December 21, 2012
Contract termination seems like it should be a straightforward proposition. Generally, a contract either expires or it may be terminated by the parties, with or without cause. Often there is a provision allowing renewal. Although the process is often straightforward, thorny issues may arise when the contract has provisions that survive termination. The importance of clearly understanding the difference between contract renewal and contract extension was recently illustrated in the Tennessee Supreme Court’s decision in BSG, LLC v. Check Velocity, Inc., 2012 Tenn. LEXIS 822, 8-9 (Tenn. Nov. 20, 2012).
After their original contract expired, BSG sued CheckVelocity, alleging that the CheckVelocity’s failure to pay fees that were allegedly owed under the provision dealing with survival under their former contract constituted a breach. The contract provided that payment of a referral fee, described in the contract as a “fee residual”, survived the termination of the agreement and continued “until the expiration of the customer agreements as they may have been renewed.”
At issue was the referral fee resulting from an agreement between the CheckVelocity and a customer referred to CheckVelocity by BSG while their contract was in force. The issue was whether an agreement between the CheckVelocity and the customer, that was signed after the BSG/CheckVelocity contract expired, was a renewal of the first agreement (and therefore subject to fee residuals) or whether the second agreement was an entirely new contract that supplanted the first agreement.
The Court concluded there was ambiguity in the contract due to the parties’ use of the word “renewed”. The Court noted that “renewal” has multiple meanings. Renewal includes “the re-creation of a legal relationship or the replacement of an old contract with a new contract, as opposed to the mere extension of a previous relationship or contract” (i.e. an entirely new contract) and also includes “a contract for an additional period of time with the same terms and obligations as a prior contract and does not confer new obligations or rights.” The Court therefore concluded that the phrase “as they may be renewed” could be ambiguous because it may be understood to include an entirely new contract as well as a contract extension.
The Court ultimately looked to the renewal provision in the BSG/CheckVelocity agreement and concluded that the parties underlying contract used the term “renewal” in the sense of extending the contract for an additional period of time with the same terms and obligations as a prior contract. Concluding that the term “renewal” should be construed consistently throughout the agreement, the Court held that the second agreement, which required additional services and changed material terms of the first agreement, was not a “renewed” agreement and therefore no residual fees were owed.
Lawyers are often accused of using two terms when one will do. However, it appears that in some cases, it would be wise to distinguish between extending and renewing a contract. Arguably the outcome of this case would have been different by the simple drafting expedients of stating that the underlying contract could be “extended” after its termination date and the residual fee survived the termination of the agreement and continued “until the expiration of the customer agreements as they may have been renewed or extended.”