A New Twist on Automatic Renewal Provisions

A recent lawsuit in New York focused on automatic renewal within the state. While not all states have auto renewal statutes it’s likely that many are considering such laws. Every properly worded alarm contract will contain an automatic renewal provision, and all that I have read are fairly similar, providing that “. . . and this agreement will automatically renew for [like term] [for additional five years] [year to year thereafter] month to month . . .

New York permits automatic renewal but places a heavy notice burden on the supplier of the service before the renewal will be enforced. Failure to comply with the notice requirement renders the renewal term cancelable at will. Notice needs to be by personal delivery or Certified Mail within a 15-day window. No alarm companies in New York that I know of comply, yet all rely on the automatic renewal. I should note that those using the Standard Form Agreements (which are most alarm companies by the way) are exempt from complying because the statute does not pertain to month-to-month renewals.

In the recent case, the plaintiff installed and serviced ATM machines and received a fee for each transaction. The agreement, signed July 2002, was for five years and renewed for five-year periods. The defendant decided to terminate in December 2012, which was six months into the latest renewal period. The plaintiff sued and the defendant defended based on New York’s auto renewal statute, GOL 5-903 that no notice had been given of renewal. The judge agreed and the case was dismissed.

Here’s what caught my attention: This “automatic renewal” provision does not read like the ones we see in alarm contracts, but the distinction I see does not appear to have been raised in the judge’s decision. You don’t see the familiar words “will automatically renew” in the contract. Rather, this contract gives the service provider the “option, in its sole discretion, to extend this agreement for additional periods of five (5) years each.” That right to exercise an option to extend the agreement is not, in my view, an automatic renewal provision.

We don’t have the contract in the decision so we don’t know whether there is anything in the contract that deals with how or when the option is to be exercised. We do know that the next sentence in this poorly drafted document provides: “[Defendants] agree that any changes in processing or an early termination of the processing service with [plaintiff] will cause lost revenue due to extended warranty purchases, repairs and/or any upfront cost.” This attempt by the drafter of the document to fix damages fails because there is no measure of damages fixed or formula by which to calculate damages.

Clearly, the judge and apparently the lawyers considered the renewal option as an automatic renewal. The statute by its terms applies to contracts where “. . . term of the contract shall be deemed renewed for a specified additional period . . .” Apparently no one notices that the contract in this case was not deemed to renew, but the service provider had to exercise an “option, in its sole discretion, to extend this agreement . . .”

All I can say is that I didn’t draft this contract and I wasn’t hired to enforce it. You have a choice who your attorney is; choose wisely, my friends.

The opinions expressed in this column are not necessarily those of SSI, and not intended as legal advice.