How To Properly Set Up A Contract That Automatically Renews?

The renewal of contracts is subject to the nature and purpose of the business. 

If you are looking to test the waters with a new client or vendor before making a long-term commitment, you may or may not want to have a contract renewal clause.

On the other hand, if you are convinced of the capabilities of the involved parties and you are up for a long-term engagement, automated contract renewals will free you from the need to track dates on your calendar, let alone spare you from going through all the tedious paperwork. 

Keeping this as the core of thus article , we discuss below how to properly set up a business contract with an automated renewal clause.

This article will help you understand the perks of auto-renewing while outlining ways to do it. .

Evergreen Contracts: What does that mean and what are its advantages?

“Evergreen Contracts” are contracts that get renewed automatically at a certain time or date if certain conditions are met . 

In other words, contracts that renew in the absence of legal notice on its own are termed as evergreen contracts. 

The clause that lies within such contracts is generally referred to as the evergreen clause.

Here is an example - “This agreement is evergreen and shall be renewed every 24 months. 

If any of the parties decide to cancel the contract, it should be presented in writing by either of the parties, fifteen days prior to the upcoming renewal date".

Moving ahead, we see the benefits of having an auto-renewal clause in your contract.

The first and most important benefit of having an autorenewal clause is the predictability of its repeated need. 

Consider that the parties enter into an arrangement when one will ship products to the other. 

With auto-renewal contracts, both the parties have this assurance that they are working together until one purposely ends the agreement.

Also, auto renewal contracts eliminate negotiations. Until the contract ends, it is renewed. It implies that neither of the parties would make amendments to the clause. 

One thing to note here is that a notice period should be included if one of the parties wishes to end the agreement. Without that, no party can break the clause.

The best way to create auto-renewing contracts

The most preferred way is to insert a clause on auto-renewal in your contract.

Adding the clause

The best way is to introduce the clause within the contract. The standard format of the auto-renewal clause is:

This agreement shall have an initial term of two years from the effective date. Upon expiration of the initial term, this agreement shall automatically renew for a period of one year.

Once you have added the clause, communicate the same to the other parties, and ensure effective onboarding. 

This will keep all of you on the same page, eliminating the possibility of disagreements in the future.

Adding the clause further ensures that you are well aware of the presence of such a thing and that you abide by the legal obligations that come along with it.

The key terms related to auto-renewing or evergreen contracts

When creating a legal contract, with or without the auto-renewal clause, there are a few terms that you must know.

Auto-renewal clause: A clause that signifies the contract renewal, if the contract is not closed by any of the parties in the duration mentioned for cancellation in this clause.

Termination/cancellation: To purposely end the agreement.
Open Period: The tenure of the agreement.

Breach: Acting in a way different from what is agreed upon in the contract.

Expiration: The day when the agreement ends and is due for renewal

The above helps you better understand and find the clause.

The Final Word

Adding the auto-renewal clause within your contract is a decision you make when signing up for a deal.

It is known that auto-renewal of contracts has its share of disadvantages and if the same is not emphasized, it would lead to a problem.

Hence, it is important to first know whether you want such a clause. If yes, then you have to add all of the terms and conditions relevant to the same. 

Whether the contract renews with the same conditions or is it subject to negotiations, etc. 

Everything must be thought about and then etched in the legal contract. Failing the above, you might face legal action.

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