Column: Automatic renewal clauses not so automatic
BY JUDITH ZERDEN
Many service providers include automatic renewal provisions in their contracts to maintain their customer base without renegotiating contracts with their customers.
However, as a recent New York Appellate Court decision highlights, an automatic renewal provision isn”™t enough to lock a customer into a successive term unless the provider complies with the notice requirements contained in Section 5-903, an often-overlooked section of the New York General Obligations Law.
Section 5-903 specifically pertains to a contract for service, maintenance or repair to or for any real or personal property. It requires that a provider give written notification of a contract”™s automatic renewal clause to the recipient of the service between 15 and 30 days prior to the renewal date specified in the agreement.
The written notice must be served personally or by certified mail. Importantly, if the required statutory notice is not provided, the provider cannot enforce the automatic renewal clause and the customer can terminate the contract after the expiration of the initial term. This result is consistent with the statute”™s remedial legislative intent of protecting customers from unwittingly continuing to remain bound to service contracts that they are dissatisfied with or no longer need.
What services are covered?
In keeping with its broad remedial purpose, New York courts generally have taken an expansive approach in interpreting Section 5-903, applying it to service contracts for intellectual property as well as tangible personal property and real property.
The statute has been held applicable in a wide variety of contexts, including the management of real property, the provision of telephone answering services, the provision and servicing of equipment for financial information and hospital equipment, the installation and servicing of vending machines, and the cleaning, repair and delivery of uniforms.
A notable exception to the type of “services” encompassed by Section 5-903 is its inapplicability to “personal services contracts,” such as consulting agreements, employment contracts or professional retainer agreements. For example, the statute has been held inapplicable to a retainer for legal services, an agreement for the administration of an employee benefits plan and an agreement to provide access to information and analytics concerning commercial and collateral mortgage-backed securities via the provider”™s website.
Court decision
The parameters of a service agreement for personal property covered under Section 5-903 versus a consulting,
analytical or administrative service agreement were at issue in the recent Appellate Division, First Department decision in Healthcare I.Q. L.L.C. v. Tsai Chung Chao, (2014 NY Slip Op. 03216) (May 6, 2014). There, the plaintiff, Healthcare I.Q. (HCIQ), a health care services company, and the defendant, Dr. Tsai Chung Chao and his medical practice (Chao) had executed a practice management and licensing agreement, pursuant to which Chao uploaded all its patient records and files to HCIQ”™s proprietary program.
HCIQ was responsible for “the practice staff, management and supervision of the medical billing, coding, collection of reimbursable insurance dollars, adherence to documentation guidelines, compliance issues, business issues, and for overall management of the medical facility.”
The agreement, initially for a 36-month term, called for automatic renewals for successive 18-month periods unless either party sent written notice of its intention to terminate to the other. It was undisputed that neither party sent such notification of termination and that HCIQ failed to provide the written notification of renewal required by Section 5-903 to Chao.
Chao maintained that, without written notification of the renewal clause, it had the right to cancel the agreement at any time after the initial 36-month period. HCIQ contended that its services were of a consulting, analytical or administrative nature, rendering Section 5-903 inapplicable. In its unanimous decision, the Appellate Division agreed with Chao, ruling that the parties”™ agreement was “for service ”¦ to or for ”¦ personal property,” since “the services provided were directly and inextricably related to the billing and medical records of the practice, which are personal property.”
The court further explained: “Here the agreement provided for HCIQ to take dominion over the records and to maintain and organize them on an ongoing basis. ”¦ This was not merely incidental access to the records in the context of administrative or consulting services.”
Although under the facts of Healthcare I.Q., the court found that HCIQ”™s “level of unfettered use, access, physical possession and management of (Chao”™s) records” easily placed the agreement within the ambit of Section 5-903, determining the nature of the services provided may not always be as clear.
In today”™s marketplace, where service companies frequently provide consulting and other administrative services as part of their engagements, the applicability of Section 5-903 is not assured. Nevertheless, the decision in Healthcare I.Q. serves as a reminder that it is imperative that any provider of services seeking to enforce an automatic renewal clause fully comply with the statutory notice requirements. Conversely, a consumer of services subject to an automatic renewal provision should be aware of its statutory rights under the agreement.
Judith Zerden is of counsel to Kurzman Eisenberg Corbin & Lever L.L.P. in White Plains, where she specializes in commercial litigation. She can be reached at 914-286-6367 or jzerden@kelaw.com.