Tips For Commodity Brokers And Traders Facing Auto-Renewal Provisions In Vendor Agreements

Businesses of all kinds, and all sizes, enter into vendor agreements in the ordinary course of business. And like many third-party vendors, the types of vendors that cater specifically to the technology needs of commodity brokers and traders — those offering services for data streams, instant messaging, front-end software, and audit trails services — frequently contain "auto-renewal" provisions (also sometimes called "evergreen" provisions).

Evergreen provisions have the effect of allowing the contract to continue forever unless the customer gives a timely notice of termination. These provisions, if ignored, can become potentially expensive problems, because most customers have no system for tracking the cancellation deadlines of their agreements.

For example, assume Commodity Broker XYZ wants to enter into a data license agreement with a vendor whereby the vendor will stream market quotes or other data to XYZ. The license agreement is likely to have a provision similar to this:

"This Agreement shall remain in effect for one year ("Original Term"), and shall automatically renew for successive one-year terms (each a "Renewal Term")unless sooner terminated by XYZ upon at least ninety days' written notice prior to the expiration the Original Term or any Renewal Term."

Sound familiar? Some vendors take a very aggressive approach to these evergreen provisions, and claim that the language must be construed literally. (In particular, we have seen brokerage and trading firms struggling to modify or cancel contracts with providers of financial data and instant messaging terminals.)

For example, assume the expiration of the original term of the vendor's agreement is December 31. If notice to terminate should have been given, say, October 1 (90 days before year-end) but instead is actually given by XYZ on December 1 (30 days before year-end), then the vendor refuses to cancel the agreement because notice was untimely. The vendor then threatens collection if XYZ does not pay for the full amount of the agreement through the end of the following year. Obviously, this would be a very expensive result if XYZ no longer needs the service that is seeking to terminate.

Two questions arise: First, is an evergreen provision enforceable? Second, if it is, can losses be mitigated?

Generally speaking, evergreen provisions may be enforceable, but some states have created hurdles to make it more difficult for vendors to enforce them. In New York, for example, a...