What is an Evergreen Clause?
Evergreen is a term of art meaning a contract that stays current or active. Accordingly, an evergreen contract is unending and ongoing, or one that has no termination date. Evergreen contracts contain provisions for the automatic renewal of the contract for additional set periods of time. In contracts with evergreen clauses, a termination date is established at the onset of the contract. When the termination date arrives, the contract remains in effect unless either party terminates it in accordance with the terms of the agreement.
In general, an evergreen clause requires the receiving party to provide notice to the other party , usually between 30 and 90 days prior to the established termination date, of its intention to either continue the agreement for another term or terminate the agreement so that the party can proceed to enter into new contracts on its own behalf.
The key to these types of clauses is that the receiving party needs to provide timely notice by the deadline set out in the contract to avoid any damages or penalties. An evergreen clause can be a useful protection to the client, as opposed to a termination provision that allows a party to terminate the contract for any reason.
Benefits of Evergreen Clauses
Evergreen clauses also offer practical advantages for parties to an agreement. For example, if you consider that most agreements are entered into for a fixed term and the parties may wish to spend time negotiating renewal terms or renegotiating the contract after it expires (which may require fresh legal review for amendments), an evergreen clause avoids this inconvenience and protects both parties against the unintended termination or expiry of the agreement.
Option for an Early Termination: Signing parties will often be dissatisfied with their choice of initial contract period, whether it is too long or short. The inclusion of an option to terminate early can allow both parties to fairly reassess their original expectations with regard to the changing circumstances of the professional relationship.
Risks Involved
Risks and Challenges of Evergreen Agreements
In many cases businesses may not be aware of the fact that a contract has renewed, particularly where a contract has been in place for some time. It is not uncommon, as a result, for business owners to end up committing to a long-term contract without first assessing whether or not the terms of the contract are still beneficial.
There are several reasons why an evergreen clause will not be in the best interests of a business, but it is particularly important to establish a policy regarding early termination of contracts in order to avoid issues that may arise. Earlier termination provisions listed in an evergreen agreement can take the form of an exit strategy that allows one or both parties to terminate the agreement without penalty before the contract’s automatic renewal date. Conversely, it may be beneficial to develop and execute an early termination provision into the agreement for the party which is at risk of non-performance under the agreement.
In addition, businesses that are bound by a master services agreement (MSA) are typically bound by the terms of that MSA as they relate to the services being provided. For instance, if a service provider enters into an MSA with an end-user for one service that is set to automatically renew, but creates a separate schedule under the MSA for the provision of a different service, the service provider is in the position where they may be bound by the commercial terms of the agreement in relation to the services being provided under the MSA when those terms are no longer in the service provider’s interest. To resolve such a scenario, service providers should ensure that the terms of the MSA clearly specify that MSAs will only apply in relation to the services that have been specified in the schedules to the agreement. In addition, service providers should include early termination provisions for the termination of services under MSAs where they may no longer be require in relation to a particular customer.
Legal Aspects
Evergreen agreement clauses can come under the scrutiny of regulatory bodies. In the case of Denmark, Gregory v. con Am and O’Connor, both of which are discussed in greater detail below, the Danish competition authorities brought the clauses to the attention of the National Competition Authority after consumers complained. The Danish competition authority reached a settlement with both car rental companies with regard to their evergreen agreement clauses. As both Gregory and con Am signed conciliation agreements with the Danish competition authority, the terms of the conciliation agreements are not in the public eye.
Unlike Denmark, the UK’s Office of Fair Trading (OFT) is more publically critical of evergreen agreement clauses and how they can be an abuse of a company’s market power. In its guidelines on the assessment of agreements in the vehicle salvage sector, the USG states: In the case of an evergreen contract, the vehicle salvage company should normally be allowed to terminate. An evergreen contract can suck a customer into a cycle of tacit renewal that can be difficult for the customer to break out of. It also means by default the customer will pay higher fees for an extended period of time without needing to take any demonstrable action. There is a risk that the vehicle salvage company could charge significantly higher fees than it would be able to charge in a market without those evergreen contracts in place. Evergreen contracts are therefore likely to fall foul of the competition law unless there is clear evidence that they were acceptable, in terms of their duration, at the time they were entered into. For example, if it can be shown that a customer has deliberately entered into the evergreen contracts, having had the opportunity to review the terms, the contract length might be acceptable. Failing that, the terms of the agreement must contain express safeguards on price, or allow the customer to exit the contract much earlier than the customer could exit a comparable contract in the market without causing any significant loss of benefit to the vehicle salvage company. Evergreen contracts should therefore be subject to scrutiny by the OFT as to whether they are acceptable. This means that evergreen clauses should also be seen in the context of the strength of the respective parties’ market position. If a party is acting in a monopoly position, and exercises its market power by introducing evergreen clauses, then such clauses may be subject to scrutiny under national competition laws.
