If you’re interested in Evergreen Clauses, you should consider L4SB’s flat-rate contract review. Only $20/page (minimum 5 pages).
In my previous blog post, Not incorporating is risky business, I suggested everyone in business for themselves should incorporate their business. This article will be helpful for anyone, whether they are incorporated or not. It is the first, of many, articles in which I will talk about contract best-practices.
One of the most basic elements of a contract is its term. Term indicates “the duration” for a contract, or how long a contract remains in force. The courts will not honor a perpetual contract, so all contracts have some form of language indicating the term of the contract. The most common term I’ve seen over the years is one (1) year, although it’s equally valid to have contracts with a term of one (1) month or ten (10) years.
So, how is it that you signed a contract with your employee / vendor / partner / lessor / whomever years ago, yet it is still in force?
The answer is the ubiquitous evergreen clause. An evergreen clause is a statement within a contract, that says something to the effect of “this agreement shall automatically renew for another one (1) year term, unless either party provides notice to the other of its intent to terminate this agreement not less than thirty (30) days before the end of the then current term.”
There are many ways to word an evergreen clause, but they all have the same common characteristics: If triggered, they act to keep alive the contract for longer (hence the name, “evergreen,” since they keep the contract ever green). And, they have some mechanism to end the contract (otherwise, the contract would be perpetual and therefore invalid). Evergreen clauses can otherwise vary drastically: They vary in how much time needs to act, to end the contract. They can create a window sometime before the term ends, or a window sometime within the end of the term. They can create quite onerous hurdles to “get out of” a contract, if one wanted to prevent it from automatically renewing.
Evergreen clauses are okay if you’re providing a service, but work against you if you’re receiving a service.
In general, I’ve found that evergreen clauses are good when you’re providing a regular or routine product or service to a customer. It helps lock in the customer. I also found that evergreen clauses are acceptable for leasing premises. It helps keep the price stable, and something like leasing premises are significant enough that most people can remember when the contract is up for renewal. However, in most other cases, especially where you’re the consumer of a regular or routine product or service, evergreen clauses work against you.
I had the unfortunate experience of assisting one of my clients out of a contract, which required a notice within thirty (30) days of termination (not sooner and not later), and the notice was only accepted if there was no balance on the account. The contract incurred monthly fees, however. So, my client submitted notice, but the notice was rejected because the company said money was owed on the contract. The problem was, by the time my client received notice from the company that they didn’t accept his notice to terminate, it was past the thirty (30) days and the company said my client was on the hook for another year on the contract.
Nightmare scenario, but there are other reasons why you don’t want enter into contracts with evergreen clauses.
Only agree to an evergreen clause, if there’s a really good reason.
One of the most common reasons not to enter into an evergreen clause with a provider, is to take advantage of downward pricing pressures. Don’t be fooled by the promise of “lock your price in,” because (1) prices rarely go up in our competitive economy, and (2) if prices really went up, the vendor would be sure to exercise their option out of the contract. Evergreen clauses breed complacency in the relationship, and you miss out on an opportunity to “renegotiate.” This is especially important after a year of service, because well, you’ve had a year of service. You know the ins-and-outs of the relationship, and you’re in a better position to make demands, whether it be on price, delivery options, returns or response time.
How do you get out from under an evergreen clause?
The first way to avoid an evergreen clause, is to not sign a contract with an evergreen clause. Simply refuse to sign, unless the evergreen clause is removed. If the opposite party will not remove the evergreen clause, yet you still want to do business with them, then line out the evergreen clause before you sign the contract. Just simply line it out (and initial where you made the change).
If lining out an offending evergreen clause is not possible either, then the last trick is to make sure it’s a “sometime before” versus a “sometime within” clause. See the example below. Request the change, and most contracting parties will let you do this.
If you cannot avoid the evergreen clause altogether, then you might want to consider simply evoking the evergreen clause (if it’s the right type of evergreen clause). Consider the following two evergreen clauses:
- Sometime before: This agreement shall automatically renew for another one (1) year term, unless either party provides notice to the other of its intent to terminate this agreement not less than thirty (30) days before the end of the then current term.
- Sometime within: This agreement shall automatically renew for another one (1) year term, unless either party provides notice to the other of its intent to terminate this agreement within thirty (30) days of the end of the then current term.
Evoking the first example (the “sometime before”) clause is easy. Just send notice to the other party, of your intent to not renew the contract anytime before thirty (30) days before the end of the contract. For example, send notice right now. Make sure that notice is well-documented, and get the other party to acknowledge the notice.
The second example is harder. You need to create a calendar item, and make sure you send a notice of your intent not to renew within the right time-frame.
Law 4 Small Business. A little law now can save a lot later.
Wow…the world is certainly about words….little ones can certainly make what otherwise appears to be a friendly contract…. into one which is a trap.
