The automatic renewal clause and the social function of the contract

  • 30 December, 2013 - News

The automatic renewal clause and the social function of the contract

Guilherme Pereira Romano- Attorney in the Consulting field.

The contract is a legal transaction defined by the willingness of all parties involved, who are responsible for establishing the parameters which will guide such agreement. Since it is a legal relation between private individuals, any term which is not contrary to the Law, public policy or to accepted principles of morality, is allowed.

In this context, in allegiance with the Brazilian Civil Code requirements, the parties will jointly establish the obligations to which they will be submitted, as well as the term that will guide the contractual relationship.
After the time has elapsed, the contractual relationship will expire, together with the legal transaction effectiveness. The term agreed between the parties is subordinated to a specific event, which can be certain, when it is possible to specify the date for the cessation of the agreement effects, or uncertain, when the termination date is undetermined.

In this sense, the permanent contracts, mainly the products supply and the fixed-term service agreement, will be analyzed in order to verify the possibility of insertion of a clause that ensures the automatic renewal in this type of agreement.

It is important to emphasize that this article does not intend to discuss the matter from the Consumer Law`s angle, in which the subjective aspects have more relevance and end up overcoming the other contractual principles. This is the reason why the automatic renewal clause is often considered abusive if we consider that the customer agreed to a standard contract, without the possibility of negotiation.
The controversy about this disposal arises from the fact that the automatic renewal binds the parties to the exact term initially fixed, maintaining the validity of the penalties that were established for the early termination by one of the parties.

The analysis on the interpretation and feasibility of the Automatic Renewal Clause shall be made by principles of the social function of the contract and freedom of will.

The principle of the parties´ freedom of choice can be simply submitted to this hypothesis, since the contracting parties are able to express their intentions, defining the content and discipline of the legal relationships, in which they are participating. If the automatic renewal clause is expressly agreed upon the parties, it means that there was an obvious interest of the contractors in celebrating it, for any reason, even though it may be to guarantee, in an oblique way, the service provisions and product supply.
On the other hand, the principles of the social function of the contract aim not only to provide the balance between the parties, but also the stability of the obligations, so that the parties can forecast their commitments which were bond by contract, including with third parties.

This aspect can go by unnoticed by the law professionals because of the unawareness of management mechanisms, even though it is extremely relevant for the business administrators. It happens because the demand for services or products must be within the capacity, and at the same time not under the minimum margin of idleness that could make the social function performance impracticable.
It is exactly in this context that the automatic renewal becomes an instrument to preserve the social function of the contract, since the previous manifestation in favor of the contract termination in a reasonable term, that is normally directly proportional to the contractual agreement term, is essential to allow the parties to search for a new partner to meet the services or products demand.

As a result, the maintenance of an undetermined term after the expiration of the initial term and the possibility of unilateral termination upon previous request, end up bringing instability to the contractual relationship, which the automatic renewal clause tries to prevent.

It is worth to mention that, for several times, in order to maintain the contractual tie and to ensure that the obligations will be fulfilled, the service provider ends up refusing the contract celebration with third parties, since the high volume of demand would exceed its capacity.

This way, if it had not been for the automatic renewal clause, a service provider could refuse a new demand in order to meet a larger demand which already exists, and this existing customer could shortly after unilaterally terminate the contract, making the provider unable to program the capacity and demand.

As a result, the abrupt discontinuity of a product/service supply, might compromise the production of one who had already scheduled to receive a certain amount of raw material, indispensable for the production.
Therefore, the service/product provider needs a contractual mechanism to assure the planning of activities according to his demand and capacity projection, as well as the guarantee of the client/customer/taker that his demand will be supplied, without any unexpected disruption.

Thus, the automatic renewal clause cannot be considered as abusive, since it protects both parties and aims to preserve the social function of the contract through the stability of the obligations. Furthermore, the lack of this provision might make the contract execution impracticable, since the absence of the guarantee of continuity after the end of the term could cause damage to both parties.

Besides, the mechanism to promote the contractual nexus termination can be used by both parties in the same way, as long as it is made in due time and in accordance with the previous notification agreed.
Finally, the contractual freedom must not be restricted, since the legal requirements are being fulfilled. Therefore, the automatic renewal shall be adopted to adapt the contractual obligations to the reality of the contracting parties and dynamic of the market.

Código Civil, Art. 122 – São lícitas, em geral, todas as condições não contrárias à lei, à ordem pública ou aos bons costumes; entre as condições defesas se incluem as que privarem de todo efeito o negócio jurídico, ou o sujeitarem ao puro arbítrio de uma das partes.

DINIZ, Maria Helena. Tratado Teórico e Prático dos Contratos. 5. ed. – São Paulo: Saraiva, 2003. v. 1.
GOMES, Orlando. Contratos. 12ª ed. – Rio de Janeiro: Forense: 1993..
RIZZARDO, Arnaldo. Contratos. Rio de Janeiro. Ed. Forense, 2005.
NERY JUNIOR, Nelson e NERY, Rosa Maria de Andrade. Código civil comentado. 9ª ed. – São Paulo: Editora Revista dos Tribunais, 2012.