The question of contract renewal vs extension is one contract drafters need to be cognizant of in the language they use. We often hear the terms “contract renewal” and “contract extension” used interchangeably. It may come as a surprise to learn that these expressions may have different legal implications.
Contract renewal vs extension
If contract says a party may “renew the contract for up to 3 additional terms of 5 years,” it could be interpreted to mean that the parties intend to create an entirely new contract with a new effective date at each renewal. If the contract says a party may “extend the contract,” then the effective date of that contract will not change; an extension is clearly a continuance of the same contract.
While is most cases the distinction is not likely to matter, there are instances where it could.
Case Illustration: 2012 US decision BSG LLC v. Check Velocity
In the US decision BSG LLC v. Check Velocity, we see how being unclear as to the legal implication of a contract renewal vs extension can lead to disputes. At issue in this decision was whether a subsequent contract between the parties was just a renewal of the term of the old contract or whether the subsequent contract was an entirely new contract that supplanted the earlier agreement.
In that case the plaintiff tried to avoid having to pay a debt under the initial agreement that the plaintiff claimed had been overridden in the second agreement.
In determining whether the contract was a renewal or an extension, the court fixated on the fact that the parties had not defined the term “renew” in their agreement. It went on to say that:
the term “renewal” has multiple meanings. A renewal is “[t]he 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.” Black’s Law Dictionary 1410 (9th ed.2009). This definition of renewal includes an entirely new contract. This Court has noted, however, that renewal “is frequently used as synonymous with extension.” Womble v. Walker, 181 Tenn. 246, 181 S.W.2d 5, 8 (Tenn.1944) (internal quotation marks omitted). When used in the sense of a contract extension, a renewal is 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. Cf. Womble, 181 S.W.2d at 8 (discussing renewal of a lease); Brewer v. Vanguard Ins. Co., 614 S.W.2d 360, 363 (Tenn.Ct.App.1980) (discussing renewal of an insurance contract). Considered in isolation, the meaning of 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. See Allstate Ins. Co., 195 S.W.3d at 611.
While the court was ultimately satisfied that the use of renewal in this case did not result in a new contract but only extended the previous contract, this illustrates how being unclear as to the intention around the term “renewal” can lead to interpretation questions and disputes.
Contract renewal vs extension comes down to language
We suggest when you build in options for contract “renewals” that you consider whether you intend for there to be a break in the contract chain or merely wish to extend the term of an existing agreement. If the intention is to extend the term of an existing agreement, then calling it an extension avoids arguments that tend to arise around renewal language.
If using the term “contract renewal,” drafters should be clear as to the intent to restart or merely extend the relationship under new terms to avoid facing arguments that old liabilities or obligations have been extinguished. If restarting the relationship, then ensure any legal implications around a break in the contract chain are appropriately addressed.
An example of where this could be important is in a lease context. If a tenant has an obligation to restore premises to the state it was in on the original lease effective date, and a new lease agreement is being signed under a lease renewal clause, it would be important to reflect that the date of the first lease still applies for purposes of the restoration obligation.
The bottom line is to be mindful of the language used in your contracts around contract extensions and renewals. Failing to take proper care could lead to interpretation issues and disputes, which is something contract drafters should try to avoid.
Disclaimer
This article is not legal advice. It aims to inform readers about the Supreme Court decision’s principles. Consult legal counsel for a better understanding of the decision’s implications for your organization and an appropriate response.
