In our last issue, we asked whether you have ever been on the wrong end of a rollover clause, and found you were stuck with an under performing contract for an extended term.
In this edition, we lift the lid on some useful tips on how to prevent issues with rollover clauses, and some strategies to employ if this advice is coming to you a little too late, and you are now trying to get out of a contract with one of these ugly clauses …
Does a roll-over clause work for your supply needs?
As discussed in our previous article, it might be useful for you to know that if you miss a renewal date, you still have certainty of the terms that govern your relationship with your supplier.
If it makes sense to have such a clause (or you simply can’t convince your supplier to get it out of the contract) you could use some of the safeguards below to protect against the inherent risks:
- Insert a termination for convenience clause in your favour (for example, give your organisation the ability to terminate the contract on 30, 60 or 90 days notice without cause, after the expiry of the initial term)
- Have the contract renew on a month by month (or quarter by quarter) basis after the end of the initial term, until you have been able to review the contract and the prices (to ensure the quality and pricing is still competitive) – you will still have a contract on foot, but without the risk of being locked in for too long
- Give yourself an express right of termination right if the supplier is underperforming. Make sure that the contract provides you with the right to terminate the contract early (and without the payment of damages) if the supplier fails to meet the standards you have set out in any relevant service level agreements, or other standards, or KPIs you may have negotiated.
- You could even consider adding clauses that give you an express right of termination if the contract is not meeting your organisations requirements for other reasons – for example if the contract becomes overpriced in comparison to the market, or the range of goods or services they provide doesn’t match the competition.
- Give your company flexibility by negotiating the ability to change the quantity of goods ordered, or value of services used if the requirements of your organisation change, or at selected intervals during the contract term. For example, you might negotiate to have this right of contract amendment on nominated “contract review dates” or at the time of the renewal of the contract.
If a roll-over clause doesn’t work for your needs…
… make sure you negotiate it out of the contract! Instead have the contract terminate at the end of the initial term – but make sure that you have contract management practices in place that alert you to the termination date well in advance, so that you can work on putting in place a new contract in time.
Don’t forget to factor in the time involved in reviewing the arrangement with the current supplier, and potentially negotiating with new suppliers if needed.
If you can’t negotiate the clause out
If you are unable to negotiate the clause out of the contract, first try to negotiate the inclusion of the types of clauses that we have set out above. But most importantly, you MUST make sure you have a number of alerts in place to remind you of the date when the contract is due for renewal, and when you must notify your supplier of any intention to terminate.
You might even be able to serve a termination notice now, to take affect at the appropriate termination date, just so you don’t forget!
Disclaimer: The material contained on this website is provided for general information purposes only and does not constitute legal advice. You should not depend upon any information appearing on this website without seeking legal advice. We do not guarantee that the contents of this website will be accurate, complete or up-to-date.
