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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS
Contract Corner

Autorenewal provisions (sometimes referred to as evergreen provisions) are common in commercial agreements for the provision of technology and related services. Vendors may want their agreements to autorenew to save time negotiating new contracts and to continue the customer relationship. Customers often desire to terminate an agreement, thinking they have the right to do so, only to realize the term of the agreement has been automatically renewed for another year or number of years.

Autorenewal provisions in commercial agreements may be convenient and can be mutually beneficial, but should be carefully considered before being agreed to or made part of a template commercial agreement. In this Contract Corner, we provide key considerations for autorenewal provisions.

  1. Objective. What is the purpose of the autorenewal provision? Is the autorenewal provision included to make it easier for the contract to continue? Does it continue to lock in negotiated pricing for the customer or provide a long-term upside to a vendor in exchange for discounts during the initial term? How does the autorenewal option affect each party’s objectives (and potential risk)?
  2. Advance Notice. Autorenewal provisions often contain language that states the contract will renew unless notice of termination is provided by a party within X number of days prior to the end of the then-current term. This may seem like a reasonable position, but the parties should consider whether they have tracking systems in place to make this provision something they could comply with and/or have advance notice of in order to make a decision within the stated time period prior to the autorenewal.
  3. Term. The autorenewal provision may be more or less consequential depending on the term of the contract. If the term is lengthy and it autorenews for an additional term of the same length, the parties should consider the ramifications of a long-term agreement that will renew without notification to or consent of either party, and how both parties’ business objectives may change during the course of the contract. If the term or the renewal period is shorter, it may not be a risk to agree for the term to automatically renew.
  4. Right to Terminate for Breach? An autorenewal provision may be less onerous if there is another way for a party to terminate. That said, demonstrating a breach under the negotiated terms is not always easy. Often a customer will feel it is not getting the services it contracted for and wants to terminate the contract with the service provider. However, just because a customer does not think it is getting great service does not mean there is a clear breach of the contract. In such instance, the customer may not have a clear right to terminate for breach (and even if it does, it may be subject to a right for the vendor to cure).
  5. Right to Terminate for Convenience? If there is a right to terminate for convenience, the autorenewal clause may be fairly inconsequential, and can be given less weight in negotiations.
  6. Specific State or Jurisdiction Requirements for Enforceability. The parties should consider whether there are state or jurisdiction-specific requirements regarding autorenewals for certain products and services.