Automatic renewal clauses not so automatic

What services are covered?

Many service providers include automatic renewal provisions in their contracts to main-tain their customer base without renegotiat-ing contracts with their customers. 

However, as a recent New York Appellate Court decision highlights, an automatic re-newal provision isn’t enough to lock a cus-tomer into a successive term unless the pro-vider 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 con-tract 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 re-cipient 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 re-quired statutory notice is not provided, the provider cannot enforce the automatic renew-al 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. 

analytical or administrative service agree-ment 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 de-fendant, Dr. Tsai Chung Chao and his medi-cal practice (Chao) had executed a practice management and licensing agreement, pursu-ant to which Chao uploaded all its patient records and files to HCIQ’s proprietary pro-gram. 

HCIQ was responsible for “the practice staff, management and supervision of the medical billing, coding, collection of reimbursable insurance dollars, adherence to documenta-tion 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 notifi-cation 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, analyti-cal or administrative nature, rendering Sec-tion 5-903 inapplicable.  In its unanimous de-cision, the Appellate Division agreed with Chao, ruling that the parties’ agreement was “for service…to or for…personal property,” 

In keeping with its broad remedial purpose, New York courts generally have taken an ex-pansive approach in interpreting Section 5-903, applying it to service contracts for intel-lectual property as well as tangible personal property and real property. 

The statute has been held applicable in a wide variety of contexts, including the man-agement 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 inap-plicability to “personal services contracts,” such as consulting agreements, employment contracts or professional retainer agreements. For example, the statute has been held inap-plicable to a retainer for legal services, an agreement for the administration of an em-ployee benefits plan and an agreement to provide access to information and analytics concerning commercial and collateral mort-gage-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, 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 unfet-tered 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 com-panies 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.  Converse-ly, 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