Contract Tip: Avoid Evergreen Clauses
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.