The pitfalls of auto renewal

Introduction

In a challenging financial environment, you will want to be sure you are maximising value for money from your service providers – whether you are purchasing as consumers or businesses. A procurement review may suggest you can do better elsewhere, and yet when you look through your contract for your termination right, you find you have no exit barring a serious breach of contract by the supplier that can’t be remedied.

One of the chief bars to an effective procurement review is likely to be the auto renewal clause buried in the small print; these are very common if not the norm in services contracts. From a supplier’s point of view, the advantage of an auto renewal clause is that they offer the customer only a brief window of escape once a year; miss that, and he is locked in for another year giving them certainty on revenue streams.

What does an auto renewal clause look like?

The Order Form, Statement of Work, or the SLA, might say:

This agreement is for a period of 12 months (Initial Term)

So, you might think that 12 months is the fixed term; perhaps you are in month 11, and will be able to exit in a month’s time.  However, you check the supplier’s Ts & Cs and find something like this:

… Unless terminated earlier in accordance with clause [Breach clause] this agreement continues for the Initial Term and automatically extends for a further 12 months (Extended Term) at the end of the Initial Term and at the end of each Extended Term unless either party gives notice to the other at least three months before the end of the Initial Term or the relevant Extended Term, to terminate this agreement at the end of the Initial Term or the relevant Extended Term, as the case may be.

So, you are locked in for another 13 months.

Consumers are better off

Consumers are better off than the business customer when it comes to auto renewal.  Following the Citizens Advice Bureau’s “super complaint” to the CMA (Competition and Markets Authority) about loyalty penalties in 2018, the CMA set out the principles that suppliers should follow with consumers:

• People must be able to exit a contract at least as easily as they can enter it
• Auto-renewal should generally be on an ‘opt in’ basis upfront, and include a clear and prominent option without auto-renewal in most markets
• Exit fees should not be used after any initial minimum/fixed term
• Auto-renewal onto a fresh fixed term should not generally be used
• Customers must be sufficiently informed about the renewal and any price changes (through sufficient notifications) in good time
• Switching should generally be managed by the gaining supplier so that customers do not have to contact their existing supplier if they want to move

In 2026, the Digital Markets, Competition and Consumers Act 2024 will come into effect with new rules on the pre-contract information that suppliers must give consumers, detailing their termination and cancellation rights.  The Act will set out detailed requirements on when the supplier must send renewal reminder notices to consumers, what information the notices must contain, how they must be presented and how far in advance of renewal they must be given.

Businesses have no such protection

Meanwhile, the business customer has no such protection, and can expect the courts to uphold the auto renewal.  Where commercial parties are concerned, a fundamental building block of the English common law is that parties have a general freedom to enter into legally binding agreements and formulate individual terms within such an agreement.

As long as the supplier Ts&Cs have been provided to the customer before the contract is signed, the customer is bound by the auto renewal clause.  Suppliers are under no obligation to provide any reminder to their business customers about the renewal, or the notice period requirement to avoid it.

What can you do?

The prevention is as always far better than the cure.  If you are signing up with a new supplier, always check the Ts&Cs to see whether there is an auto renewal clause.  If there is:

• Try to get it expressly removed in the Order Form, or Statement of Work, and
• Make sure the Order Form says that it takes precedence over the Ts & Cs in the event of conflict.

If you cannot negotiate this, then you must diarise your window to serve notice – e.g. if the clause says that notice must be served at least 3 months before the end of the term to escape renewal, then make a diary note for 4 months before to ensure you do serve that notice if by that stage you want to switch suppliers.

Conclusion

When trying to terminate, remember to check the notices clause!  Another bear trap for unwary customers will be an ineffective notice, that has not been served in accordance with the notices clause which is typically found at the end of the Ts&Cs.  For example, it might look something like this:

A notice given to a party under or in connection with this agreement shall be in writing and shall be delivered by hand or by pre-paid first-class post or other next working day delivery service at its registered office address.

If you do send your notice at the right time, but you don’t comply with this requirement, for example you send it in the form of an email to your account manager, then your notice will be ineffective, and you will be locked in for another 12 months.

If you are already in the agreement, then unfortunately you are bound and will have to wait until your next opportunity to serve notice; again, it is essential to diarise well in advance, and if in doubt, check with your lawyer that your notice complies with the contract and is effective.  And keep a copy when you send it!