What is an Evergreen Contract?
Evergreen contracts are unique agreements, distinguishable from a typical, fixed-term contracts, because they automatically renew after a specified period. The purpose of this provision is to extend the agreement for a further period of time so as to eliminate the need for an individual to actively renegotiate the agreement at the end of the agreed-upon term. It is important to note that an evergreen contract does not mean that an individual will be continually bound by the contract over time. However, if you don’t actively terminate the agreement at the end of its term, you may find yourself bound by the renewal period, whether you want to be or not.
The words "evergreen" and "evergreen clause" are used to refer to the provisions of a contract that automatically renew the terms . In the event you renegotiate with the other party upon expiration of the contract, the provisions of the evergreen clause will no longer apply. The most common reasons an individual may want to use an evergreen contract are:
The party who might want to enlist an evergreen contract is obviously the one who may stand to benefit in some way if the contract is automatically renewed. For example, if you are a pharmaceutical sales rep and have a contract with a pharmaceutical company to sell its products, then you might want to include an evergreen clause. This way, when the contract is set to expire, it will automatically renew for another year (or whatever time period may have been agreed upon). All parties, of course, have the opportunity to terminate the contract at that point or to negotiate additional terms.
Common Characteristics of Evergreen Contracts
Evergreen contracts may come in many forms, but all generally share certain key characteristics. The following discussion explains how the automatic renewal clauses of evergreen contracts are typically structured and some of the most common conditions under which they may be cancelled.
Automatic Renewal Clause – An evergreen contract will almost always contain an automatic renewal clause that expressly states the contract shall automatically renew upon its expiration for successive specified periods of time (or unless and until the parties cancel it). Some evergreen contracts contain time limits on the duration of the automatic renewal period(s) (e.g., the contract shall renew for an additional period of six months; the contract shall continue to renew through December 31, 20XX).
Duration – In the absence of a contractual limitation on automatic renewal period(s), an evergreen contract will automatically renew for periods of one year until cancelled by either party. A party’s right to cancel or terminate an evergreen contract may be contained in a separate cancellation clause. For example, many evergreen contracts have incorporated agreements allow a party to cancel the contract with thirty (30) days’ prior written notice.
Notice of Cancellation – If a party has the right to cancel an evergreen contract, the contract may require the cancelling party provide advance notice of its intent to cancel the contract (e.g., thirty (30) days’ prior written notice).
Termination for Cause – Even if a party does not have the right to cancel an evergreen contract, it may still have the right to terminate the contract for "cause." The standard of "cause" is generally spelled out in the agreement, or if not, it can be implied by law from the nature of the agreement and surrounding circumstances (e.g. failure to pay, breach of contract, etc.).
Mutual Agreement – Even if a party does not have the right to cancel for cause, both parties to the evergreen contract may agree to cancel or terminate the contract by mutual agreement at any time.
Benefits of Using Evergreen Contracts
One of the most significant advantages of evergreen contracts is the convenience they offer. The extended time period allows both parties to avoid the administrative tasks associated with contract renewals, which can be particularly burdensome for businesses with numerous agreements in place. Instead, the terms are clearly set out in the original document, and the parties can focus on other aspects of their operations without worrying about the need to renegotiate terms or extend deadlines.
In addition to reducing red tape, evergreen contracts also promote continuity of service. For businesses that rely on external service providers, such as technology consultants, suppliers, or outsourcing firms, continuity is essential to maintaining productivity and minimizing disruptions. An evergreen contract ensures that these service providers are always available to address business needs without delays or interruptions.
Finally, evergreen contracts can be an economical choice. In many cases, it may be cheaper to pay for successive services at a negotiated, but fixed fee, as opposed to extending the contract each time services are needed. This is especially true when market rates for goods and services are expected to rise over time. By locking in a rate, businesses and individuals can protect themselves from market volatility and guarantee consistent pricing over time.
Despite the numerous benefits they offer, businesses and individuals should still proceed with caution when executing evergreen contracts. Specific provisions should be included to address issues such as termination rights, notice periods, and any options for renegotiation or early termination.
Disadvantages of Evergreen Contracts
The primary disadvantage to an evergreen contract involves the two situations described above: (1) you may want to terminate the relationship with the business partner but are unable to do so; and (2) you may forget about the terms contained in the evergreen agreement because a party’s obligation is automatically renewed without any action by the party who is fulfilling the obligations. Here are a few ways that evergreen contracts can be problematic:
An example is an employment contract. Say Company X and Employee Y have an employment contract. The contract provides that Employee Y will receive an annual salary of 25 percent above the normal salary for his or her position in the first year, a 15 percent raise in the second year, and a 10 percent raise in the third year and for every year thereafter. The contract provides that it is automatically renewed for a period of three years in perpetuity unless either party wants to terminate. Three years after it is signed, Company X decides it does not want to be obligated to provide Employee Y with any further pay increases, but the evergreen clause means that Employee Y will continue to get a pay increase simply because no one has yet terminated the employment contract.
