Are Autorenewal Contracts Legal?
An autorenewal contract gives your company many advantages in a competitive market. The use of subscription services has increased significantly over the last few decades, and automatically renewing contracts is a major part of that industry. The question is, though: Are autorenewal contracts legal? The answer is yes, but these autorenewal agreements are subject to many federal and state laws designed to protect consumers. You must follow and navigate these laws to ensure your contracts remain enforceable.
What are autorenewal contracts?
Autorenewal contracts are contracts that renew automatically if certain conditions occur or if they are not canceled. These provisions are very common in subscription-based services and within the software industry but are utilized by all kinds of companies. These agreements continue without action by either party and automatically renew for the renewal period specified within the contract. This can help avoid a requirement to renew a service you wish to continue on an ongoing basis.
These contracts contain automatic renewal clauses—commonly called “evergreen” clauses. It is a clause that is automatically extended, without amendment, year over year unless a party provides notice that it is not to be renewed. This is just one example, as many other provisions could effectuate an autorenewal contract as well. This puts a duty on the customer to end the contractual relationship if they want it to end. Otherwise, the contract will automatically continue into the next renewal period.
Other renewal options
Autorenewal contracts may use other methods to automatically extend the contract term. These include, but are not limited to:
- Required notice: With this method, renewal occurs if the parties take some action to renew the agreement. This form of autorenewal requires notice to renew the contract but makes the process simpler by preventing renegotiation of the contract terms. This is an easy way to retain the original contract language and save money in business transactions.
- Renewal proposal: A contract may specify a renewal proposal to occur by a specified date to continue the terms of the original agreement. This allows the parties to renegotiate particular terms if they wish while still retaining the bulk of the original agreement.
- Right to renewal clause: A right to renewal clause allows a customer an extension of their contract to complete ongoing negotiations. This is typically a short period to provide flexibility to the parties as they determine how to move forward in their contractual relationship.
How renewal and cancellation work
When using autorenewal contracts, it is important to know how to renew or cancel an agreement. Your business can utilize autorenewal agreements both ways. You can use them with your customers to help with retention and for cost-saving purposes. You may also use them for the software or services you need from other providers.
Autorenewal contracts are canceled based on the specific language of the contract provision. This typically requires notice to the provider that you wish to terminate the contract moving forward. Most provisions require this notice to occur within a specific time of the renewal date.
Failure to provide proper notice will likely result in the automatic renewal of a new contract term. The length of that term will depend on the language of the contract. Some contracts may specify other requirements of cancellation, like:
- Return of equipment or software
- Specific parties to whom notice must be given
- The form of the notice (email, signed letter from an officer, etc.)
- Effect of late cancellation notice
Renewal is typically much simpler. If the signee does nothing, the contract renews and the contractual relationship continues. This is one of the many benefits of an autorenewal contract.
Are autorenewal contracts legal?
Autorenewal contracts are legal and can be enforced in court. They are subject to certain requirements and state law may vary on what an autorenewal contract must contain to be enforceable. The enforceability of these provisions differs based on the contractual relationship of the parties. This primarily hinges on whether the contract is between two business entities or whether it is a consumer relationship.
Business to business contracts
Autorenewal contracts are routinely enforced between two businesses. Commercial agreements with autorenewal clauses are extremely common. When two businesses agree to a contract, they do so on an equal footing. Each is a sophisticated entity that has the chance to review the agreement and make informed choices. Each business has the opportunity to have an attorney or legal team review the agreement to ensure their rights are protected.
Courts also typically enforce these provisions when one business did not cancel the autorenewal within the specified period. If clear contract language is used, and one business fails to follow that language, the agreement will likely be enforced. This automatically extends the term of the agreement as well as the other contractual obligations. (Read this article on how to fight autorenewal chargebacks.)
Business to consumer contracts
Business to consumer contracts are scrutinized more intensely. Consumers are not typically on equal footing with a large business, and autorenewal provisions may be considered unconscionable when they are handled improperly. States continue to increase protections for consumers that face autorenewal contracts.
