Fred Stutzman over at Unit Structures laments the issue of individual auto-renewing agreements (like those of any kind of subscription you may sign onto). He’s rightfully upset about his individual circumstance, and even without reading the specifics of the ZipCar agreement (I’m sure there is one somewhere), the basic business practice is the issue – auto-renewing agreements, especially subscriptions, are problematic.
So what then of larger contracts of the evergreen sort? The software maintenance renewals? The never-ending services subscriptions? The truth is that subscriptions are a benefit to both buyers and sellers – the trick is knowing what you’ve agreed to and how to get out cleanly when you are no longer interested. Thus, as with almost every other contract term we discuss, renewal clauses are important post-contract terms to watch.
There are 4 parts to your basic renewal term: mechanism of renewal (auto vs notice), length of renewal, cost of renewal and termination notice period. Unfortunately, most contracts don’t put all of these things into one section and they try to use brevity in hopes that renewals will just “happen”. Rather, make sure that each of these four areas is not only agreeable, but actually what you intend.
Mechanism – as we were just talking about evergreen clauses, the mechanism of renewal is the distinction between an automatic renewal (it’s continually green, like a pine tree) and one which requires some form of affirmation to renew. As I mentioned in the term and termination discussion we had a week or so ago, the issue isn’t whether you allow it to auto-renew or not, the issue is whether you can TRACK it’s auto-renewing nature. If a customer doesn’t have the ability to track these things, it’s better to have the contract terminate – the vendor will ALWAYS come knocking to get you to renew.
Length (term) – If you allow for an auto-renewal, I always suggest a relatively short term (about 1 year). This is a reasonable time frame in which business decisions can be made, plans can change, etcetera. Anything longer and you might find yourself stuck with a contract you don’t want – anything less and you’ll spend more time worrying about the renewals than in getting real work completed.
Cost – Agreeing to auto-renewing contracts should come with a price-break. You should either have a continuation of the prior-years’ fees, or a SLIGHT increase based on the average increase in the cost of doing business. In other words, the customer benefits from agreeing to the risk of auto-renewal. On the other hand, customers should be prepared to negotiate cost increases if the contract no longer auto-renews. (Actually, the customer used to always get a cost-increase-limiter on renewals… now this distinction seems to be taking root. Pay attention.) Oh, and if there’s NO renewal at all, the customer should not be surprised to see potentially large jumps in cost if they try to restart the services after some lapse/gap in service.
Termination period – Last, but not least, even with an auto-renewing agreement, there should be some amout of notice by which a party can terminate an evergreen contract. As stated before, it’s usually some increment of 30 days – with longer periods of notice required for longer initial terms or larger-dollar deals. As a buyer, I typically do not want my vendor to be able to terminate – even outside the notice period – because I want them to keep providing me service so long as I want it. This is probably one of very few areas where I have felt justified in asking for such lop-sided terms. Because what I don’t want is a situation where I’m willing to continue paying for service, but the vendor decides that they simply don’t like me anymore. The only time I want a vendor to be able to terminate is if I don’t live up to my contractual obligations (such as paying ontime).
Oh, and as Frank unfortunately discovered, make sure there aren’t any other potential gotcha’s buried in the deal which would make termination difficult.
The concept of notice seems fairly simple. In advance of a particular date, usually by some multiple of 30 days, a party is required to send the other party a letter (“notice”) of their intent to take some form of action. Notice can be required for extending or terminating an agreement, asking for price increases or decreases, a desire to perform an audit, or any number of other contractual possibilities. Notice usually comes in two parts – the date by which notice must be provided and the form in which notice must be given. Let’s start with the format first.
In almost all cases, notice must be provided in writing. This is important as it creates a permanent record. It’s quite hard to track down a conversation, obviously, but a letter or an e-mail can easily be later referenced to show that notice was actually given on time. But what about the means of transmitting the writing. I just said it could come via letter or e-mail – that should seem self-explanatory. But the truth is that there are still arguments over the method by which it’s sent. US Postal Service, UPS, FedEx, e-mail, fax … these are all methods you can currently use. If both parties have access to the method, then it would at least seem reasonable that such a method could be used. In 2009, it’s no longer a real excuse to say that you don’t “check your e-mail” on a regular basis.
But what’s the main difference between these transmission modes? Yup, time. On average, a letter sent via the USPS is going to take 2-5 days to reach its destination when sent and received in the continental US – longer if international. UPS and FedEx now offer ground service of the same length of time (so it’s a little cheaper to use), but in the “old days”, the bonus for using couriers was that you had second-day or next-day delivery. And, of course, fax and e-mail are virtually instantaneous. This is why you still see notice language in contracts that talks about the “effective date” or “deemed delivery date” of the notice – that you can reasonably expect that one party will have received the notice in a given amount of time given a specific transmission mode.
Why is this important? Well, that gets us to the second part of notice – the notice date. Again, the obvious purpose of notice is to provide the other party advanced warning that a party intends to take some form of action. If you’re a vendor and you want to terminate a contract, for example, the customer might need to find a new service provider. Giving them the advanced notice means that they might have enough time to find a new provider so as to effect a smooth transition without service interruption. If you send notice close to the notice date, it’s conceivable, depending on the transmission mode, that an entire week could be lost during transmission. So where most contracts will talk about the “deemed delivery date” of the notice, it’s important to also watch the effective date.