Normally you deal with a person you respect and as the terms is written so small as to be nearly unreadable, you would expect the person to at least bring it to your attention. Otherwise the opposing company to inform you that your contract is about to expire and do you wish to upgrade. If this evergreen clause was not disclosed to you before you signing and you have no inclination as to what it implies ca it not be concidered as fraud.
This a good piece of advice I just went through dealing with evergreen clause’s with my employer in Reno, NV. None of the prior Operation Managers even look at the copy machine contacts to find these clauses until it was to late. Lucky we were looking to upgrade the copy machine’s so when I extended the contract I was able to remove.
I’m an HOA board member in Delaware and have just learned that our agreement with a propane gas supplier is an “evergreen” contract. There is a term “just cause” in the agreement which states that we, the HOA can terminate the contract giving the propane company 60 days written notices for just cause. My question is: what constitutes just cause? How can we avoid another 5 years with this company when we have the chance to convert to natural gas at this time. Our contract ends 12/31/16. The contractor entered into this agreement when he built the community and its assigns, the HOA accepted it for the 10 yr duration. Now we are at the end of 5 yrs with another automatic renewal of 5 yrs it we don’t terminate or should I say IF we can terminate it. Isn’t this contract an monopolistic or illegal restraint of trade type of an agreement?
I think you’re bringing up two different issues with respect to your contract. First, if it has a 5-year term and it will renew automatically on 12/31/2016 (which is what I’m inferring from your statement above) for another 5-years, then you need to review the language regarding preventing the automatic renewal and serve notice as required to terminate the automatic renewal. Automatic renewal (i.e. “evergreen”) is different from the “just cause” language. What “just cause” means, is that if a party materially breaches the contract for some reason, then the non-breaching party can terminate the contract with 60-days written notice.
You may want to consider having a lawyer (whether us) or someone you trust, review the contract and let you know what your options are with respect to terminating.
Thank you and good luck! Larry.
With the Federal UDAP and specifically the ROSCA targeting Auto Renewal contracts requiring the clause to be Conspicious, which the FTC defined as bold, italicized, standing out from the surrounding text, isn’t that an out for the consumer(individual or business) if the agreement is all in the same font and the autorenewal clause does not meet this requirement?
This is an excellent question, and we’re going to have to update this blog article (I published this blog article way back in 2011).
But to quickly respond to you, ROSCA (which standards for “Restore Online Shoppers’ Confidence Act”) is very limited in focus. It’s intended for Internet transactions, for consumers, for specific types of sales. These restrictions will not apply for standard business-to-business contracts (i.e. your typical lease, for example, or services agreement). Furthermore, it’s my understanding that ROSCA is a remedy for the FCC — you cannot use it for your own civil cause of action or an affirmative defense. I’ll look at this more, and publish a revised blog article in the next few months.
As it relates to Federal ADAAP, I’m not aware of the FCC or CFPB exercising its authority (except for ROSCA?), and expect these to focus on consumer rights almost exclusively. I don’t see this impacting general contract law between two businesses.
Again, I’ll issue a new blog article in the next few months to comment on this.
Thank you. Larry.
How is this interpreted? is the contract no longer in force if there was no formal review and no new signatures?
“This contract, including rates, are in force for one year from this contract execution date and are
reviewed annually with an automatic annual rate increases of 3% of the current contract rate(s).”
This isn’t really well worded, but with what little you’ve given me, this really doesn’t look like an evergreen clause to me. The problem is this clause addresses both “rates” and “this contract,” but the “reviewed annually” and “automatic annual rate increases” seems to apply to “rates” and not “this contract.”
I would assume there is other language, somewhere, addressing the term. If there isn’t, then this looks like a one-year contract to me.
You really should have someone look over the entire contract, if you’re about to try and declare the contract terminated. There could be other implications, issues or detrimental reliance somehow that can have implications if you simply declare the contract terminated.
What happens if all all original parties of an evergreen agreement are dead? But the contract has evergreen clause (and also says it will enure).
Is it possible to invalidate based on the fact that all parties are dead, despite the “enure” term?
Unfortunately, it’s not really feasible to declare a contract null and void, because all the original parties to an agreement containing an evergreen clause are dead. The reason being a contract can be assigned, thereby bringing in new potential parties to a contract.
What are good avenues to invalidate an evergreen agreement?
There is an enure clause. There is an estoppel clause ie prior failure to enforce does not mean it’s no longer enforceable.
We have property we own. We keep a building on it that is violation of the agreement and have done so for 10+ years.
It is evergreen. It has enurement clause. But all parties to original agreement are dead.
Concern is we have issue with neighbor now who is using this to retaliate for something else.
You really should hire an attorney (who focuses on real property in your local jurisdiction) to look at it.
Your issues involve contracts, real property and adverse possession laws. These are all complex in their own right, and can vary significantly from one jurisdiction to the next. Therefore, you really need to hire a good real estate attorney to look at the contract, the facts and circumstances of your matter, and give you an official legal opinion of your options.
I’m sorry I cannot be more help to you. Good luck.