Perpetual bliss or purgatory? Henry Mullen, dispute resolution lawyer at Muckle LLP, picks out the key pitfalls for businesses to avoid on rolling contracts.
From supply and maintenance agreements to mobile phone contracts, so called “rolling contracts” are common place in commercial and consumer agreements. Although they can take many forms, rolling contracts usually provide that the contract shall continue or “roll over” after the end of the initial term of the contact, often on the same terms. On the one hand they can conveniently allow for parties to continue a successful relationship on agreeable terms. On the other hand, if the original relationship was not successful, or the terms are disagreeable or unappealing going forwards, rolling contracts can tie parties into an unattractive and potentially costly agreement.
So how can you make use of rolling contracts and avoid the pitfalls?
1. Read the terms carefully – do you have a rolling contract? It sounds like an obvious point, but it’s surprising how often businesses are unaware that a contract may roll over automatically after the expiry of the initial term.
2. Check the terms – are they acceptable? In some circumstances it may be beneficial for the contract to roll over on the same terms. For example, if you expect the cost of goods/services you are paying for to rise you may wish to make use of the benefits of the lower rates set in the initial agreement. Conversely, if you are the seller or supplier you want to ensure that the contract will still be profitable if it rolls over.
3. Check the tenure – how long is your new contract? It is also important to check the length of the new contract once it has rolled over. In some cases the contract will roll over on a month by month or yearly basis. On others, the contract will effectively renew for the same duration of the initial term of the contract. In these instances you could risk being tied into unattractive agreements of 3-5 years or longer.
Businesses dealing with consumers should be aware that some terms, which automatically renew consumer contracts, may be considered to be unfair and therefore unenforceable. The Competition and Markets Authority have provided some guidance with examples online at gov.uk.
4. Check the termination provisions – am I still in time?
Often, rolling contracts provide that the contract will automatically renew after the expiry of the initial term unless one of the parties provides notice to terminate the agreement. Notice periods vary so be sure to make a note of it and set a reminder to trigger when it is nearing expiry.
You should also ensure that you comply with any notice provisions in the agreement. If a notice is served incorrectly it may be invalid and not prevent the contract rolling over. 5. I’ve missed the deadline – don’t panic – you still have options
If you do not want to continue with the contract but have failed to serve the notice in time, you have several options.
A. Continue with the contract (it may be that you can still derive benefit from it).
B. Determine whether there is a break clause which would entitle you to terminate the agreement early.
C. Consider whether you have some other right to terminate (for example for breach of contract by the other party).
D. Negotiate a termination of the agreement with the other party (they may not wish to continue the agreement either).
E. Terminate the agreement. This is likely to entitle the other party to claim damages. These damages may be limited to its loss of profit (although not always). In some circumstances it may be preferable or more cost effective to pay the other party’s losses rather than continue with the contract.
This advice is by no means exhaustive and often these matters are heavily fact dependant. If you have any queries about your documents, or for a free consultation, please call Henry Mullen on 0191 211 7894 or email henry.mullen@muckle-llp.com
