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Exercising a right to renew a contract
Contract renewal should be a relatively straightforward process. Subject to satisfying any requirements which make renewal of the contract conditional, it should simply be necessary to follow the terms set out in the contract for its renewal. This is so irrespective of whether it is an agency, distributor, franchise or licence contract and whether the renewal process is expressed as a right or as an option.
But there can be potholes along the way.
First, in respect of the clarity of the requirements to be satisfied which make renewal conditional. One answer may be to seek clarification from the other party to the contract as to its interpretation of the relevant contractual provisions. But if this is to be done, it should not be left to the last minute as this will simply make it easier for the other party to delay responding until it is too late.
In this situation the party wishing to exercise the right to renew will have little choice but to apply its own interpretation to the requirements in question, proceed on the basis that they have been satisfied, and cross its fingers!
Second, by not following what is set out in the contract for the exercise of the right to renew.
If the contract requires notice be given:
- in a particular form;
- in a particular way;
- at a particular time or during a particular time period,
failure to do so will simply make it easier for the counterparty to argue that notice was either:
- not given or
- not given as required and, as such, is ineffective.
Third, by delaying challenging the other party if it embarks on a process which hints at renewal but is anything but.
In a recent case the UK distributor of an overseas activewear supplier accepted at face value assurances by the supplier that the contract renewal needed to be sorted out. It was as if this was just a box ticking exercise. Unfortunately, the distributor was lulled into a false sense of security as the supplier explored the extent to which the distributor was prepared to become an agent and the possibility of proceeding with a different agent entirely.
The supplier was then able to give notice of termination of the distributorship agreement and claim (whether or not correctly) that contractual notice had not been given to exercise the right of renewal. As a result, the distributor was left stranded.
Take home points
- Read and understand the contract in question and particularly the renewal provisions.
- Act clearly and promptly so as to reduce the possibility of disagreement.
- Be prepared to challenge the decision or lack of decision of the counterparty.
- Keep a clear record of communications with the other party so as to reduce the possibility of uncertainty.