Auto-renewal clauses promise to set your contracts on autopilot, ensuring a recurring revenue stream.

But are there hidden costs underneath "set it and forget it" contracts?

This guide discussed automatic renewal clauses, potential pitfalls, and mitigation strategies to protect your business from lawsuits.

What is an automatic renewal clause?

An automatic renewal clause states that a contract will automatically renew unless one of the parties provides prior notice to discontinue the partnership. Such clauses are used in recurring contracts such as house leases, vendor agreements, subscriptions, and memberships.

An auto-renewal clause specifies the length of the subsequent renewal term, the notice period required for termination or non-renewal, and any other conditions that may apply.

For example, if, in contrast, there is a provision stating that “the contract will renew next year automatically, unless one party provides a written notice of termination at least 30 days before the current term's expiration date,” in this case if the party fails to terminate the contract, they may get stuck in another renewal cycle.

Also Read: Contract Renewal Process: Strategy + Best Practices

The importance of an automatic renewal clauses

Autorenewal or automatic renewal clauses ensure that services and contracts renew automatically, preventing interruptions. They save time, reduce costs, and provide financial stability. Knowing the importance of these clauses helps in making informed decisions and maintaining smooth operations. Let's explore why autorenewal clauses are essential.

#1 Delivering essential goods and services without interruption

This is particularly important if you deal with the logistics of goods and services. Automatic renewals mean your subscriptions or services continue without the need for manual renewal, which you might overlook.

#2 Maximizing time and cost efficiency in contract renewals

Automatically renewing a contract saves you the time and resources that would otherwise be spent renegotiating or signing a new agreement. This benefits both parties in a long-term relationship, reducing the administrative burden for businesses and the hassle for you.

#3 Securing revenue stability for strategic growth

For businesses, autorenewals provide predictable cash flow, helping to stabilize revenue and financial planning. Consistent revenue streams from automatic renewals enable businesses to forecast their financial status more accurately, plan for future growth, and invest in improvements or expansions without the uncertainty of fluctuating income.

#4  Enhancing customer loyalty and lifetime value

Autorenewal clauses can help businesses maintain a steady customer base by reducing churn. You are more likely to continue using a service if it renews automatically, rather than having to actively renew your subscription. This passive retention strategy can lead to higher customer lifetime value and stronger customer relationships.

#5 Simplifying renewal management for all parties

Both businesses and consumers benefit from the reduced complexity of managing renewals. For businesses, it simplifies billing and reduces the likelihood of service interruptions due to lapses in contract terms. For you, it means continued access to services without the need to remember renewal dates and go through the renewal process manually.

#6 Reducing risks and disputes with clear contract terms

Clear terms in an autorenewal clause can help avoid disputes by setting expectations for the renewal process, notice periods, and any applicable fees or conditions. By outlining these terms explicitly, both parties understand their obligations and rights, reducing the potential for conflicts or misunderstandings.

Also read: How to Resolve Contract Disputes - SpotDraft

Understanding the risks of automatic renewal clauses

Automatic contract renewal clauses, while beneficial, come with certain considerations that must not be overlooked. From unexpected expenses and legal repercussions, automatic renewal clauses can pose significant risks for businesses and customers alike.

#1 Unplanned financial commitments

Autorenewal clauses can lead to unexpected financial commitments. If a party is unprepared for the renewal and fails to cancel in time, they may be obligated to continue paying for goods or services they no longer require. This culminates in unnecessary expenses, with negative impacts on budgeting and cash flow.

#2 Inability to adapt to changing circumstances

Business needs, economic conditions, and industry trends are constantly changing. However, if automatic renewal clauses do not account for these changes adequately, parties can be locked into agreements that no longer align with their current objectives.

#3 Loss of flexibility and control

Autorenewal clauses limit a customer's ability to opt out or make changes to their subscription or service agreement. This lack of flexibility can be frustrating for consumers who may want to switch to a different provider, scale down their subscription level, or simply discontinue the service. As a service provider, you may also find it challenging to adjust pricing or terms in response to changing market conditions.

