It can be surprisingly difficult to know when a contract ends. This article explains how to classify contract terms. For effective contract management, we need to know when to set automatic alerts and notifications. The contract termination date is critical to contract management.
Definite term contracts
Contracts start. Contracts end.
The term of a contract refers to its duration. To calculate the term, we need to know at least one date, usually the start date. The start date is typically called the effective date.
Contracts address at least these two points in time. Even if they are evergreen (indefinite end date), contracts still address their own end.
A contract with a definite term has only a start and an end date. There is no option to extend or renew the contract. Even if the contract has survival provisions or contingencies, it is still definite for purposes of contract management.
We can use the effective date to send notifications to the business that the contract is in force. The end date can trigger our automatic alerts prior to termination.
Many contracts renew at the end of the term, which means that the end date is not much of an end date.
Contract renewals come in several flavors. First, contracts with automatic renewals might simply renew for a certain period.
Maybe renewal happens automatically for more than one period.
Why not just use the end date of the last auto-renewal period as the end for the entire contract? Good question. The most common reason is that auto-renewals have wrinkles to give them character.
Contracts often grant one party a unilateral right to renew the contract at its election. In this example, Party A and Party B have entered into a contract that gives Party A the right to renew for successive one year periods. Party A does that for two years and then stops.
The language might read something like:
Party A may, in its sole discretion, elect to renew this Agreement for successive one (1) year periods. Party A must exercise its right thirty (30) days prior to termination of the then current period.
Contracts can also specify the number of renewal options that a party has.
Party A may only renew this Agreement for three (3) additional terms.
In the optional renewal example, Party A explicitly said, "I exercise my right to renew the contract," twice. Contracts also automatically renew for succeeding periods without an explicit exercise of an option.
In these cases, the contract typically says that it renews for defined periods of time for a certain number of times.
This Agreement shall renew for one (1) year upon the termination of the then current term. This Agreement shall renew for no more than four (4) successive terms.
Again, why not just provide for an end date that adds four years to the base term? The reason is that auto-renewal contracts typically give one or both parties the right to terminate the renewal (and therefore the contract) prior to the start of a renewal. This mechanism gives the parties an option on a long term deal without a long term commitment.
This Agreement shall renew for one (1) year upon the termination of the then current term; provided that neither party has given notice of termination at least thirty (30) days prior to the end of the then current term. This Agreement shall renew for no more than four (4) successive terms.
Lawyers and contract managers often do not like auto-renewal contracts, because the agreements are filed and forgotten, which means that the contract renews before anyone in the business has the opportunity to review it before they are locked into the agreement for another year (or whatever the renewal period is). Some contract management software can easily address this business problem.
Some contracts are not designed to end. More precisely, they are drafted to continue as long as possible. An evergreen agreement renews for a period of time automatically without notice. Such a contract continues to renew until one party elects to terminate the contract.
This is not the same thing as a long-term contract. For example, a 100 year lease, might seem like an evergreen contract because the end date is so far in the future, but a 100 year lease is still a definite term contract.
Given this definition, it is helpful to note that an evergreen contract is not the same as an auto-renewal contract. An auto-renewal contract, like its evergreen corollary, renews automatically, but for a specific number of times. An auto-renewing five year lease, for example, might contain a one-year renewal provision.
Evergreen contract management tips are covered in another article.
Relative and absolute dates
When contracts declare that they end on a certain date, contract management is greatly simplified.
This Agreement shall terminate on February 1, 2021.
On February 2, 2021, this contract has no effect. This language uses an absolute date.
Not all contracts are this precise. A date can be expressed as a relative date. A relative date is one that is calculated from a known start date plus a period of time.
Even with a definite term (no auto-renewals), the end date for a contract can be surprisingly squirrelly.
This Agreement shall terminate four (4) years from the Effective Date.
If the effective date is February 1, 2017, then the end date is February 1, 2021. Does the contract terminate at the end of February 1, 2021, or at the end of January 31, 2021? In other words, is the term inclusive or exclusive of February 1, 2021? In some cases, like loan agreements, is might matter that 2020 is a leap year.
The effective date can also be relative.
This Agreement shall be effective upon the date it is fully executed by both parties and continues for a period of four (4) years.
The contract manager has a two problems to solve. First, when did the contract start? Second, when does it end?
Precision is necessary to ensure that the management team is aware of when they need to comply with a contract and act to renew it if necessary.
Contract managers must use the correct contract dates
It seems simple to say that a contract starts when it starts and ends when it ends.
For a variety of reasons, both the effective date and the end date can be complicated. These problems are not necessarily a product of ambiguous contract drafting. In fact, all of these issues (relative dates, calculated end dates, optional renewals, automatic renewals, and evergreen contracts) can be drafted with precision.