In today’s business landscape, contracts that automatically renew (commonly known as “evergreen” or “autorenewal” contracts) are becoming increasingly prevalent. While these arrangements may appear convenient at first glance, the fine print often contains provisions that can restrict flexibility, impose long-term commitments, or escalate costs over time.
Here is what business owners need to know before signing an autorenewal contract.
What Is an Autorenewal Contract and Why Should You Care?
An autorenewal contract is one that automatically renews at the end of its initial term unless a party provides written notice of termination within a specified timeframe. Failure to provide written notice within the timeframe required will result in the contract being renewed for an additional term.
Here is an example of an autorenewal clause:
“The initial term of this Agreement shall be one (1) year commencing as of the date hereof. Thereafter, the term of this Agreement shall automatically renew for successive one (1) year terms unless either party gives written notice of non-renewal at least sixty (60) days before the initial term or then-current renewal term.”
Under the terms of the above provision, if neither party provides the required advance written notice, the contract renews – whether or not that was the parties’ intention. While it may be possible to negotiate termination after missing the deadline, most parties will enforce the renewal term.
Key Considerations Before Signing
One of the most important things to understand about any autorenewal contract is its terms. Understanding the “T.E.R.M.” of each contract can help you avoid unintended consequences:
- T – Term Length: Duration of the initial contract term (e.g., 1 year, 3 years)
- E – Exit Notice Period: How far in advance must notice be given to terminate the contract (e.g., 30, 60, 90 days prior to the contract’s renewal date).
- R – Required Notice Method: The required method to terminate (e.g., email, certified mail to a specified address/department)
- M – Modifications Upon Renewal: Any changes that take effect upon the contract renewing for another term (e.g., price increases or additional obligations)
To avoid missing notice periods and unintentionally locking your business into a lengthy renewal term, you should calendar the relevant time periods/notice requirements after signing to ensure you do not miss the deadline to terminate the contract.
What To Avoid
- Don’t Sign If You’re Uncertain: If you are unsure about the long-term commitment or financial implications, avoid locking into an autorenewal contract. However, if the counterparty insists on an autorenewal provision, consider the following strategies:
- Shorten the Renewal Term: Negotiate a shorter renewal period, such as six months instead of a full year, to maintain flexibility while still benefiting from the arrangement;
- Include an Early Exit Clause: Incorporate a clause that allows the business to terminate the contract early for a fee that is reasonable and manageable; or
- Implement Performance Metrics: Include benchmarks, service levels, or performance metrics to ensure the contract continues only if it provides measurable value to the business.
- Don’t Rely on Goodwill: Even longstanding vendor relationships can turn into litigation if the contract’s terms are not strictly observed.
Consequences of Missing the Termination Deadline
Failing to properly terminate an autorenewal contract can have serious consequences and result in:
- Automatic renewal and the legal obligation to perform under the new term.
- Litigation risks, especially if you attempt to cancel after missing the deadline to provide notice of nonrenewal.
Are Autorenewal Contracts Enforceable?
Generally, yes. Most jurisdictions consider these contracts enforceable, but the enforceability may depend on whether the renewal terms are disclosed and whether the agreement complies with applicable consumer or commercial protection laws.
Bottom Line
Autorenewal contracts are not inherently bad; however, they require close attention. Before entering into or attempting to exit an autorenewal contract, seek legal counsel to safeguard your interest and avoid committing your business to obligations it cannot afford.
For more information, contact Joseph Chletsos at .
