Automatic Renewal Clauses: From a Buyer's Perspective

Automatic renewal clauses (“ARC”) seem to find their way into every type of commercial contract imaginable – from the most critical supply agreements to the delivery of towels for the bathroom. A typical ARC looks something like this: “This agreement shall have an initial term of one year from the effective date. Upon expiration of the initial term, this agreement shall automatically renew for a period of one year.”

So long as both parties are content with this arrangement, an ARC serves to maintain the basic terms of the contract (such as insurance requirements, payment terms, and indemnification) without the need for renegotiation. But what if the buyer is no longer content with the status quo and wants to move to another vendor?

Historically, parties had the freedom to contract any renewal term they wanted. That general rule changed in 2011 for a limited subset of “business contracts” as defined in Wis. Stat. §134.49 – for the limited contracts defined by the statute, the vendor must give additional notices regarding the ARC. While the potential applicability of Wis. Stat. §134.49 could give a buyer some wiggle room in avoiding an unwanted renewal period (if the vendor does not comply), it is risky to include an ARC on faith that it will be found unenforceable later. Instead, when a vendor presents a proposed contract that includes an ARC, the buyer should consider:

1. Is the automatic renewal advantageous to the buyer? In some cases, an automatic renewal can work to a buyer’s advantage (e.g., if the contract locks in certain pricing). However, if the ARC does not provide any substantive benefit to the buyer, the buyer should propose to strike the ARC in its entirety. Without an ARC, the parties can continue to do business on an order-by-order basis, subject to the rules of Article 2, applicable invoice terms, or the parties’ past practice.

2. How can the buyer terminate the contract? The idea behind an ARC is to bind the parties to a set period. However, vendors often insert an ARC without modifying other termination provisions of the same agreement, leaving a glaring inconsistency. For example, if the termination provision allows either party to terminate the agreement without cause upon giving notice, then the ARC has very little impact. Even if the agreement is automatically renewed for another term, the buyer can give notice of termination at any time. More commonly, however, agreements do not allow termination without cause and instead only allow termination upon an uncured breach by the other party. Therefore, absent a breach by the vendor, a well-drafted ARC could commit the buyer to another term.

3. How will the buyer monitor the renewal? If the vendor refuses to strike the ARC (or if the buyer decides to sign the agreement with an ARC), the buyer must set up an internal alert system to opt out of the renewal at the end of the initial term. In the example given above, the buyer can provide that notice at any time before the anniversary date of the agreement. Some agreements are narrower, requiring notice at last 30, 90 or even 180 days before the termination of the initial term. In more extreme cases, agreements sometimes require the buyer give notice of non-renewal “not more than 60 and not less than 30 days before renewal” – that essentially gives the buyer a 30-day window to give the proper notice! Unless the buyer has an ultra-reliable alert system, the more narrow the window, the more likely the buyer is to get trapped in an unwanted term. As an alternative, buyers should consider sending the vendor a notice of non-renewal immediately after the contract is signed. If allowed by the terms of the ARC, doing so will avoid any chance the buyer will overlook the notice deadline later.

In summary, watch out for an ARC. If it does not benefit the buyer, the buyer is well served to negotiate its removal. If the buyer cannot do so, look for other contractual mechanisms to terminate the contract or find a way to track the deadline for giving notice of non-renewal.

Written By:
Law Firm of Conway, Olejniczak & Jerry, S.C.