Definition of an Evergreen Contract
Evergreen contracts, often referred to as perpetual contracts, are agreements in which the parties have no end-date. Instead of being bound to a specific term such as 5-years, the parties agree to continue until one of the parties provides notice to the other of their intent to terminate. Evergreen contracts have some unique defining features.
The most characteristic feature of an evergreen contract is that it automatically renews. As soon as the term of the contract expires the parties are rebounded to the agreement until another party notifies the other of their desire to terminate. Of course, automatic renewal clauses may not be binding if termination is desired sooner than the automatic renewal date.
Another unique feature of an evergreen contract is an inherent obligation of good faith on behalf of the parties. Due to the fact that the parties are not bound by a specific termination date, both parties have a continuing obligation to try and reach an amicable solution for a termination date . In many commercial contracts this would mean that, even though a party is dissatisfied with the contractual relationship, they are required to make a reasonable effort to provide the other party with notice of termination as early as possible.
Unlike fixed contract terms, the terms and conditions of a contract are generally negotiated in an evergreen contract. As mentioned above, since there is no defined termination date, the parties must come together in good faith to negotiate the closing of the contract, which means that terms hinge on the relationship between the parties.
The fact that contracts usually have an initial term or expiration date is the major difference between evergreen contracts and traditional contracts. A party with a traditional contract can call for a contraction of the contractual relationship after a specific period while evergreen contracts would require a renewal of the contract and good faith negotiations before the relationship can be terminated.
Benefits of Evergreen Contracts
Evergreen contracts offer a number of advantages for businesses and individuals. For businesses, one of the most significant benefits is the provision for automatic renewal. Automatic renewals save the time and expense associated with termination of the contract and negotiation of a new agreement. When a contract provides for automatic renewal, the parties are saved the costs of negotiating a new contract.
Contracts that renew automatically often contain terms that allow either party to terminate the agreement upon notice or expiration of a stated period. When one of the parties wishes to terminate the agreement, they must give the appropriate notice or provide the specified period of time prior to expiration of the contract.
One benefit of evergreen contracts for businesses is the possibility of negotiating an increase to the contract price. Generally, if a contract calls for renewal, the price remains the same. However, it may be possible to negotiate a higher price at the time of renewal. Raising the price at renewal can be advantageous for a business as well as the individual circumventing the need to file a lawsuit for breach of contract.
Evergreen contracts can be beneficial for businesses in the event the parties do not come to a clear agreement. In the event of a dispute, the contract continues to be in effect until the dispute is resolved or the parties fail to meet the conditions for renewal. Often disputes arise for lack of communication. As such, the contract provides a mechanism for problem resolution. If negotiations are stalled, the parties can take time to review the terms of the contract or consult an attorney regarding future obligations.
Contracts that automatically renew are also beneficial for individuals. Many individuals receive discount for automated renewals. When a person subscribes to a service for a certain period of time, there is an option to renew. Often the discount is substantial enough to be considered a significant savings. For the person offering the product or service, an automated renewal makes it possible to predict future revenues.
Where Are Evergreen Contracts Used?
Evergreen agreements are commonly found in a variety of industries that rely on either the supply of a good or service to a customer on a recurring basis or to the employment and retention of an employee. Below are some examples of these types of contracts.
Subscription services are regularly long-term (sometimes indefinite) agreements where a customer agrees to pay for the service over a certain period of time and the lifetime of the contract automatically renews at the end of each term until otherwise terminated. Examples of this include satellite television or cable contracts and cellular service contracts.
Regardless of whether an evergreen provision is included in the initial contract, physical and mental health services common provide a patient with the ability to extend a treatment plan and schedule recurring appointments as necessary. While some health insurance plans limit coverage of mental health services based on a maximum number of covered sessions per month or year, mental health services in states that have adopted state mental health parity laws are required to cover the same number of mental health care visits as no mental health visits. As such, a mental health professional may be subject to the evergreen provisions of this state law.
Service agreements can also renew automatically for a period of time until one party gives oral notice to terminate the agreement. This is common in the hospitality industry, such as when an event planner agrees to book a certain number of nights at a hotel, through an agreement that allows the customer to terminate the agreement with a minimum amount of notice prior to the commencement of the booking term.
Once a contract containing an evergreen clause is executed, it may be very difficult to terminate. Both parties should give careful thought to whether such a provision would be appropriate in a contract and the length of time such a provision should last.
