice and the terms on which the agreement would end. This is not applicable for breach of agreement or inclusion of an evergreen clause.
Ending the breach of contract
In an evergreen clause, despite restrictions to the breach of contract, each party still has an opportunity to terminate the contract immediately. Considering the services, benefits, applicable terms under the agreement, it is proposed to withstand a cure period. The cure period is not a remainder of the terms applied in the agreement. It is crucial in situations where the breach is nonpayment of compensation.
Concept and application of renegotiation
An evergreen contract or automatic renewal clause does not prevent renegotiation. It supports renegotiation and allows the party to understand the terms of the agreement in a better way. Since the parties have maintained the relationship in a certain contract for a long period, it permits them to reanalyze the terms and decide whether to terminate or continue the contract. It also consents them to amend the contract in the new term if necessary.
Remolding the terms
According to the services under the agreement, in an automatic renewal clause, there is no rush to meet the ends of the agreement. The provider may avoid negotiating the terms of the agreement before the initial period of the notice or during the renewal period. It is possible to remold the terms considering the party's requirement or circumstances.
Examples of automatic renewal
A software license company's automatic renewal agreement
Term: The initial term states that the maintenance services shall begin upon the Licensee's receipt of the product under this agreement. It was proposed to continue until the last day of the calendar month of the second anniversary of the term.
Thereafter, the services will be automatically renewed for an additional one-year term unless either party provides the other with written notice to the contrary at least twenty-one days before the end of the current term to terminate the contract.