Drafting Effective Evergreen Clauses
An evergreen clause may state that the agreement will continue unless one party provides a certain period of notice of termination. Such clauses should be clearly drafted, with a specific reference to the duration in question. Example: "This agreement will continue for a period of one (1) year. Upon the expiration of such initial term, this agreement will auto renew every year so long as the parties do not provide the other party with at least thirty (30) days’ written notice of their desire to terminate this agreement in strict accordance with this section." It is important to state the specific length and duration of renewals. This eliminates disputes over such length and duration, which are not obvious. Without language on this point, a court could order the renewal term to be a reasonable period of time. In California, courts have potentially unlimited discretion regarding "reasonable" notice. Courts in other states may order a fixed, but different period of time. It is also important to provide for a specific procedure for how notice of termination must be given . Example: "Any notice of termination must be in writing, must occur by personal service, messenger service, or by facsimile, e-mail, overnight courier, or certified or registered mail, provided, a certified or registered letter is properly addressed, postage prepaid, and deposited with the United States Postal Service." Parties may want to specify a contact person in each of their respective organizations to handle either or both notice to terminate and notice of renewal of the agreement. Example: "All notices with respect to this agreement must be delivered at the following addresses: To [Party A or B]: [Contact Person] Title: Insert Address Re: [Insert name of agreement] To [Party A or B]: [Contact Person] Title: Insert Address Re: [Insert name of agreement] The parties may also wish to provide separate e-mail addresses for notices in addition to a physical address. In these days of fast communication, a best practice may be to require simultaneous delivery of both a hard copy and an electronic copy when delivering a notice of termination or renewal of the agreement: Example: "In addition, contemporaneously with delivery of any notice pursuant to this provision, party shall send a copy [specify if in addition to the exact same notice, or in lieu of the same notice] electronically, to [specify e-mail address]."
Typical Applications in Industry
As with most contractual provisions, the types of agreements in which evergreen clauses are most commonly found will depend on the nature and relationship of the parties and the subject matter of the agreement.
For example, service agreements are popular vehicles for evergreen clauses, as they allow the parties to extend a contractual relationship over time without the parties potentially incurring turnover costs in regularly negotiating new terms. Evergreen clauses are also commonly recognized and used in leases, where they help landlords avoid the costs of negotiating and executing replacement leases at the end of the term. However, landlords should be careful about the durations of the automatic renewal periods, lest they inadvertently create a long-term lease subject to a less favorable legal regime.
While evergreen clauses are not unique to commercial services and lease agreements, they are also widely used in the context of subscription services. For instance, website developers often include evergreen clauses in their end user license agreements ("EULAs"), as does the well-known online fundraising and marketing platform KickStarter.
Potential Alternatives
Not all commercial arrangements can be structured around evergreen provisions, so it is common for parties to consider different contracting mechanisms. These alternatives include fixed-term contracts with or without renewal mechanisms, contracts with automatic termination provisions, and termination rights. Each mechanism has its advantages and disadvantages in balancing the needs of the parties.
Most parties are familiar with contracts with fixed terms due to their prevalence in many aspects of life. Typically, parties will know that, in the absence of a renewal mechanism, they will be bound to the contract for an agreed fixed period. Most frequently, this fixed term will not exceed five years. A limitation of a fixed term contract is the inflexibility it entails. As with a fixed term tenancy, the parties may not be able to extend their relationship beyond the set duration without lengthy negotiations and potentially lengthy notice periods.
However, two alternatives are increasingly being used in commercial contracts to allow for greater flexibility in negotiations and also provide the parties with the benefit of certainty and commensurate protection against sudden termination or withdrawal, namely:
• renewed arrangements with or without an agreed minimum period of notice and
• contracts which terminate unless extended by a positive act of the parties.
These alternative arrangements are often used to facilitate the continuity of an ongoing relationship, because it can take time to negotiate commercial arrangements and parties are often reluctant to invest time and effort upfront with no certainty. Indeed, many relationships can take years to develop and build up trust and familiarity between the parties to the contract, so it is no surprise that the ability to enter into a contract beyond an initial term of say two or three years is often attractive to both sides to a contract.
In the case of a renewed arrangement, the parties will be required to give certain periods of notice before the expiry of the initial or any subsequent terms of the contract, but the total duration of the contract may be any period agreed between the parties. Some parties prefer for their arrangements to be renewed (or otherwise agreed to continue) unless one party decides otherwise, because this lessens the burden on the parties by relieving them of the obligation to "re-negotiate" the contract, which can be especially beneficial in long-term arrangements where changes to the terms may be relatively minor. This is most typically seen in renewable property leases, which may operate on a month-to-month basis with a right of either party to terminate on short notice . These arrangements are attractive because the parties can to a great degree ignore the end of the current term and assume that the contract will continue unless they are told otherwise.
Contracts which automatically terminate unless extended by the positive act of the parties often have an agreed minimum period of notice and may allow the parties to extend the contract on the same terms (by notice). For example, it is common for insurance policies to be renewed automatically for a fixed period, which may be described as "inception to inception". Again, these are advantageous to parties wanting certainty that the contract will remain in force unless otherwise advised.
However, care is needed when drafting contracts with automatic termination clauses because:
• they can be unintentionally triggered if the appropriate formalities are not observed; and
• they may present claims issues in situations where a party seeks to avoid liability for prior breaches.
For example, in one case an adverse costs order made against an assetless claimant was overturned for appeals unwittingly filed outside the strict time limits imposed in the court rules. The property in question was no longer raw land but had, by way of a sublease arrangement, been developed into operational premises by the defendant in the ten months between filing the notice on appeal and moving for leave to appeal. The order for payment of the defendant’s costs was set aside because the automatic termination clause in the sublease had been triggered (although the defendant was ultimately held to be estopped from relying on this ground).
Depending on how it is worded, an automatic termination clause could similarly be triggered where ongoing liability can be avoided by a further positive act by the parties. For example, a party may be able to trigger an automatic termination clause if a court finds that it has breached the contract and thereby fails to extend the contract when it is expected to. Furthermore, if a party finds itself in economic difficulties and wishes to avoid its obligations to comply with certain terms of the contract, it may be that the clause will be satisfied if it fails to perform its contractual obligations.
Automatic termination clauses should, therefore, be treated with caution and carefully considered in the context of the aims of the parties when drafting agreements.
Therefore, it is important that evergreen and other rolling agreement clauses are clearly drafted to achieve the required outcome for the parties.