What Is an Evergreen Contract?
Evergreen contracts, commonly referred to as evergreen or auto-renew contracts, are agreements that automatically extend for a set period of time unless either party provides advance notice of its intent not to renew. While some contracts also allow for renewal at the end of each term period by mutual consent of the parties, this type of termination does not fall under the definitions of an evergreen contract.
Evergreen contracts have been in use for many years in any number of industries. Examples include long-term leases, employment agreements, and employee benefits contracts. The financial industry also routinely employs evergreen contracts. Long-term contracts that are tied to market fluctuations and specific calculations often feature evergreen clauses for this very reason. However, the majority of evergreen contracts are typically found in the insurance and software industries, where automatic renewal provides a degree of certainty in an otherwise chaotic business environment.
An auto-renew clause is generally straightforward in terms of the language used in the contract and its intent. However, even standard contract terms can be viewed from different angles. A renewable contract may have a base term that covers anywhere from one month to five years . Under the terms of the contract, should there be no notice from either party 30 days (or other measure of time as defined in the contract) prior to expiration of the current term, the contract is automatically renewed for another full term. At the end of this period, the renewal process repeats itself.
Evergreen contracts differ notably from most other types of contracts because they do not bind either party to a specific timeframe. Instead, both parties are required only to abide by the terms of the contract during the current term. Regardless of the time frame specified in the agreement, the contract will terminate 30 days after either party provides notice of termination. Unlike most employment contracts, which can extend indefinitely by renewing or signing contracts every few years, evergreen contracts do not require the same level of commitment. They also remove uncertainty by providing a clear end date on which both parties can agree.
Evergreen contracts are considered advantageous by many business owners, as they relieve the necessity to continually revisit and negotiate the terms of a contract. This is by far the most important feature of these contracts in the minds of busy business owners. However, contracts that include auto-renew provisions may not be such a bargain for the other party to the contract. In recent years, Congress has made repeated attempts to define the uses of evergreen contracts, especially those involving wind power.
Pros of Evergreen Contracts
Used to streamline agreements between businesses and their employees or a company and a business partner, evergreen contracts can provide a host of benefits for all parties involved when used effectively. Continuous services are one of the most popular benefits of these contracts for most companies and individuals. Being able to contractually ensure service providers will deliver uninterrupted service over a long period of time prevents financial losses from paying fees to a service provider who is unable to meet contract expectations ahead of time. When a contract has a set expiration date, there is no guarantee the contract will be fulfilled as expected.
Evergreen contracts also allow for an SEO management company to lock in service for an extended period of time on a flexible basis, ensuring all sites are fully optimized and maintained. This, in turn, saves the business money by assuring price lock-in. Another example is an employee who can sign on for the length of time his or her company wishes him or her to be associated with it and can guarantee that full-time employment status so his or her wages won’t be suddenly in jeopardy.
Uncertainty of revenue is reduced both for past accounts payable and future income. While revenue occasionally dips, as it often does in the service business, having evergreen contracts in place means businesses have 100% assurance those contracts will renew indefinitely.
Common Uses of Evergreen Contracts
Evergreen contracts are particularly common in the following industries and scenarios:
Long-term leases. Companies often use evergreen contracts when leasing space or equipment. An example is a loan lease agreement for equipment or appliances where the lease "evergreens" every 12 months unless the lessee provides notice otherwise.
Independent contractor agreements. Independent contractors typically use evergreen contracts with their clients to provide for an indefinite term during which the contractors will perform some defined scope of services as long as they both desire to continue the relationship. Independent contractors may use evergreen contracts where they can justify the indefinite term and seek to avoid post-termination efforts by the client to replace them. Evergreen contracts are also more common to use under California law than a typical independent contractor agreement because California courts have more forgiveness towards contracts that have an indefinite term for independent contractors. However, many employers will try to strictly enforce the termination of these contracts unless there is a strong business justification for the use of evergreen contracts.
Employment contracts. Evergreen contracts often provide for indefinite terms for employment so long as the employee and employer wish to continue the employment relationship. Much like with independent contractors, employers seek to avoid the expenses associated with hiring and training candidates to replace incumbent employees with evergreen contracts. Some parties will still place a clause into the contract that allows the employer to terminate the employee immediately (or after providing a limited amount of notice to the employee) in the event of gross misconduct.
Recurring purchases. Evergreen contracts are often readily used for recurring purchases of goods or services like insurance. In these types of contracts, the buyer agree to purchase some set amount of goods or services every month, quarter, etc. as agreed, unless they otherwise notify the provider.
Legal Issues and Compliance
It is not surprising that when entering into a contract that will be in effect for the foreseeable future, a party will look for the flexibility to either bring the contact to an end and/or have the opportunity to renegotiate the terms. Such a party may also desire to include a right of termination if the performance of the other party does not meet certain benchmarks. Despite these apparent seeming "common sense" considerations, courts generally do not permit such rights to be exercised at will (unless otherwise agreed), and instead will look to the language in the contract which – quite often – is not as expected, particularly in the case of mooted renewals.
Most "evergreen" contracts contain provisions allowing the contract to be amended in writing, which seems fairly uncontroversial. However, such provisions often contain preconditions of notice to the other party that a party intends to amend the contract even though such amendments do not purport to modify the contract for purposes of termination. In that instance, the courts may find that it is incumbent on the other party to plead and prove that the party who provided notice did so to the rebut the presumption of automatic renewal. In one South African case, the judge found that the party in breach of an evergreen contract was estopped from unilaterally terminating out of time, even when given reasonable notice, although the court also indicated that there may be exceptions if the party seeking equitable relief can show that it would be unreasonable or unfair to hold the party to the strict requirements of the contract. Once again, the intent of the parties is determinative.
