WHAT IS THE TERM OF YOUR CONTRACT?
Contracts for the provision of on-going services or goods generally have a term. For example, a vendor may provide a constant supply of a particular good needed in the business upon pre-agreed pricing terms for a number of years. When businesses negotiate this type of an agreement, the term is fairly obvious and top of mind.
There is an often overlooked provision, however, that can result in a nasty surprise by an extension of the term beyond what the business had contemplated. It is not uncommon for vendors to put an automatic renewal provision in an agreement in the hopes that the business relationship will extend beyond the initial term either through inertia or, more problematically, oversight. Many business owners often have found out, to their chagrin, that they missed or had forgotten the terms of an automatic renewal provision. The result was that the contract had been extended under terms that were no longer advantageous. And in some cases, this had been for a considerable number of additional years.
Usually these clauses require advance notice from the business to the vendor in order to prevent the automatic renewal taking place. If you have a very thorough contract management system in place to diary these dates and dedicated employees who have primary responsibility for monitoring them, these may not present much of a problem. However, in our experience, most businesses simply lose track of the need to give the notice and contracts generally just automatically renew.
Obviously, this can become a fairly significant problem, particularly if it is a high dollar contract. It is rare that there is an adequate legal defense to the renewal. Vendors frequently want significant compensation to agree to terminate the contract early.
The best practice is to request these provisions be stricken from agreements as a matter of course. If they cannot be stricken for some reason, or if the business finds it advantageous to keep it in there for some reason, then careful diarying and monitoring of the relevant dates should be verified by management. These are not difficult or complicated legal concepts, but failure to be aware of them can become extremely expensive.