We’re all familiar with the automatic renewal (evergreen) clause that appears in many supplier proposed agreements. The following is a typical example:
This Agreement shall be for a term of one year beginning on January 1, 2013 and expiring in December 31, 2013 and shall automatically renew for one year periods unless terminated by either party by giving the other written notice of termination at least sixty (60) days prior to the expiration of any one year period.
Under this clause, the customer must notify the supplier no later than November 1st if it doesn’t want the contract to automatically renew. If the customer fails to provide timely notice, the contract will automatically renew for another one year period.
Too often, our internal clients sign a supplier proposed document which contains an evergreen clause. Frequently, the window of opportunity to terminate the agreement passes, and the company finds itself on contract for another year.
In the context of commercial business-to-business contracts, courts often strictly construe these provisions where the contract language is clear and unambiguous. In those cases, if the contract language is not followed and notice is not given within the required time to terminate, the contract extends automatically for another term.
A NEW TWIST: SELLER BEWARE
A few states have passed laws that may make it difficult for suppliers to enforce automatic renewal clauses. Most of these laws apply only to contracts between businesses and consumers. However, two states, New York and Wisconsin, have enacted statutes applicable to business to business contracts.
New York General Obligation Law Section 5-903
In 2006, New York passed a statute which provides that automatic renewal provisions in contracts for service, maintenance or repair are unenforceable unless “the person furnishing the service, maintenance or repair, at least fifteen days and not more than thirty days previous to the time specified for serving such notice upon him, shall give to the person receiving the service, maintenance or repair written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract.”
Wisconsin Statute Section 134.49
In 2011, Wisconsin passed a statute that affects the enforceability of automatic renewal clauses in certain business-to-business contracts. Generally, the law applies to business to business contracts for the lease of business equipment or for providing business services, with some exceptions.
Under the statute, an automatic renewal provision in a business contract is void unless the supplier (i.e., service provider/ lessor) gives the customer proper notice, and the customer has initialed the evergreen clause in a specific location in the contract, as described in the statute. A supplier who attempts to enforce an automatic renewal provision that violates Section 134.49 may be liable for damages.
If you’re selling services/ products to consumers, you should be aware of statutes in a number of states which create requirements applicable to automatic renewal in a wide range of contracts. Failure to abide by statutory requirements governing automatic renewal clauses may make these clauses unenforceable.
The following states have laws pertaining to automatic renewal clauses that generally fall into three categories:
- Auto-renewal laws that apply to contracts with consumers, not businesses, that require only clear and conspicuous disclosure of auto-renewal terms. The following states have such laws: California, North Carolina, Louisiana, Oregon;
- Auto-renewal laws that apply to contracts with consumers, not businesses, that require clear and conspicuous disclosure of auto-renewal terms and require a service provider to notify its customer of the auto-renewal within a certain period of time before the cancellation deadline. The following states have such laws: Connecticut, Florida, Illinois, Hawaii and Utah;
- Auto-renewal laws that impose similar requirements as those described above, but only with respect to specific types of contracts, such as, contracts for health club memberships, home security services, leases of certain types of personal property, retail telecommunications service subscriptions. The following states have such laws: Arkansas, Maryland, South Carolina, South Dakota, Tennessee and Wisconsin.
TIPS FOR BUYERS AND SELLERS
Many companies have been unpleasantly surprised by an auto-renewal clause and have paid the price by being economically obligated for a renewal term. As a result, many companies have internal policies against including evergreen clauses in their contracts.
However, If correctly written, these clauses can be beneficial to the buyer. This requires two additional considerations and clauses: i) A mechanism to cap any price increase in the renewal term; and ii) An additional clause giving the buyer the right to terminate the contract at any time on XX days advance notice to the seller.
Check your state’s statute before inserting an auto-renewal clause in your contract. There may be requirements regarding conspicuous disclosure of the clause, notice to your customer and the types of contracts that must meet these requirements.