A question which often arises is whether an auto-renewal clause is enforceable. Such clause is also sometimes referred to as an evergreen clause. Typically, an auto-renewal/evergreen clause might take the following form:
"Each Term shall automatically renew for subsequent period of the same length as the initial Term unless either party gives the other written notice of termination at least (30) days prior to expiration of the current term."
Essentially, if you are an individual or a consumer company and you are entering into a contract with a supplier company for a fixed period of 12 months, then you should carefully read and understands the terms and conditions. This is because although the contract will initially be for a fixed period of 12 months, there might be an auto-renewal clause in the contract.
The auto-renewal clause needs your attention because it allows the supplier company to auto-renew the contract at the end of the initial 12 months period, for a further period of 12 months. However, the auto-renewal of the contract can be avoided if you provide the supplier company a written notice of termination at least 30 days before the expiry of the ongoing term.
Nevertheless, if you do not provide this written notice of termination, the contract will be extended automatically, and you will be required to pay for the next year’s service. This is regardless of whether you need the service or not. In other words, you will be tied into the contract for another 12 months and will need to continue paying for the service.
A dispute often arises in this regard. Many individuals and consumer companies do not appreciate the existence of auto-renewal clauses in their contracts. Then once the supplier company auto-renews the contracts and send invoices for the renewal year, the consumer/consumer company disputes the auto-renewal invoices on the basis that they no longer use or want the services. Notably, such disputes are not usually entertained by supplier companies and when this happens, it results in the consumer/consumer company questioning the enforceability of the auto-renewal clauses.
Interestingly, the court’s approach on the enforceability of the auto-renewal clauses depends on whether the contract is between two businesses or between a business and an individual. When the contract is between a supplier company and an individual customer, the Consumer Rights Act 2015, Consumer Protection Act 1987 and the Supply of Goods and Services Act 1982 can provide some protection to the individuals against these auto-renewal clauses.
However, there is no such protection available when the contract is between two businesses. It was stated in Watford Electronics v Sanderson [2001] 1 all ER (Comm) 696 by Chadwick LJ that when two businesses enter into a contract with each other, they are “the best judge of the commercial fairness of the agreement which they have made, including the fairness of each of the terms of that agreement”.
The comment made by Chadwick LJ illustrates that when the contract is between two businesses and there is a dispute regarding the enforceability of auto-renewal clauses, courts are reluctant to set aside such clauses.
Therefore, if you are a business entering into a contract with another business, you must carefully read the terms and conditions to see if there is an auto-renewal clause in the contract. If such clause exists, you should ensure that you understand its complications. At this stage, you should also make a note of the initial expiry date and the method of termination accepted by the supplier company. If you are an individual consider, the statutes might provide some protection. However, you should still take precautions.
Written by : Shehroze Mehmood, Trainee Solicitor
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