Real-World Examples of Evergreen Contracts
Examples of evergreen contracts in practice are virtually everywhere, with the most common examples occurring in the subscription industry. There are literally thousands of products and services available to purchase on either a one-time basis or a subscription basis, whether in the form of a physical product or a SaaS-based service.
Probably the most common type of evergreen contract is the monthly subscription to a physical product. Often this type of subscription begins with a free or low-cost introductory offer and automatically converts to a monthly subscription at the end of the trial period. For example, a coffee supplier may offer to supply either a single box of coffee or a year’s worth of monthly deliveries of coffee. At the end of the year, the subscription continues indefinitely unless the customer opts out of the subscription. This type of offer is apparently standard in the subscription world, as I have seen the same offer for dozens of types of products and services.
Another example is a subscription to a SaaS-based service. A perennial favorite of the subscription market is antivirus/antimalware software, which is offered on an annual basis but which will automatically renew at the end of the subscription term, unless the customer opts out of the renewal . I have seen this type of offer from the "big three" antivirus/antimalware vendors in virtually every iteration of their products for years, regardless of whether the product is in package form or downloaded from a web page.
Another example, although somewhat rarer than the two previous examples, is a typical purchase agreement for a leased or financed vehicle from a car dealership. I believe that most, if not all, states in the U.S. have provisions that purport to be limiting the term of an automobile lease to a maximum of 39 months. At the end of the lease, the lessee has the right to purchase the vehicle and the he is usually given a final month to make that purchase. However, the prevailing form of the purchase agreement, at least here in Florida, is venue and jurisdiction over the agreement is purportedly unnecessary. Ever since I have been aware of these agreements, they also contain language purporting to renew the lease and "extend to additional terms" should the purchaser fail to sign and return the purchase agreement. This is typically offered as a convenience to the purchaser and is apparently standard throughout some of the major car leasing companies.
Legal Implications and Regulatory Compliance
As with any contract type, the interpretation of evergreen contracts can have nuanced legal implications. In certain jurisdictions, there are specific regulatory requirements that must be met for evergreen provisions to be enforceable.
For example, California has a requirement that lends to the validity of evergreen provisions in the context of a security agreement. Under California Code of Civil Procedure section 681, a debtor facing earnings withholding is entitled to redeem earnings that otherwise would be subject to such withholding when the amount to be withheld would exceed the total amount of the judgment in question. If the third-party garnishee (e.g., employer) in such a context is also subject to the jurisdiction of the California courts, then that third-party garnishee has the right to petition the court directly to terminate the withholding order.
Further, most commercial laws will not allow a perpetuity clause or other unlawful restraint to be enforced against any party. For instance, in the case of Anderson v. Howard Family Tr., 222 Ariz. 21 (Ariz. 2009), the Arizona Supreme Court examined the concept of the "rule against perpetuities" and found that an option to renew a lease that was not limited by a period of time was subject to termination because it would put the defendant’s property in an indefinite control situation for the life of defendant’s other heirs, which the court found to be against public policy. In contrast, see In re Estate of Gibbons, 2007-Ohio-134 (Ohio App. Ct. 2007) (Ohio statute specifically allowed for a lease option extension as part of a marital termination settlement in a divorce decree).
Evergreen provisions can involve other intricacies, including implied or affirmative duties of good faith and fair dealing, and periodic review requirements. For this reason, it is important that evergreen agreements are well-drafted, clear, and unambiguous.
Best Practices for Managing Evergreen Contracts
To effectively manage evergreen contracts, the best practice is to include a co-termination clause and have a termination or expiration clause that allows for a termination on defined notice within the contract. This way, when the contract expires, the parties can be sure that all of the parties and their systems are ready for the new contract terms, avoiding continued performance of an expired contract .
Some companies, particularly those with a high volume of series of shorter duration contracts, utilize an enterprise renewal and termination system for contracts with the same vendor, treating these contracts as a single agreement in some respects and maintaining only one summary. Others begin expiration procedures two years ahead if they know there are just one or two changes in the contract, because the renewal process is time consuming. Although the intent of evergreen contracts is to save the time involved in renewals, many times this can have the opposite effect.