Avoiding the contract extension trap

The scenario usually goes like this. A school entered into a contract a few years back - very often for a 'software as a service' arrangement, but almost always for an 'arm's length' service. The contract was a three year contract, and the school expected it to come to an end last month. But they've just received an invoice from the supplier for next year's services, and have been told that the contract has automatically extended for another year (or perhaps another three!). They have been told that if they didn't want the contract to automatically extend, they should have served notice to terminate a few months back, as described in the contract.

The question we're often asked is "do we have to pay - can we stop the extension?". Frustratingly, very often the answer is that the extension is enforceable, and the school is left trying to negotiate a costly exit with the supplier. Sometimes, the drafting of the contract (almost always on the supplier's standard terms) is sufficiently poor that we can find a way to undermine the extension. But more often than not the school is locked in to a contract that it no longer wants, even where it had very reasonably understood that their contract was limited to a fixed period.

How do you avoid finding yourself in that position?

We recommend the following:

• If possible, do not agree to the inclusion of 'automatic extension' provisions in your contracts. That's easy to say - in reality, very often suppliers of the sorts of services where these clauses appear do not entertain changes to their standard terms. But look out for the clauses even if you can't amend them - focus on the provisions which describe the term of the contract, together with the termination clause (as well as, of course, reading through the contract more generally).
• If your contract does have an automatic extension mechanism, and you can't negotiate it out, be careful to diarise the point at which you will need to give notice to terminate in order to avoid the extension. Bear in mind that people move on, so make sure it's diarised somewhere centrally and can be picked up by colleagues in good time.
• If you are concerned that you might have contracts that could trip you up, it would be worth you carrying out a quick audit of your contracts. This will allow you to identify those with automatic extension clauses, and make a diary note to bring them to an end in good time if you need to.
• When you do serve notice to terminate, be really careful to make sure that your notice complies - to the letter - with the requirements of the contract. Your contract will probably contain detail describing how to serve notice, where it should be sent, and when it is 'deemed' to have been delivered. You must comply strictly with those requirements - even if they seem unnecessary. If the contract requires notice to be delivered only by first class post, then sending notice by e-mail will almost certainly not be effective. The supplier will very likely be within their rights to wait until the notice deadline has passed, and then inform you that the contract has extended - despite your e-mail.

These clauses can be costly and can often seem very unfair - but our experience is that they catch a lot of schools out. However, provided that you keep an eye out for them and are aware of what you are signing up to, and how to manage them, you should be able to avoid the worst of their effects.

If you have questions about auto-renewal provisions or need help negotiating or managing your contracts, please get in touch with Ed Rimmell or Charlotte Williams in our Commercial team