Terms and Conditions Apply – The Rolling Contract

Alchemists sought to turn base metal into gold, but their searches and efforts proved fruitless.  Physicists have studied the cosmos and determined that there can be no perpetual motion due to the laws of thermodynamics. Lawyers, however, have worked out how to turn base letters into gold, through the perpetual (or at least rolling) contract.

A typical complaint made by non-lawyers when reading contract terms will be that they are all “small print” and written in “legalese”. Contracts are typically drafted by lawyers, to be understood by lawyers with legal certainty in mind, rather than with the aim of being usable or understandable by those who are actually reading or signing them. Despite this, it is essential that anyone in private practice do, as those who sign without reading or understanding may fall into a number of pitfalls.

This article is concerned with one trap for the unwary, concerning how long the contract is going to last. This is sometimes called the “term” or “duration” of the contract.

A query which can arise from clients, concerns contract renewal clauses, whereby they have found suppliers informing them that they are stuck with contracts that they no longer want or require for a further period. Buried in the contract may be terms which, if not appreciated at the outset, may come as a surprise and mean that a contract lasts much longer than you expected.

In particular, these queries arise in relation to what may be called “rolling contracts” or “auto renewing contracts”, also known as contracts with “evergreen” clauses. These contracts are typically entered into for a fixed period.  For example, you may wish to contract with a supplier for the provision of advertising services for 2 years.   You may forget about this contract over the next 24 months, but decide to try a new supplier at the end of the 2 years.  However, if the original contract contained a provision which provides for the contract to automatically renew for a further period, you may (unless notice has been given in the right way) be stuck with the old supplier.  In the worst case, you may be stuck with the old supplier, and have entered into a contract with the new supplier.

These clauses are found in a huge variety of contracts and can catch out practitioners whether acting as single consultant, or in contractual groups or corporate structures.

The precise terms of such clauses vary from contract to contract. Typically, they provide that if no notice is given by a specified time before the expiry of the first term (for example three months before the expiry date) then the contract shall automatically roll on for a period. These clauses provide for certainty of ongoing terms without the need for new contracts to be entered each year, and provide certainty for the supplier and provider on which they may plan for the next years business (provided no notice has been given). Whilst these are the basic justifications for such terms most of us will have some experience of such contracts (and their potential pitfalls) from the perspective of a consumer, for whom they have not always proved popular.

Unfair contract terms are what they say on the tin; terms, or clauses, in contracts which are deemed to be unfair, and so are unenforceable in the courts. When such terms arise in the business-to-consumer relationship, protection for the consumer can be found in legislation[i].  The latest guidance on consumer protection indicates that, for consumers, automatically rolling over contracts may be unfair, unless the contracts contain protections.

However, when businesses contract between themselves, the law largely takes the view that they are “the best judge of the commercial fairness of the agreement which they have made, including the fairness of each of the terms of that agreement”[ii]. The view of the law is that commercial parties should be sufficiently prudent to either read and understand what they were signing up to, or have sought advice. Unfortunately, too few people necessarily read the terms they sign, or (if not understood) seek legal advice. Despite this, the position remains that if a business did not take steps to understand the terms of the contract, they should have, and the terms and conditions will therefore apply, with very few exceptions[iii].

When a small business contracts with a much larger business, they can feel powerless to negotiate the terms of the contract. For consumers, this would attract legislative protection but for small businesses, no such protection is available. Whilst other jurisdictions have sought to address this imbalance in business-to-business (B2B) contracts[iv], the UK is yet to adopt such an approach.

Limited protection against some unfair terms between businesses is found in legislation. This is available where businesses have not negotiated the terms of the contract, and instead have contracted on one business’ standard terms[v]. In these circumstances, provisions of contracts limiting liability, or permitting a defaulting supplier to either perform no or different services to that contracted for, will be subject to a test of “reasonableness”[vi]. However, an auto-renewal clause would not be caught by this requirement.

Research by the Federation of Small Businesses (FSB) in 2016[vii], found that 24% of respondents had suffered from the negative consequences of rolling contracts, resulting in businesses either being tied into lengthy notice periods (22%), or having to pay high early termination fees (20%) to end the contract. The FSB’s research found that, on average, B2B “unfair” contract terms had cost the UK’s small business community an estimated £1.3bn per annum.

It is important that businesses review the contracts they sign up to, as businesses are generally held to the contracts that they make.  Clauses providing for automatic renewal are just one of the potential traps which can be buried in the text of contracts.  In practice, such traps, once noted, are easily avoided simply by the giving of notice in the right way.  Unfortunately, those who do not read the small print, or take action having read articles such as this, may find themselves in difficulty.

[i] Consumer Rights Act 2015, Consumer Protection Act 1987 and the Supply of Goods and Services Act 1982 to name a few.

[ii] Watford Electronics v Sanderson [2001] 1 all ER (Comm) 696, Chadwick LJ

[iii] Some exceptions do exist, for example where a party seeks to exclude liability for death or personal injury as a result of their negligence, the contract term will not be effective.

[iv] In November 2016, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 came into effect in Australia and extended their consumer protection laws to cover small businesses.

[v] s3(1) Unfair Contract Terms Act 1977

[vi] s3(2) Unfair Contract Terms Act 1977

[vii]Treating Smaller Businesses Like Consumers: Unfair Contract Terms”, FSB, August 2016, available at: https://www.fsb.org.uk/docs/default-source/fsb-org-uk/treating-smaller-businesses-like-consumers–survey-summary-final.pdf?sfvrsn=0