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What You need to Know about the “Automatic Renewal” Clause

If you have entered into a contract that is no longer meeting your needs and you call to cancel the agreement, you may be surprised to learn that you are bound by the contract to continue paying the other party for the same amount of time as the original term of the contract. How does this happen? The terms and conditions of certain contracts contain an “automatic renewal” clause. This type of provision is also referred to as an “evergreen clause.”

An example of an automatic renewal clause is something along these lines:

All terms contained herein will automatically renew for the same length of time as the initial term of the contract unless either party provides the other with at least thirty (30) days written notice of termination of the contract prior to the expiration of the current term.

In other words, unless you notify the other party in writing at least 30 days before the current contract term expires that you do not want to renew the contract, the agreement is automatically renewed. An evergreen clause can be found in a variety of types of contracts, especially service, supply and distribution agreements.

So, is an automatic renewal enforceable? Like most things in life, “it depends.” Many courts strictly construe this type of contractual language in commercial contracts that do not involve a consumer. If the language is clear and unambiguous, the court is likely to consider it enforceable and extend the agreement for another term if proper and timely notice to cancel is not given.

Several states have passed laws attempting to make the use of automatic renewal clauses more difficult. Many require the evergreen clause to be in all bolded and capitalized letters in order to make the provision more conspicuous. Some states go further and require the party attempting to enforce the automatic renewal to provide an advance reminder to the other party that the automatic renewal date is approaching. Failure to comply with the statutory requirements can render an automatic renewal clause unenforceable.

If you have questions regarding business law matters, contact us today to schedule an initial consultation. Leslie S. Marell has been practicing business and commercial law for over 25 years. She is established in private practice and has extensive legal experience counseling companies in the areas of business contracts and transactions, purchasing, sales, marketing, computer and technology law, employment law and day to day legal matters. Let us provide your company the advice and guidance you need.

 

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