In this case, the NSW Supreme Court considered the operation of a renewal mechanism under an equipment rental contract, and whether the renewal clause would become a term of the contract during the renewal term (so that the contract would renew perpetually unless validly terminated).
Clear and unambiguous provisions in a contract will be enforced, even if this could result in a harsh commercial outcome for one party. Accordingly, it is critical for parties to ensure that contracts are drafted in a way that properly reflects their intentions, particularly in relation to key commercial provisions such as the contract term, renewal rights and pricing.
The parties had seemingly intended to enter a hire-purchase arrangement under which certain electronic equipment would become the property of the renting party after the expiry of an initial four year term. However, the terms of their agreement did not reflect this. Instead the agreement was written as a rental arrangement that would automatically roll over at the end of the initial term. This resulted in quarterly rental payments being deducted from the renting party’s bank account for nine years after the expiry of the initial term. The renting party sought to recover these payments on the basis that they had been made in error, but the hiring party claimed that the contract had been renewed and was on foot when the payments were made, so that the payments were therefore properly made and received.
The rental agreement contained a renewal clause which provided for an automatic twelve month renewal at the end of the initial term. The crux of the dispute was whether the renewal clause should be read to mean that there should be only one renewal, or whether each successive term was subject to its own automatic twelve month renewal (so that the contract would renew perpetually unless terminated).
The agreement provided that it would automatically renew at the end of the initial term “upon the same terms and conditions as appear in this Agreement”. The Court said that these clear words meant that the renewal clause itself was also incorporated into the renewed agreement, along with all of the other terms, so that the agreement would automatically renew for successive twelve month periods until one of the parties took action to terminate it. Accordingly, while the renting party believed that the agreement had expired at the end of the initial term, the agreement had in fact been automatically renewed for an additional 9 years, thereby creating an additional liability for 9 years’ of rental payments. While acknowledging that the result in this case was harsh, the Court did not feel that this justified a departure from the clear meaning of the words used in the agreement.
The decision illustrates that care must be taken in the drafting of renewal clauses to ensure they are expressed to operate in the way both parties intend. Automatic renewal mechanisms are common in commercial agreements and can have obvious attractions for both buyer and seller. For the buyer they can bring greater certainty about continuity of supply on favourable terms and for the seller they can mean greater certainty about revenue streams. However, any such mechanism should be drafted in a way that makes clear whether renewal is a one-off or recurring event, how the contract can be brought to an end, and how other terms (like price) are affected by renewal. Where the contract allows a party to avoid renewal by the giving of a notice to that effect, then each party needs to ensure that its contract management systems are adequate to enable it to give notice at the correct time.
To see the full judgment in this case, please click here.