Netflix, Amazon and Phone Contracts: Are your contracts for fixed, renewable or indefinite periods?

As part of agreeing a contract with a prospective client a key element of the contract will be the term for which services or goods are to be provided; where there is a fixed project it may be that the term correlates to the delivery of the project itself, but if there are ongoing services, such as under a managed services agreement, then the terms will likely need to either be on the terms of a either renewing terms or indefinite terms to be ended by a party.

Where there is a determined, fixed timeframe for a particular project then the likelihood will be that the contract itself will be for the fixed term or a term determined by the completion of the project. It may also be that the contract is set for an extended fixed term with the ambition for at the end of such term to renegotiate the agreement itself.

A key advantage of fixed terms in the certainty provided to both parties knowing how long the agreement is for. However with this certainty, and in lieu of a breach of the agreement, the contract will have less flexibility for the parties; an example where such flexibility could have been beneficial is where an unforeseen event, such as COVID, arises which was not planned for.

Where, for example, you are creating a website for a client at a fixed price then the term of the agreement should be based upon completion of the project’s scope, however where after this completion date the website is to be continued to be managed there will have to be a term in place which allows for this continued management.

One final tip in relation to fixed term, project based contracts is to be aware of any contract where ‘time is of the essence’ for certain deadlines or requirement completion pieces, as in such situations a failure to meet such a deadline can be deemed to be a repudiatory breach of the agreement and lead to the contract being terminated immediately, even where this is for a fixed term.

Where there are ongoing services or the provision of goods then a fixed term would not be appropriate for both of the parties. Having to negotiate a new contract for each fixed period may require more administration than is necessary and in this instance there are two options available: a series of renewable terms or an indefinite rolling term.

Renewable terms are a series of set terms, such as for one year, which renew (either automatically or on a procedure agreed by the parties) at the end of each period for the same period. For example where a contract is for an initial term of a year, at the end of the year the contract will renew for another year. The benefit, for both parties, from operating under this type of structure is having security for a set term whilst the term then renewing in a less administratively intrusive manner.

This can also be used for longer term relationships, where a term can be set at five years, for example, with a procedure in place for at the end of this period, or in the final year of the term, for the parties to renegotiate certain key terms, such as pricing, and then renew the agreement for further fixed terms. Having a forward thinking contract which plans for the future and development of the relationship is both beneficial for the relationship itself but also reduces the time spent away from carrying out the actual work.

Comparatively, a more flexible alternative can be an indefinite contract being in place which is solely subject to the parties agreeing, or one party giving notice, to terminate the agreement. Having in place a contract which does not have a defined end date can be useful to allow for a seamless and continuous relationship to take place however at the cost of certainty as the parties can be ended upon notice being given at any time. Alternatively this flexibility may actually be beneficial to the parties. Another issue, which can be solved by good drafting, is that having an indefinite contract does not leave scope for renegotiating the price; however this can be solved by having price review clausing in place.

As you can see the three main duration variants for a contract, fixed, renewable and indefinite, each have their own benefits, whilst all three being better suited to how certain businesses operate, types of work as well as working for individual relationships. It may be that your business has operated under a particular set up for a period of time and you want to change this to better suit how the business wishes to go forward, or for individual contracts you have with certain clients or suppliers. If that is the case feel free to get in touch whether you’re looking for these changes or to modernise and future proof any terms you have in place generally.

If you think that your contracts or businesses structure may be benefited by changing to a different term structure or you are interested in having your terms reviewed, or put in place, then please feel free to get in touch with me by telephone 01273 447 065 or by email at [email protected]