#4 Customer dissatisfaction and negative reputation

Autorenewals can sometimes be controversial and not sit well with customers, especially when they do not intend to renew. When customers feel trapped in a contract they no longer wish to be a part of, they're bound to feel negative about it and possibly dissuade others from doing business with the company.

#5 Compliance and legal issues

Contracts are created in accordance with specific legal and regulatory standards. These are also constantly evolving alongside the ever-changing business ecosystem. Thus, when automatic renewal clauses are left to trigger an extension of partnership without proper compliance checks, parties could fall into non-compliance and face legal consequences.

Also Read: Tracking Contract Compliance: Best Practices + Tools

How to mitigate risks associated with automatic renewal clauses

“Get in fast, flag the biggest risks, manage those risks, and move on to the next thing.”

~Jonathan Franz, Head of Legal, Crunchbase
Navigating Economic Turbulence and Thriving in Chaos‍

To deal with the consequences of automated renewal clauses, the right mitigation strategies are crucial. Some of the most proven ones include:

#1 Thoroughly review the automatic renewal clause

The first step to making an automatic renewal clause safe for business is to closely examine it. Dissect its language and ensure the terms and conditions pertaining to renewal are transparent and well-understood by all. This may include details about the required notice periods for cancellations, renewal fees, or any limitations on the right to terminate the contract at any point.

If you find any potential pitfalls or unfavorable terms, ensure you renegotiate them before committing to the contract.

#2 Establish clear notice and cancellation procedures

Notice periods and cancellation procedures are the major causes of disputes related to automatic renewal contracts. Setting a clear and reasonable notice period ensures that customers are informed ahead of time before a renewal takes place, so they have sufficient time to evaluate certain variables and make informed decisions. Also, it ensures that customers are aware of the need to inform their service providers ahead of time if they wish to refrain from renewing a contract upon expiry.

Additionally, you should ensure that the contract contains convenient cancellation procedures alongside accessible communication channels. This ensures that the chances of getting trapped in a renewal cycle are substantially minimized.

“I’ve often faced clients complaining about how they end up renewing unwanted contracts because nobody told them whether the contract was supposed to be terminated. I recommend SpotDraft to them because it allows you to set up renewal reminders weeks ahead of the last date of contract.”

~Mohammad Moiz, Vice President, Customer Success, SpotDraft

#3 Implement effective recordkeeping and tracking systems

Managing multiple contracts puts you at a higher risk of getting caught in automatic renewals, especially when your contracts are siloed in different departments and disjointed storage systems.

Fix your recordkeeping to ensure you stay on top of renewal dates and deadlines. One way to do that is to consolidate your contracts in a centralized location so you can easily access and track them.

Also, set reminders for upcoming renewals and record all interactions and contract modifications from the execution to renewal.

To make the process even smoother, use a Contract Lifecycle Management (CLM) platform like SpotDraft. It helps you

• Manage all your contracts in a secure and searchable cloud storage 
• Set automated reminders to keep track of important dates
• Establish an audit trail that monitors changes throughout the contract's lifecycle

By following an organized approach to contract management, you can track renewal dates, terminate contracts on time, and save time and resources.

#4 Maintain transparency and healthy communication

Half of the issues associated with automatic contract renewals can be solved through transparency and healthy communication. It strengthens trust between contracting partners and opens the door for more business opportunities.

To boost communication and maintain transparency, follow these tips:

• Ensure your partners are proactively informed on upcoming renewals 
• Be transparent about renewal terms and any associated price changes.
• Establish reliable communication lines and respond promptly to customer inquiries and concerns.

All of this becomes even easier when you have a contract management system. It acts as a single source of truth for contract negotiation, reviewing, and maintenance. Through built-in collaboration features, you can invite stakeholders (both internal and external) and share updates without switching between multiple apps.

