TOP TEN PITFALLS IN NEGOTIATING AND DRAFTING BUSINESS CONTRACTS – PART IV (AUTOMATIC RENEWAL CLAUSES)

Welcome to the fourth of my ten-part series that can show you how simple-looking parts of a business deal can come back to haunt you.  Thank you for visiting, and please also read my other installments about how to avoid getting into trouble in the first place, instead of how to get out of trouble later.  Parts I, II and III, which discuss letters of intent, due diligence, and noncompetition clauses, can be found elsewhere in this blog.  I have published an abbreviated version of this whole series in the January 2014 issue of Nevada Business magazine. Here is the link, but with fair warning – it is so abbreviated that it only has seven pitfalls, and there is much more to be said than what you will see in that article! http://www.nevadabusiness.com/2014/01/seven-pitfalls-avoid-negotiating-business-contracts/

Automatic Renewals

You’ve entered into a contract for three years, the contract was long and loaded with legalese, and the closer you get to the end of the three years, the less you remember about the technicalities. You are just looking forward to moving on in another direction once the three years are up.

But, maybe when you were entering into the contract, both parties loved each other and hoped that if all went well, the relationship would go on and on. Or something like that.

Well, this might be overlooked – until too late: many contracts have an automatic renewal clause that keeps renewing the contract unless one party gives a written notice to the other party, well in advance of the so-called expiration date, specifically stating that the contract will not be renewed. Advance notice requirements of 90 to 120 days are not uncommon, and the consequences of overlooking them can be severe.

This type of clause is often overlooked in pre-signing negotiations because at that time, you don’t see it having any impact on you. At that time, you might just be thinking about getting the contract signed so you can start doing business. However, it becomes a pitfall later on if you haven’t calendared the notice deadline, or if the notice deadline is so early that it is hard to make a timely decision about whether to renew, renegotiate, or move on.

If the other party to the contract insists on one of these clauses and you don’t particularly want it, and especially if it is a long-term contract, don’t hesitate to object or demand a good reason for it (and maybe demand some concessions in return). Maybe the real reason the other party wants that clause is to lull you into renewing before you even know that you have renewed!

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