More specifically, pay attention to notice dates as it relates to headaches that may be caused by receipt of notice. The bigger the potential headache (or more work involved to deal with the effect of notice), the longer the notice period should be. For most contracts, notice for termination is going to be about 30 days. Notice for an intent to audit is going to be 5-10 business days. But for multi-year, large service contracts, it’s not unreasonable to have notice requirements 6-12 months in advance of termination.
If and when you receive notice from the other side, please remember to actually take action and tell the various internal stakeholders that notice was received. If you’re the contracts person for your organization, make sure that you’ve provided a quick instruction sheet to your business owners on what to do with contracts-related communications (ie: give a copy immediately to you). Granted, if you have a contract management system you’ll already know these event dates are coming up and you’ll be talking with your business owners in advance… but if you don’t, and a notice letter arrives, you may need to encourage action on their part.
Lastly, remember that notice periods are contractual requirements and that missing a notice opportunity can have dire consequences. Invariably, long notice periods are missed on multi-year, seven-figure renewals. This is another reason to always think twice about long-term renewal periods on agreements… and the effect than an evergreen clause can have on your organization. My personal recommendation is to never have agreements more than 3-5 years in initial length, with renewal periods of more than 1 or 2 years. I still like the long notice periods and I use a contract management system that gives me advanced notice of notice. So if I have a 12/31 termination date, with a six month notice period (6/30), then my contract management system can give me an e-mail reminder any amount of time I want prior to 6/30 (usually 45-60 days). That way, I have plenty of time to talk with my business owner about renewal or termination.
What’s in your contract?
Everyone’s buzzing about bailout money being used to pay for AIG executive bonuses – to the same folks’ whose division was the one that caused AIG to fail.
Even President Obama was on camera, promising to do something about it.
The House of Representatives released copies of the contracts that are supposedly preventing the government from taking action on this. Too bad they don’t have a contracts guy reading section 3.04(b) with any clarity:
“3.04. Forfeiture of 2008 and 2009 Guaranteed Retention Awards as a Result of Termination of Employment of Covered Person. If the employment (or, as applicable, consultancy) of a Covered Person terminates prior to payment of a Guaranteed Retention Award, the Covered Person will forfeit the right to such Guaranteed Retention Award in the following circumstances: […]
b) the Covered Person’s employment (or, as applicable, consultancy) is terminated by AIG-FP for cause (“cause” means conduct involving intentional wrongdoing, fraud, dishonesty, gross negligence, material breach of the AIG Code of Conduct or other policies of AIG-FP or AIG, or conviction of or entry of a plea of guilty or no contest to a criminal offense); […]”
Given that the US Government now has a controlling interest in the organization, and given that the US Government has such an interest due to these executives’ imputed gross negligence (“recklessness and greed” according to President Obama), one would think that the US Government could simply fire these individuals – thereby preventing them from getting their bonus.
Just a thought… maybe I’m misreading something somewhere, but I don’t think so. President Obama: Please give me a shout if the AG needs some contract-review assistance. 🙂
(Thanks to ContractsProf Blog for many of the links.)
[Update: I guess there’s always the IRS version. I still think that 10% is too much of a bonus for these folks.]
I had a few posts on 5-9 availability in the last two years. Today, ZDNet reports that 3Tera is offering 5 9’s. The really positive thing I saw in the article is that 3Tera plans to provide automatic SLA credits in the event of downtime that blows the metric – which, if there’s truly 5-9 availability, shouldn’t take much doing.
I’ll ask the question again that I asked before: Is it worth the cost?
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SLES 501 – RFx Planning and Creation
SLES 502 – RFx Release and Response
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Filed under: contract management
Everyone wants to find ways to do their jobs more efficiently. Technology helps, of course, as portions of a job that are ripe for automation are the first places where technology can step in. I’ve argued in the past that we, however, are in a unique position – that the jobs we typically do aren’t really attuned for automation. It might be time to start rethinking that argument, at least a little.
As with any work, to determine how best to automate, you first must break the job down into its component parts and identify those that you can automatize. So, for a contract negotiator, you may perform any number of the following tasks (and I’m going to paint broad strokes on this one). For each area, then, here are some of the tools now available to help with those tasks. Note: I make no editorial comment about any of these tools at this time… I’m just providing them for your benefit/reference.
RFP Issuance and Management
Contract Review and/or Negotiation
Contract Drafting or Template Creation
FirstDraft – can’t find them anymore, but they used to be out there 😉
Contract Management – not comprehensive, just the folks I’ve heard about
Blueridge Software (Contract Assistant)
Deven Desai over at madisonian has a great post on Theory and Law Practice. I’ll let the article do itself justice, but the explanation for understanding theory is exactly why I usually demur when asked to provide templates, either here on this site or within the Software Licensing Handbook.
Giving the template to someone is like handing them a fish but expecting them to figure out how to fish with the thing flopping around in their hands. Hopefully, what I’m doing here is teaching you to fish (I like to think of it as deep sea fishing, actually… strapped into a chair on the back of a large boat… hauling in that sailfish that might skewer you if you’re not careful) – so you can develop your own templates and respond to someone else’s templates, all without breaking a sweat.