Trapped in a Contract

by Hilary Hirtle

Don't Get Burned by Evergreen and Automatic Renewal Clauses

Lurking in any number of service agreements and other forms of contract is a clause that reads something like this:

This agreement will renew at the end of its term for a further term unless either party gives the other written notice of termination within 30 days prior to the end of the relevant term.

This “evergreen clause” perpetually renews the contract unless a party to the contract follows the correct process to cancel it within a typically narrow window of time (that is set forth in the contract). An automatic renewal clause also renews a contract in the absence of action by a party to the contract but renews only a finite number of times.

Evergreen and auto-renewal clauses are commonly found in:

• Service agreements (cable, voice over internet phone, etc.)
• Leases
• Purchasing contracts
• Revolving loans
• Insurance coverage policies
• Magazine subscriptions

Renewal provisions can be convenient and constructive if the renewal term is brief, e.g., a month; the problems arise with long renewal terms—one year, three years, etc., as an organization may find itself stuck in a contract and with service payments for months or years beyond the usefulness of the service.

Organizations should be wary of draconian renewal clauses that are sometimes embedded in seemingly innocuous contracts. If an organization enters into a contract containing such a clause, the organization should consider the following:

Watch for Traps
Be aware that an automatic renewal clause may be buried within the legalese of a contract, for example in the interminable sea of text that often appears in association with an “I’ve read and agree with the terms” button on the web.

Negotiating Provisions
It may be possible to negotiate changes to a proposed contract to make automatic renewal acceptable by:

• Allowing either party to cancel the agreement at any time following the initial renewal; or
• Making the renewal term brief—e.g., one or three months—to minimize the time the customer might pay for an unwanted service before cancellation is possible.

Enforceability and Escape

If an individual person gets trapped in an auto-renewing contract and challenges it, the service provider may be quite agreeable to compromise. However, in business-to-business (including nonprofit organization) transactions, the courts generally can be expected to take a hardline on enforcing renewal clauses, assuming the contract language is clear and unambiguous. 

Rules Vary by State
Rules regarding automatic renewal vary by state, both as provided in court rulings and as enacted by state legislators. To better understand risks and options and to achieve improved outcomes when dealing with automatic renewal issues, legal counsel is advisable.

You can read WeConservePA’s guide, Trapped in a Contract in its entirety here.

Find more guides, model documents, and technical assistance from WeConservePA at WeConservePA.org/tools.