Business to business (B2B) contracts commonly contain a clause which provides for the contract to auto-renew at the end of its initial period. Typically, such clauses say that the contract will continue for a further fixed period at the end of its initial term unless it is terminated by giving a minimum period of notice before the renewal date. They can also extend automatically terms which have already been extended for a further period in the absence of a termination notice. Clare Mackay, Senior Associate in the Commercial Litigation & Dispute Resolution Team at
SA Law, offers SMEToday’s readers some insight on what to look out for.
While auto-renewal clauses can offer advantages for both supplier and customer by ensuring the continuation of an ongoing service, they can also lead to customers inadvertently being locked into a contract when they neither want nor need that service going forward. Not only may this not be what the customer intended, it also precludes an opportunity to negotiate more advantageous terms with the supplier in return for continuing the services for an additional term.
A customer who finds themselves tied into a contract for an unwanted additional term because of an auto-renewal clause is unlikely to find any assistance from a court. English law enshrines the principle of freedom of contract, which essentially means that judges are reluctant to interfere with terms commercial parties have entered into, even if they result in a bad bargain for one of them. Nor will a judge imply a term (for example, for termination on reasonable notice) which conflicts with an express contractual term. It is also no defence for a customer to argue that they didn’t actually read the terms that they signed up to.
There are however some potential arguments open to customers who unwittingly find themselves tied into a contract for a much longer period than they intended:
- Were the terms which contain the auto-renewal clause actually incorporated into the contract at the outset? Were hard copies provided or was incorporation by reference to terms available on a website? Did the customer have a reasonable opportunity to review all of the terms and conditions before entering the contract? Is the auto-renewal clause sufficiently unusual or onerous to merit it being specifically drawn to the customer’s attention when the contract was made? An extreme example might be an automatic 10 year extension on top of a one year initial term,
- Are there any grounds to terminate the contract for cause, either under its termination provisions or at common law if there has been a repudiatory (i.e. a really serious) breach? If there have been problems with the goods/services supplied, they might provide an exit route but care is needed before leaping to rely on them to avoid creating further issues.
- Were any misrepresentations made prior to the contract being entered? Depending on the nature of the misrepresentation, it may be possible to rescind the contract.
- How clear is the wording of the auto-renewal clause? For example, does it say how and when notice is to be given to avoid the contract auto-renewing? Is the clause open to a more favourable interpretation in favour of the customer?
- Is there any argument that the customer was contracting as a consumer rather than a business? Consumers have far more protection than business purchasers and benefit from the Unfair Terms in Consumer Contract Regulations 1999, which say that terms which seek to tie a consumer into a contract must be fair – so, for example, a clause which provided for a complex notification procedure to avoid auto-renewal is potentially unfair. Auto-renewal clauses are very much on the Competition and Markets Authority’s radar. An example of this is its investigation into the auto-renewal of anti-virus software subscriptions operated by Norton, which resulted in Norton giving the CMA undertakings regarding their use.
- Talk to the supplier – they might be open to negotiating a shorter extended term or more favourable rates for an existing customer, although the customer is in a pretty weak negotiating position if the contract has already auto-renewed.
At the risk of stating the obvious, the risk on an inadvertent and unintended extension of a contract can be avoided by good contract management. Ensure that you have clear lines of authority in relation to who can sign contracts and train those who can on auto-renewals. Keep a record of each contract’s term, whether it contains an auto-renewal clause and if so, by which date and by what method does notice need to be given to prevent the contract being automatically extended for a further term. Diarise those dates and consider well in advance whether the goods or services are ones that your business will require for an additional term. If not, serve notice to terminate in accordance with the contract’s notice provisions before the auto-renewal date.
Clare Mackay, Senior Associate in the Commercial Litigation & Dispute Resolution Team at SA Law