“Leveraging a CLM has been key because it has reduced a lot of friction from handoffs between legal and business. Rather than going back and forth over email, Slack, Word, Zoom, DocuSign, and a whole tech stack, the CLM acts as a single source of truth.”
‍~ Jonathan Franz, Head of Legal, Crunchbase
Navigating Economic Turbulence and Thriving in Chaos

#5 Evaluate customer satisfaction and retention

Your goal here is to identify ways to ensure your contract partners are happy to renew their contracts with you, and the best way to do this is to dive into data.

• Has there been any dispute regarding your automatic renewals? 
• What have customers complained about the most? 
• What percentage of existing partners churn before renewal?

You can get such information through surveys, direct communication, and your CLM analytics. SpotDraft, for instance, offers an analytics tool for various metrics to determine whether your customers are happy with your contracts.

Furthermore, ensure you optimize your renewal strategies according to data and feedback generated from this evaluation. That way, you’ll record more renewals and less churn over time.

#6 Take note of legal and regulatory requirements relevant to autorenewals

When dealing with automatic renewal clauses, it's essential to evaluate the legal requirements that may apply to your jurisdiction and industry. 

Get familiar with relevant consumer protection laws, including laws related to contract formation, notice periods, consent, privacy, and cancellation rights.

For example, businesses in many parts of Europe are subject to the Unfair Contract Terms Directive. This regulation renders your automatic renewal clause void and unenforceable if it causes a significant imbalance that’s detrimental to your consumer.

You must also ensure that you’re consistently up to date with the constantly evolving jurisdictional and industry regulatory landscape.

“Take inputs from legal heads of various jurisdictions. The more you talk to them, the better you understand changing laws and regulations.”

~Bhavna Singh, GC & DPO, Subex Limited
‍Elevating Legal: Fostering Transparency and Accountability in Large Tech Enterprises

Also Read: The Ultimate Guide to Contract Compliance

#7 Consider alternative renewal approaches

In some cases, especially in long-term business relationships, it may be beneficial to collaborate with the contract partner to figure out alternative ways of handling renewals.

You can start by assessing the suitability of manual renewals.

This largely depends on the nature and complexity of the contract, the customer's needs, and your organization's capabilities. Manual renewal approaches can benefit contracts such as professional service arrangements, Service Level Agreements (SLAs), and licensing deals that require ongoing collaboration, periodic assessments, and adjustments based on changing business needs.

Additionally, instead of engaging customers in long-term auto-renewal contracts, consider keeping them on shorter ones. This gives them more flexibility and allows them to reassess their needs and preferences more frequently.

Advantages of autorenewal clauses

Autorenewal clauses streamline operations, ensure consistent service delivery, and provide financial predictability. 

#1 Ensure steady cash flow and reliable financial planning

Autorenewal clauses help you manage cash flow better by ensuring a steady income stream. This consistent revenue can make your financial planning more accurate and reliable​​.

#2 Reduce administrative burden and frees up resources

By eliminating the need for repetitive tasks associated with manual renewals, autorenewals reduce your administrative burden. This frees up resources, allowing your team to focus on more strategic activities​​.

#3 Enhance customer experience and satisfaction

For your customers, autorenewals offer convenience by removing the need for manual renewals. This enhances their overall experience, leading to greater satisfaction and loyalty​​.

#4 Provide discounts and loyalty benefits for long-term customers

Many companies offer discounts or additional benefits for customers who opt for autorenewals. This can be an attractive incentive, increasing the likelihood of long-term customer retention.

#5 Strengthen vendor relationships with favorable terms

Maintaining long-term relationships with vendors through automatic renewals can lead to more favorable terms and better service. Vendors may offer discounts, better support, or other perks to clients who commit to long-term contracts.

#6 Improve inventory and supply chain predictability

Automatic renewals can help you manage inventory and supply chain more predictably. Knowing that certain contracts will renew helps you plan better and reduces the risk of overstocking or understocking​.

