Discharge of Surety
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This article is written by Sparsh Chaudhary, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from Lawsikho.

Introduction

The following article deals with the nuances of B2B contracts. After going through the article, the readers would have a better understanding of B2B contracts and the procedure involving renewals of the same. However, before moving forward with the concept of automatic renewals in B2B contracts, it is imperative that we talk about the definition of a B2B contract. In simple words, a B2B contract means when a business obtains services of another business in order to achieve its goal, the transaction that takes place between both the businesses is known as business to business or B2B. For example, if today Reliance Industries Private Limited takes services of an accountancy firm to audit their business then the transaction between Reliance Industries Private Limited and the accountancy firm would be known as a B2B transaction or contract.

What is the meaning of automatic renewals?

As the name suggests, automatic renewal means when the contract gets another term on the same terms and conditions without taking the explicit consent of both parties. In common parlance, automatic renewals are also known as EverGreen clauses. It is advisable not to confuse between automatic renewals and evergreen clauses as they both aim at providing the same meaning or functioning to a contract. Therefore, it is safe to say that both these terms are interchangeable and hence both have the same meaning in the context of a contract. One might see that the concept of evergreen clauses is more mature and developed in foreign countries such as the USA and UK. However, nowadays the Indian law is also seeing a  surge of automatic renewals in the contracts between the business entities.

Since The Indian Contract Act validates the oral agreement between the parties, therefore, in a B2B contract, the automatic renewal clause can be invoked by the parties through their actions or words.

It is important to note that the automatic renewal takes place towards the end of a contract to extend the term of the contract for a certain period of time.

Netflix and other OTT subscriptions

Yes, you read it right. Netflix and other OTT platforms offer their subscriptions to the masses and I am sure that you people are not oblivious to the fact that their subscription gets renewed after the expiry of the subscription cycle that you choose. In other words, we have been getting into the automatic renewals contracts or agreements for quite some time now and these OTT platforms are the prime example of the same.

How are automatic renewals included in B2B contracts?

Since we are done with the meaning of automatic renewals it is now time to discuss how this clause can be incorporated into the contract.

We already know that there are two types of contracts: 

  1. Oral contract. 
  2. Written contract. 

When we talk about the oral contract it is true that the Indian Contract Act validates the oral contract however, it is a task to make it enforceable before a court of law. But as the name suggests, the automatic renewal clause can be included by the parties to the contract by merely agreeing to the automatic renewal clause. But now, in present times, people are very much aware of the downsides of an oral contract and therefore nowadays only a handful of people get into this kind of contract and most people choose to get into a written contract to get some kind of validation and enforceability of the law.

With a written contract the concept of automatic renewal or evergreen clause becomes very much clear and perceivable. In a written contract there has to be a dedicated separate clause for the automatic renewal of a contract and that automatic renewal clause should be carefully and thoroughly drafted by the parties as it can have some kind of major effect on the contract. 

For example; A is in the business of manufacturing men’s innerwear and B has approached A to obtain the distributorship of his business. A agrees to it and gives the distributorship to B for a term of 12 months that shall be automatically renewed for another 12 months after the expiry of the initial term and thereafter it shall be renewed automatically for another 12 months till it reaches the 48th month. However, the term of the agreement shall not exceed 48 months. Here the clause of automatic renewal is explicit and agreed by both the parties and therefore is enforceable. 

Like I mentioned above, the automatic renewal clause operates at the end of the contract and therefore, it is imperative to keep it in mind in order to review the terms and conditions of the contract if one needs to terminate the contract. Usually what happens is that one party forgets that they are engaged in an auto-renewal contract and therefore they do not pay attention to the termination clause of the contract. It has to be borne in mind that termination notice shall be sent prior to the expiry of the ongoing contract and commencement of the new term of the contract. 

Benefits of automatic renewals in B2B contracts

The automatic renewal in a B2B contract offers an opportunity to reap many benefits out of it. The benefits of the automatic renewal contract are as following:

  • Time-saving

It eliminates the cumbersome process of dwelling on the registration of a new contract. At the same time, it saves money and time for the parties and keeps them involved in the foregoing business transactions.

  • Negotiation

One of the best parts of the automatic renewal contracts is that the parties do not need to get into negotiation for the same contract all over again. It saves labour and brains of the parties and at the same time provides peace of mind to them.

  • Stability

This clause also aims at achieving stability amongst the parties so that they can work to achieve their goals with less friction in their business relationship. 

  • Capital gain

The automatic renewal contract clause also helps in achieving good capital gain as it is very little or no negotiation in the contract and the parties are already adapting and adhering to the terms and conditions of the contract.

Disadvantages of automatic renewals

Like any other contract or clause the automatic renewal contract also suffers from various flaws and limitations that are as follows: 

  • Expensive

As we already know that the scope of negotiation in the case of an automatic renewal contract is very less therefore sometimes it becomes very expensive for the parties to carry forward the obligations of the contract.

  • Disputes

When a party feels that the obligations of the contract are too heavy for him to carry forward and at the same time finds themselves in a situation where they have to keep the contract running for another term, it leads to disputes among the parties. 

  • Inefficiency

The undue pressures of the inflexible terms of the contract make the parties inefficient and hostile with the working dynamics of the contract.

  • Against the will

It happened to me quite some time ago when I wanted to cancel my Netflix subscription but forgot about the renewal date and when I used to receive a message on my mobile phone that my account is being debited for another month I used to find myself forced to watch the contents on that platform. I know it happens to most of the people that against their will the contract gets renewed without letting them know and this is one of the major drawbacks of automatic renewal.

In the case of Tupperware India Private Ltd vs Veena Walia on 9 March 2018, DHC, O.M.P 842/2011 the court said that: If needed, reference can be made to the above-mentioned judgment of the Delhi High Court that specifically deals with the automatic renewal clauses in a contract. This judgment also talks about how a contract having an automatic renewal clause can be terminated by a party and what would be the repercussions if the termination notice is sent after the expiry of the ongoing contract term.

Conclusion

I am sure you must be wondering after going through the advantages and disadvantages of the automatic renewal clause that it’s kind of a two-sided sword. On the one hand, it has so many benefits to offer but on the other hand, it takes away the liberty of the parties to engage themselves with some other better opportunities.

In my opinion, it is not a bad clause to have in your contract but at the same time, it should be treated as some boilerplate clause as it can surely dent your future plans. It is advisable to go through each and every clause of a contract and go through it once in a while so that what is meant to be good to you won’t do any harm to you.

References 


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