Automatic Contract Renewals: Get Out Your Colored Pens

March 13th, 2008

When your business enters an open-ended relationship with another company, there are two ways to manage the term. First is to provide that the agreement will terminate automatically unless renewed, and second is the opposite- the contract renews automatically unless is it specifically canceled. Each method has its pros and cons. Here are some ideas to consider:

Automatic Termination
All contracts should be periodically reviewed for value to the company. One way to make sure this happens is to provide that the contract must be actively renewed or it is deemed to lapse. The problem here is that it requires memory and attention to manage. I would not recommend this to any but the most detail-oriented of clients who have a great calendar system to track review/renewal dates and a person capable of staying on top of them all.

However, for certain special transactions such as limited-term trials, this can make sense. The risk, of course, is that one forgets to renew, realizes several months later that the company has incorporated someone else’s technology into a product and is then in a poor negotiating position when the time comes to set the general availability pricing.

Automatic Renewal
This is far easier to manage, for obvious reasons, and I recommend it as the default. The trick here is that most automatic renewal contracts allow termination (without cause) only within a set period, such as 60 days prior to the renewal date. Miss the window and you could be stuck with the deal for another year. A calendar of these dates- at least for big-ticket contracts- is still highly recommended.

With automatic renewals, it is also crucial to check the “emergency exits”. What are the grounds for “for cause” termination? Once invoked, can the other side cure the breach? Is that desirable or would it be better just to let everyone walk away?

Good Practices in the Real World
In both cases, the challenge is not get caught by surprise. As a company grows the volume of contracts and renewal dates gets larger as well. Again, I suggest a calendar (or a spreadsheet) of key dates and a person charged with keeping it updated.  In most cases, renewal is a non-issue unless there are problems with the relationship.  An ounce of planning here can avoid a pound of headaches.

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