Limitations of autorenewal clauses

#1 Inability to adapt to evolving business needs

Business needs, economic conditions, and industry trends are constantly changing. Autorenewal clauses may lock you into agreements that no longer align with your current objectives or needs, limiting your flexibility.

#2 Loss of control over subscriptions and service agreements

Autorenewals limit your ability to opt-out or make changes to your subscription or service agreement. This lack of flexibility can be frustrating if you want to switch providers, scale down your subscription level, or discontinue the service altogether.

#3 Potential for customer dissatisfaction and negative experiences

Autorenewals can sometimes lead to customer dissatisfaction, especially if you did not intend to renew. Feeling trapped in a contract you no longer wish to be a part of can result in negative feelings toward the company and potentially harm its reputation​

#4 Compliance and legal risks with evolving standards

Contracts must comply with specific legal and regulatory standards, which are constantly evolving. Autorenewal clauses that do not meet these requirements can lead to non-compliance and legal consequences, posing risks for both parties involved​

What’s the difference between auto-renewal and evergreen contracts?

While auto-renewal and evergreen contracts share close similarities, they are fundamentally not the same.

An auto-renewal contract affects an extension of partnership for a specified number of times over a stipulated duration. Let's say you own a rental property you want to lease for an annual payment of $40,000. If you enter an agreement with a tenant to lease this property for four years, the lease contract will automatically renew every year for that stipulated duration unless the tenant offers a termination notice prior to the renewal, in accordance with your terms and conditions.

Here’s an example of an automatic renewal clause:

"This contract shall automatically renew for additional one-year terms unless either party submits a written termination notice at least X days before the end of the current term. In the absence of a termination notice, the contract shall be renewed under the same terms and conditions."

On the other hand, an evergreen contract is simply meant to run on autopilot until one party decides to call it off. This is common in joint ventures where two businesses remain in partnership indefinitely, as long as both parties remain satisfied and in a good relationship. When there's an intention to terminate an evergreen contract, the terminating party is required to give notice within a specified time ahead of the intended termination date.

Here’s an example of an evergreen clause:

"This contract shall remain in effect indefinitely until either party submits a written termination notice at least X days before the intended termination date. In the absence of a termination notice, the Agreement shall continue in perpetuity."

Are autorenewal clauses enforceable?

Autorenewal clauses are generally enforceable, but they must meet specific legal requirements to be valid.

#1 Yes, if the renewal terms are clearly and conspicuously disclosed

The renewal terms must be clearly and prominently disclosed in the contract. For instance, ABCmouse, an online learning company, faced significant enforcement action by the Federal Trade Commission (FTC). They were fined $10 million for automatic renewal clauses in their contracts that were not clearly disclosed, leading to consumer charges without explicit consent and a difficult cancellation process.

#2 Yes, if explicit consumer consent is obtained

The consumer must give explicit consent to the automatic renewal. Enforceability depends on compliance with local laws and clear communication of the renewal terms. If these conditions are not met, the clause may be deemed unenforceable, leading to legal consequences for the business.

#3 Yes, if simple and straightforward cancellation methods are provided

The contract must provide easy and straightforward ways for the consumer to cancel the renewal. For example, a clause stating, "This contract shall automatically renew for additional one-year terms unless either party submits a written termination notice at least 30 days before the end of the current term," ensures that the renewal terms are clear, requires explicit action to cancel, and sets a reasonable notice period for termination.

Track auto-renewal contract with SpotDraft

Keeping track of auto-renewable contracts is paramount to avoid legal ramifications. SpotDraft has an array of contract management features.

With its smart filtering and sorting feature, you can easily find auto-renewable contracts, add renewing dates, and get timely reminders. With its AI-powered contract editor, you can flag confusing terms to avoid future repercussions.

Want to see it in action? Click here to request a demo.