Originally published in November 2011.
Assume you are a business owner. You purchased certain computer software last year which you hoped would improve productivity, but which you now realize your business no longer uses or needs. As a result, you decide to cancel your license agreement with the vendor. When you call your vendor, however, they notify you that your license agreement with them does not allow you to simply cancel, and, making matters worse, inform you that you are contractually obligated to continue paying for the software for another full year.
How can this be? The answer is that the terms and conditions of the software license contain an "automatic renewal" or "evergreen clause."
A typical evergreen clause may read something like this:
Each Term shall automatically renew for subsequent periods of the same length as the initial Term unless either party gives the other written notice of termination at least thirty (30) days prior to expiration of the then-current Term.
Under this clause, the customer would have to notify the provider, in writing, that they did not want to renew the contract at least thirty days before the end of the current contract term. If the customer failed to provide timely written notice, the contract would automatically renew.
These types of clauses may be included in various contracts, but are particularly prevalent in service, distribution and supply contracts. Some leases also include a provision for the lease to automatically renew for another year if the tenant fails to give notice that they do not want to renew by a certain date.
The question for individuals and businesses who are parties to contracts containing automatic renewal clauses is seemingly simple: are they enforceable? The answer is, perhaps not surprisingly, "it depends."
There are many cases decided by courts across the country addressing the enforceability of evergreen clauses pertaining to different business transactions. In most cases, particularly in the context of commercial business-to-business contracts, courts strictly construe these provisions where the contract language is clear and unambiguous. If the contract language is not followed and notice is not given within the required time to terminate, the contract extends for another term automatically.
While case law may favor those parties attempting to enforce these clauses, a few state legislatures have passed laws that may make it difficult for these parties to rely on automatic renewal clauses.
For example, in 2000, Illinois adopted the "Automatic Contract Renewal Act" which makes an evergreen clause unenforceable unless the clause is "clear and conspicuous." Although that law does not define "conspicuous," the Uniform Commercial Code generally requires all capital letters and bold-face type be used.
In 2006, New York passed a statute which provides that automatic renewal provisions in contracts for service, maintenance or repair are unenforceable unless "the person furnishing the service, maintenance or repair, at least fifteen days and not more than thirty days previous to the time specified for serving such notice upon him, shall give to the person receiving the service, maintenance or repair written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract."
Just this year, Wisconsin passed automatic renewal legislation affecting the enforceability of automatic renewal clauses in certain business-to-business contracts. The statute creates specific disclosure and notice of renewal requirements on contracts. In particular, the Wisconsin statute requires: (1) an automatic renewal clause be disclosed at the time the contract is entered into; and (2) a formal advance reminder notice to a customer whose contract will otherwise be renewed for an additional term of more than one year be provided.
The failure to comply with these statutory requirements may render an automatic renewal clause unenforceable and result in the contract being terminated at the end of the current term.
Companies doing business in states that have statutes regulating these clauses should be mindful of these recently passed statutes so as to ensure compliance with their provisions. These statutes create new requirements applicable to the automatic renewal or extension of a wide range of contracts. Failure to abide by statutory requirements governing automatic renewal clauses may affect the enforceability of those provisions.
Similarly, parties who find themselves unwillingly bound to another contract term as a result of an evergreen clause should also be mindful of new legislation which may provide defenses to an automatic renewal claim.
Steve Dutton is an attorney in the Litigation Department at the law firm of McLane, Graf, Raulerson & Middleton, Professional Association.
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