For example, the State of California passed A.B. 390 on October 4, 2021, to amend the autorenewal law to further protect consumers. It requires that companies:
- Provide specific methods to cancel subscriptions or autorenewals
- Provide notice of upcoming renewal after a free or discounted trial of a product or service
- Provide reminders for autorenewal periods of one year or longer.
Many other states have similar protections in place for consumers subject to autorenewal contracts, including Delaware and Illinois.
How do I create an enforceable autorenewal agreement?
Creating an enforceable autorenewal agreement is much simpler with effective digital contracting software. To help ensure enforceability of autorenewal contracts, companies should utilize these best practices:
- Disclose material terms: Companies must disclose the material terms of their autorenewal contracts, including the total cost, contract term, billing information, and the existence of the autorenewal term provision.
- Clear and conspicuous: The notice of the autorenewal provision should be clear and conspicuous to all readers, including consumers. The text of the provisions should be easy-to-read and properly labeled. Some states may even require an all-caps provision in a conspicuous location.
- Disclosure before agreement: The disclosure of the autorenewal contract term must occur before the signee signs the agreement. For example, if a customer is using a clickwrap agreement, the notice of the automatic renewal should occur before the customer hits “I agree.”
- Affirmative consent: An autorenewal agreement should require some affirmative action the signee must take to accept the agreement. Businesses should avoid pre-checked boxes or browse-wraps, as these are commonly unenforceable.
- Make cancellation easy: Courts do not like companies that make the cancellation process overly burdensome. Consumers should easily be able to choose to cancel and be able to do so without difficulty.
Legal requirements for autorenewal contracts differ from state to state, so it is still important to have your company’s legal team create a compliant agreement.
Advantages and disadvantages of autorenewal contracts
There are many reasons to use autorenewal contracts as part of your business, but there are some drawbacks as well.
Disadvantages of using autorenewal contracts may include:
- Inflexible terms: Unless the parties renegotiate, the terms of the agreement will remain the same once the contract automatically renews. This may not be ideal if changes need to be made.
- Volume of contracts: High-volume contracting can make autorenewal contracts difficult to track if you are using unsophisticated software. This problem is easily solved with software that helps you track the entire contract lifecycle.
- Lock-in: Once the automatic renewal deadline passes, both parties are locked into the contract. This may be a disadvantage if you wanted to end the contractual relationship but missed the deadline.
Advantages of utilizing autorenewal agreements include:
- Easier forecasting: You can better predict the number of customers utilizing your services or products. This makes it easier to forecast revenue.
- Less service interruption: Automatic renewal means the services continue without interruption. This benefits both parties to the contract.
- Less friction: There is no paperwork or annoying bureaucracy to deal with, the contract simply renews unless someone cancels it.
- Better revenue capture: The vendor is better able to guarantee another year of revenue without using the Sales team or employee hours to retain the income.
- Less negotiation: Contract negotiations are tedious, time-consuming, and often expensive. With autorenewal contracts, you can save this time and money but still retain the benefit of the bargain.
- Avoid chargebacks: Chargebacks occur when a customer asks for money back from a charge on their card. Chargebacks can be burdensome to companies, but an effective autorenewal contract may help you fight back.
Using autorenewal contracts for your business
So now that you know the answer—yes—to the question, “Are autorenewal contracts legal?” you may be ready to take advantage of some of the many competitive advantages these contracts can offer your company. With autorenewal contracts, you can better retain customers and make more accurate predictions about future revenue.
And when you follow applicable federal and state laws, you can ensure these agreements are enforceable. Effective contract management software helps you meet these requirements and effectively track your signed agreements, including tracking renewal dates.
- What are autorenewal contracts?
- How renewal and cancellation work
- Are autorenewal contracts legal?
- How do I create an enforceable autorenewal agreement?
- Advantages and disadvantages of autorenewal contracts
- Using autorenewal contracts for your business
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.