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February 21, 2023

Cross-Border Update

Q1, 2023—"Beware the Automatic Renewal Provisions in Contracts With US Companies"

We are seeing more and more contract disputes involving automatic renewal provisions in contracts. The disputes involve business contracts. In New York State, some of these contracts are regulated, but in many states they are not. When entering a contract with a US-based company, whether a supplier or a vendor, it is imperative that you closely examine the termination and renewal provisions of the contract for automatic renewal provisions and the choice of law provision to determine which state’s law will be applied to the contract.

In New York State, General Obligations Law 5-903 (GOL 5-903) applies to contracts relating to service, maintenance, or repair to or for real or personal property. That covers a lot of ground. And even though statutes that regulate automatic renewal provisions are often intended as consumer protections, GOL 5-903 is not limited to consumer contracts. The statute specifically states that individuals, firms, companies, partnerships, and corporations are included in the universe of those that GOL 5-903 covers. Here is the text of this short statute:

  1. As used in this section, “person” means an individual, firm, company, partnership, or corporation.
  2. No provision of a contract for service, maintenance, or repair to or for any real or personal property which states that the term of the contract shall be deemed renewed for a specified additional period unless the person receiving the service, maintenance, or repair gives notice to the person furnishing such contract service, maintenance, or repair of his intention to terminate the contract at the expiration of such term, shall be enforceable against the person receiving the service, maintenance, or repair, unless the person furnishing the service, maintenance, or repair, at least 15 days and not more than 30 days previous to the time specified for serving such notice upon him, shall give to the person receiving the service, maintenance, or repair written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract.
  3. Nothing herein contained shall be construed to apply to a contract in which the automatic renewal period specified is one month or less.

As you can see, the key requirement in New York is that notice of the upcoming automatic renewal must be sent by the person claiming that the contract automatically renews (Reminder Notice). If the Reminder Notice is not sent, the automatic renewal provision is unenforceable. This requirement makes sense. It eliminates the inadvertent failure to terminate the contract. Unfortunately, we are currently handling cases in which the automatic renewal provision is being asserted against New York companies that signed contracts designating another state’s laws as controlling the contract.

Importantly, because many other states do not have the requirement of the Reminder Notice, Canadian companies should also examine their contract with US companies for choice of law provisions. For example, even if an Ontario company has created a New York company, and even if the New York company signs the contract with a service provider (e.g., NetSuite), the service contract may designate the laws of a state other than New York as the controlling law with respect to the contract. It is common for the entity that drafts the contract to insert a provision in the contract that designates that entity’s home state as the controlling law (and, for that matter, where disputes are to be resolved).

Depending on which party has leverage, provisions such as choice of law or automatic renewal can be successfully negotiated. For example, if a state, such as Ohio, does not have a Reminder Notice law and the Ohio service supplier insists on an automatic renewal provision, you may be able to negotiate the insertion of a contract clause requiring a Reminder Notice. A contractual Reminder Notice provision would be enforceable even in states where the Reminder Notice is not required by law.

We strongly recommend against any kind of automatic renewal provision. Our view is that the parties should be able to make a fully informed decision as to whether they want to continue to do business with each other rather than be surprised into another term of a contract they no longer want to be in. This recommendation is not intended to discourage contract clauses that give one side or the other the option to renew, such as when a tenant has the option to renew the lease for another term. However, option to renew provisions should be fully understood, because they often come with new requirements (such as rent increases), and should only cautiously be entered into.
 

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