The approach taken in common law jurisdictions generally requires that the courts will consider a contractual termination clause when determining whether the agreement has terminated. If there are no apparent clauses, the question then arises as to whether the contract is for a fixed term which will expire, with little indication from the court as to how long that term may be. There has also been a trend to consider the purpose or actual operation of the agreement as opposed to its strict interpretation in order to ascertain whether the agreement has terminated in the absence of a clause, and to evaluate whether any renewal option has been deemed to have lapsed.
In the absence of a clause of termination, the courts are unlikely (at least in common law jurisdictions) to terminate an evergreen contract, even if the reasonable expectation of the parties has not been met. The organic nature of these contracts renders them susceptible to judicial interpretation – which means that entry into an evergreen contract should be undertaken with caution.
The principle of freedom of contract allows for alterations of an agreement to amend any term, including its duration, although in the absence of a term, the courts will be sympathetic to the contention that a term is an element indispensable to the agreement. Hence, contracts which do not expressly stipulate for the duration of the contract may constitute a variation of an original agreement, rather than an amendment of an existing agreement.
The legal considerations relating to implied terms can, however, be varied. South Africa permits a deviation from the strict interpretation of a contract for the purposes of the Public Policy Doctrine and, as such, courts cannot be predictable in applying the doctrine. Generally speaking, a rigid application of the doctrine will be rejected, although what is considered reasonable will depend on the indices of public policy and the surrounding facts of the case.
Pitfalls & Risks
Despite their apparent ease of administration, evergreen contracts present a number of challenges and risks which may not be immediately apparent to the parties. Evergreen contracts are premised on the automatic renewal of the contract unless either party gives the other notice to terminate, which encourages the party who is granted the right to terminate to do so in order to avoid the contract from being automatically renewed. The party considering termination must weigh the costs of continuity of the contract against the potential benefits of discontinuing the contract. These costs and benefits must be analyzed on any given day that the termination right exists, which may lead a party to seek to have the ability to initiate termination of the contract gradually over time, and accreting those unilateral rights into the contract itself, to ensure financial prudence and desire for continuity of business align. Whether there will be an adder or multiplier effect in the calculation of these costs and benefits will vary from context to context, and so the parties should be encouraged to perform due diligence and scenario planning in terms of their potential calculations.
Depending on the context, either party may agitate for the ability to initiate termination of the contract at any given moment before the automatic renewal date. The supplier may argue that it cannot arbitrarily lose a client. The client may argue that is impossible to wait for an arbitrary time period only to be rewarded with bad quality or worse , disrupted service. In either case, the parties should be concerned with ensuring smooth and sustainable continuity of business to avoid costly disruptions.
The extent to which notice may be required to terminate an evergreen contract is also a potential source of friction between the parties. Certain contracts may only require ten days notice to renew, while others may require a month of continuous service in order to fully notice that the contract will terminate. The length of any notice periods required to terminate an evergreen contract may not be clear on the face of the contract, which could potentially create disputes between the parties where a party deems that it has given sufficient notice, but the counterparty claims that the notice window has not yet passed.
Depending on the nature of the relationship between the parties, certain terms may be stated at the outset of the evergreen contract despite indicating a temporary duration which may vanish on renewal. For example, certain termination fees payable by the client may be stated to apply for the first two years, but arguably they are also statutorily void if applied by the supplier after the second anniversary of the evergreen contract.
Negotiating the Terms of An Evergreen
The following strategies can help ensure both that your company receives a fair deal and that you don’t end up with a contract that you’re bound to for longer than you anticipated.
It may be tempting to accept one-size-fits-all boilerplate evergreen terms, particularly if you feel like you’re under pressure to sign a deal or move onto a project. However, in order to ensure the best possible outcome, do your best to negotiate terms that work for your company and you and your legal counsel will have much less work to do when it comes time to renew — or end — the contract.
You can start the negotiation process by asking questions about how the contract terms work in practice. For instance, how long is the initial term? How long after that is the auto-renewal period? If the contract is automatically renewed, how much notice would a party need to give before renewal? If either party would like to terminate, how much notice would they need to give?
If you’d like to avoid having to revisit these questions down the line, you might try requesting that the anti-renewal notice period be extended, or asking for an exception that will allow you to void the contract early, that way you’re protected even if change happens with the third-party vendor.
Regardless of your strategy, you’ve got plenty of options with regard to limiting the duration of a contract.
Examples of Evergreen Contracts
Evergreen contracts are commonly used throughout multiple industries and could be of particular interest to companies providing subscription services. In addition, many commercial and business contracts, not just those for the sale of goods or services, may contain clauses renewing the contract for subsequent periods unless one of the parties provides written notice of intent to terminate the contract prior to the end of the then current term. An employment contract with an evergreen provision authorizes the employee to continue working until one or the other party provides proper notice of termination. A construction contract may authorize the builder to occupy the property indefinitely after completion , provided that the builder uses the property only for certain purposes and pays applicable rent. An office lease may authorize a tenant to renew the lease for a specified period provided that the tenant gives proper notice of intent to renew. In each case, the initial term may be relatively short, e.g., one year, but if the parties continue to perform under the contract (the builder continues to use the property, the tenant continues to pay rent and occupy the space), the contract will last indefinitely, so long as proper notice has not been provided.
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