Problems and Issues
While evergreen contracts offer certain benefits, parties should consider the following potential challenges: Perpetual Obligations: Because evergreen contracts never have a defined term, contracting parties may find themselves bound obligating them to comply indefinitely. This presents challenges because contractual obligations and duties often change over time. Business needs change, the economy changes, and it may be prudent or necessary to adjust terms to account for inflation. For example: Cancellation and Renewal Rights: Parties should review cancellation, renewal, and amendment rights. An evergreen contract should normally permit amendment or cancellation by agreement of the parties or upon specified written demand of either party. In some cases, contractual renewal rights may be tied to the occurrence of certain events. Generally, smart business practice requires periodic review of security contracts to account for changes in market value or regulatory requirements.
Writing an Evergreen Contract
specific regard to cancellations. In other words, the provisions for termination and renewal must be clearly drafted. Both parties should maintain the right to cancel the contract, but within agreed upon time periods and under certain circumstances.
Careful drafting of the right to cancel (or to renew) is critical should either party wish to cancel the contract.
The following are some suggestions:
Clearly state the parties to the contract. The contract should identify all parties who will benefit from the contract, and how any future owners will be notified.
The duration of the contract should be clearly set out. Does the contract terminate after a certain number of years, or is it for an indefinite term? If the contract must be cancelled within a specific period it should be clearly stated.
Are there occasions when either party has the right to cancel? If so, these situations must be clearly defined. For example , can either party cancel if there is a disagreement about the agreement? If not, what happens?
Termination must be clearly defined. It is not enough to just say that a party may cancel if violations of the terms and conditions of the contract occur.
The notice period must be clearly defined. This involves stating the circumstances where prior written notification is required before either party can cancel, and defining how advance notice is given.
How will the contract be renewed? Will renewal occur automatically every year, or every other year, if neither party cancels? If either party wishes to cancel, how much notice must be given?
There is no one size fits all with respect to what should be contained in the terms of an evergreen contract. They tend to be complicated and may extend over a long period of time, and it is important to have the right to cancel and renew.
Court Cases and Precedents
Case studies and legal precedent held up the principle that the use of evergreen contracts is indeed enforceable in law; as long as their terms are reasonable.
In the case of Sundlee v Tegral Oceanics NL [2000] EWCA Civ 204, Lord Justice Otton stated "The underlying aim of a contract is to give effect to the intentions of the parties who made it."
He went further to say that an evergreen contract term "plainly extends to the length and duration of a contract, or any of its terms, and therefore assumes that the other essential terms remain unaffected and intact."
Lord Justice Otton had previously become known as "the king of the clause" due to his rulings in both The Supaswift Case from 1993 relating to the acceptance of late payments and that of a Fair Trading case in 1994 concerning the "significant degree of freedom" given to parties negotiating a contract by the 1999 Contracts (Applicable Law) Act.
Today’s understanding of evergreen contracts is that only one party may be concerned about the length of the contract; one with continuous performance by the other, a high turnover of employees or savings or commissions paid to an initial employee in an agreement where they "pay for themselves" has always been acknowledged in law. Contracts that provide for automatic renewal have become standard in the industry as the norm is for such agreements to be structured to be in place over a period of years with payment fee schedules that have to be set up and agreed upon.
Some "evergreen" agreements that are frequently used today are:
For the most part, the industry has long accepted that a sales representative would expect to be compensated for a commission sale or to fulfil a contract of employment which requires on-going work that deserves compensation.
The same is true of lead generation contracts and joint ventures that provide continuing profits or other contractual agreements performed for the benefit of long-term clients or stakeholders. Medical and automotive service contracts are all geared to provide on-going contracts with repeated service revenues by providing the consumer with a simple payment option for servicing their vehicle or aids.
The truth is that "evergreen" contracts are the successful representation of long-term thinking and one that has become an accepted and expected norm of reciprocity.
Evergreens and Best Practices
Managing evergreen contracts is critical to avoiding unintentional renewals and litigation. As every contract is different, businesses should carefully review each agreement with their operations teams to determine what measures are necessary to minimize the risk of timely non-renewal. Common strategies for effective evergreen contract management include:
- (1) Set and maintain reminders in your contract management software to alert your team of upcoming automatic renewals. Your reminders should note the time period before the renewal that requires notice and should be sent to individuals outside your company who can ensure that the notice is provided timely.
- (2) Track all correspondence related to an evergreen contract carefully. Under some circumstances , an oral agreement can modify a written agreement regarding the exercise of rights under that contract. Therefore, in addition to tracking contract notices to your contract management software, provide those notices to your legal department and file them with the underlying contract.
- (3) If you do not want to renew the contract, then ensure that notice of non-renewal is given in a timely manner as specified in the contract. Timely notice is a good opportunity to open communications with the counter party regarding the current contract terms and/or interest in renewing or renegotiating the agreement.