How long does your contract with your internet provider last? Or with your water cooler contractor? Or your ad words agency; waste removal contractor; consultants; lessor or hiring contractor; or your communications provider?
You might believe that your contract lasts for one year (or whatever term you have negotiated with your supplier) but you may be wrong. Many agreements have automatic contract renewal clauses. If yours has one, then the contract may well last much longer than you think.
We have seen automatic contract renewal clauses in agreements that our clients have signed which have, without their specific knowledge, automatically extended those contracts for up to five years beyond the original end date agreed by the parties.
Automatic renewal clauses are not always clearly identified or easy to find in the relevant contract and are often buried amongst other terms. The clauses will automatically renew the contract without you having to specifically agree for the period stipulated in the clause. This can only usually be prevented if termination is carried out in accordance with the contract, typically, for example, by written notice served between six months and three months before the contract is due to expire.
If you have already entered into a contract with a term anything like this, then YOU MUST:
(i) WORK OUT the date on which you must give notice to terminate the contract; AND
(ii) DIARISE this date to make sure that you give the notice in the time required; AND
(iii) GIVE NOTICE accordingly.
If you fail to do this, then you will find yourself still subject to the contract for an ongoing period with no ability to immediately terminate the contract or renegotiate more favourable terms before the rollover.
The typical scenario is as follows:
(i) The supplier and customer enter into a supply contract for one year.
(ii) The customer is unaware that the contract contains an automatic renewal clause.
(iii) The customer fails to terminate the contract within the time allowed by the contract.
(iv) The contract automatically renews for one, two or more years.
(v) The customer wants to leave the supplier due to pricing or service issues.
(vi) Unless the service provider has committed a serious breach of the contract, the customer cannot terminate the agreement but must wait for the end of the renewed term.
(vii) The customer tells the service provider that it wants to get out of the contract.
(viii) The service provider agrees but only on the basis that the customer pays the supplier liquidated damages for early termination which may amount to tens of thousands of dollars depending on the length of the renewed term and the cost of the contract.
(vix) The customer may have little alternative other than to remain in the contract with the liquidated damages being a significant deterrent to moving to another supplier.
The courts will uphold automatic contract renewal clauses and grant liquidated damages pursuant to properly drafted liquidated damages clauses. The enforceability of liquidated damages clauses is a huge area of dispute and beyond the scope of this discussion.
The key to addressing this problem is to either negotiate the automatic contract renewal clause out of the contract before you sign or by taking the action set out above to make sure that you terminate the contract before it automatically renews.
For small business, these automatic contract renewal clauses may be found to be “unfair” and therefore unenforceable pursuant to changes coming into force in the Australia Consumer Law and the Australian Securities and Investment Commission Act in November this year and as discussed in our article discussing new laws extending unfair contracts laws to small business posted on 12 November 2015.
Each contract and set of facts is different. For legal advice in relation to your specific situation, please call David Henderson at Hendersons Legal on 03 9629 2211.
This content is intended as commentary and should not be construed as legal advice.
For more information call David Henderson on 03 9629 2211.
