A pitfall in B2B contracts: beware the perils of auto-renewals

By Tammy Evans, below, Partner, Ignition Law

When entering into business-to-business (B2B) contracts, one of the common issues our clients encounter is that of auto-renewal clauses. Such clauses are often found in service agreements, such as for software-as-a-service (SaaS) subscriptions, internet lines, platform provision, etc. Yet they frequently go unnoticed or unheeded until such time as the contract auto-renews – to the annoyance of our clients, who suddenly find themselves legally re-committed to a service they may no longer wish to use.

In this article, I will explore the legal framework for auto-renewals in B2B contracts, which fall outside the more extensive protections afforded by consumer regulation; examine the possibilities for challenging auto-renewals; and outline the steps businesses can take to make sure they do not fall into the auto-renewal ‘trap’ in future.

Auto-renewals in B2B contracts: the key things to be aware of

A B2B contract that includes an auto-renewal clause will usually have a set duration that it remains ‘live’ for, unless you terminate it as permitted in the contract’s terms. These durations or terms can be wide-ranging, and there may be industry standards which apply.

In many instances, such contracts will auto-renew, meaning that the period of time they are in existence for renews automatically unless you take active steps to cancel them within a prescribed time-frame. Here, ‘active steps’ essentially means giving notice of your desire to cancel by a certain date and in the manner specified within the terms of the contract.

Somewhere within the contract, there will be a term that allows for this auto-renewal to occur; however, businesses are nevertheless often caught out by this. People don’t notice the auto-renewal clause, or fail to realise that if they want to avoid the automatic auto-renewal, they have to indicate that they wish to cancel, usually within rigid timescales. If they miss this cut-off date and don’t give notice, then the contract auto-renews for another term.

Challenging auto-renewals in B2B contracts: what does the law have to say?

So what does the law state about auto-renewals? The Courts generally take the view that businesses are free to enter into whatever contracts they choose, adopting a hands-off approach in a commercial setting, and are not going to be sympathetic to a party that has not read the applicable terms before signing, or has simply missed the cancellation deadline.

Furthermore, the more extensive protections available for consumers in this scenario are not going to apply in a B2B context.

However, there are some potential avenues open to you for challenging auto-renewals:

  • Was the auto-renewal term incorporated properly? Were the General Terms and Conditions (GTCs) governing the contract provided to you for review before you signed the contract? In order for the auto-renewal clause to be valid, it has to have formed part of the contract that you signed, and you have to have been made aware of the clause in the GTCs.
  • In the case of more onerous auto-renewal terms, e.g. for a period of ten years, was the clause fairly and reasonably brought to your attention? For a more onerous contractual provision (and they do need to be pretty onerous), the Court will expect the provider to have flagged it for your attention. A clause that is tucked away and hidden in standard terms which are referred to in the ‘main’ contract, but not specifically set out, could give you grounds for challenge if the clause is deemed to be sufficiently onerous.
  • Is the auto-renewal term clear and unambiguous? For example, does it specify clearly the means by which you should give notice, and what the deadline is for doing so? Bear in mind that the hurdle will be set high for proving that the wording of the auto-renewal clause creates confusion, and the onus will be on you to clear it.
  • Are there any grounds for termination based on poor performance? For instance, is the software you have contracted for defective? Is the service you have subscribed to deficient or unreliable in any way? Does the performance you are receiving not match up to what you have been promised in the terms of the contract, even if these are only implied terms? This might provide grounds for terminating the contract under those terms, thereby letting you off the hook of the auto-renewal.

Affected by auto-renewals: what practical steps can you take?

We often have clients who have found themselves unexpectedly facing an invoice for a further term, often when the service is no longer needed or inadequate. In those circumstances, we usually have to look at performance issues that need to be resolved, and for issues with the term being incorporated or overly onerous, as the auto-renewal mechanism itself is usually permitted under English Law.

On a practical level, you should make sure that you read contracts thoroughly and check the small print before you sign anything. Stress-test the clauses in your mind as to how they will affect your business in a worst-case scenario. And once you have signed any agreement that involves an auto-renewal clause, ensure that the auto-renewal notice dates are diarised and managed centrally within your business.

If there are any issues with performance, then make sure these are flagged when they arise; often businesses raise issues with performance when disputing an auto-renewal, and this can look like  a deliberate ploy to avoid the effect of the auto-renewal – so raise poor performance when it occurs, clearly and in accordance with the dispute resolution terms laid out in the contract.

The bottom line is that, with auto-renewals as with so many other aspects of the law (and indeed life itself), an ounce of prevention is much better than a pound of cure.

Tammy Evans, Partner, Ignition Law, [email protected]