What are Evergreen Contracts?
Evergreen contracts are legally binding agreements that include provisions for automatic renewal after the end of a specified term. They are often used to provide continuous service for a time period longer than one year, and after that initial term is completed, the contract continues on a rolling basis until the party that wishes to discontinue the contract provides proper written notice.
Evergreen contracts are often utilized in a variety of industries for a number of different purposes, such as:
In order to terminate a contract that was initially for a specific period of time, parties must give notice stating that, upon its expiration, they wish for the contract to end rather than for it to continue on a rolling basis . Standard business contracts often are evergreen in nature, such as office leases and other service contracts. For example, a business might enter an evergreen contract for a three-year IT support or computer maintenance system. In this case, although the contract started out for a specific term, it is automatically renewed unless there is a written cancellation issued by the end of that term. After the contract has ended, the parties can then renegotiate as necessary.
Pros of Evergreen Contracts
Evergreen contracts can hold considerable appeal for both service providers and clients. For the service provider, they provide the convenience of shorter agreements and a steady flow of work and perhaps payment. For the client, they can be convenient and make future budgeting easier by providing for long-term services at predictable pricing. When entered into as part of the overall transaction documentation for a course of dealing, such as power supply under a center agreement, the use of evergreen contracts can simplify life for the parties and add certainty to the business relationship.
For the service provider, evergreen contracts can improve cash flow. The relatively small size of each individual agreement can make it easier for the service provider to find a source of funding based on that agreement. In addition, because each deal is for a shorter term than would be expected under a larger master agreement, renewal of the supplier’s line of credit or ability to access future financing is not "tied up" over the long term.
Evergreen agreements also allow for the possibility of increased revenues for the service provider. If price levels go up or costs go down, there is room for an increase in earnings as the rate or cost structure is brought along with the supply. Contractually, it is usually possible to provide for change in rates or costs in a relatively simple manner as renewals occur on a contract-by-contract basis.
For clients, the use of evergreen contracts can promote stability in the business relationship. Ordering and delivery frequencies can be predetermined based on supply needs, and pricing parameters can be readily determined based on the flow of supplies. Nature abhors a vacuum, and removing uncertainty as to length of contract for a specific transaction can promote consistent ordering patterns. In addition, providing for the same contract terms for each individual supply can avoid an "evergreen" (renewal) negotiation process that can take time and effort away from other issues in the business relationship.
Evergreen agreements can also allow clients to take advantage of lower prices than would otherwise be possible. Since the supplier will want to tie the customer in at current pricing levels for any extent of time, it may be willing to consider an attractive option for the client to prevent the supplier from "going out of the market" with its pricing. The particular option will depend on the circumstances in which the agreements are made. For example, long-term customer customers may be given options to opt out of price increases at set intervals or to renegotiate a favorable pricing mechanism in exchange for a lower supply price. If the supplier has a better "feel" for the market than the buyer does, it may price significantly below the market at the outset in exchange for the benefit of having a price floor in place.
Cons of Evergreen Contracts
Many of the benefits to an evergreen contract have the potential to become drawbacks if the parties are not careful in their approach. In particular, the absence of a definite end date presents the possibility of an inadvertent automatic renewal. An evergreen contract typically has dates by which either party can provide notice of non-renewal to ensure that the contract does not continue indefinitely as the parties may not intend. If an automatic renewal does occur, the parties may have a difficult time getting out from under the contract because many evergreen contracts have provisions requiring notice within a certain number of days prior to the automatic renewal date. If an automatic renewal occurs and either party is unable to fulfill the notice obligations for the next renewal term, the contract will likely renew along the lines of the previous term. Remember, as mentioned above, even if a party sends notice of termination, it is also advisable to affirmatively state its intention to not renew the contract – mainly to remind the other party of its obligations and to emphasize that the notice is not simply an expression of dissatisfaction with the existing agreement but explicitly a termination and not a renewal.
Another consideration is the burden of terminating an evergreen contract. Many evergreen contracts require considerable notice to effectively terminate. The long notice period is meant to give the other party a reasonable amount of time to plan for the expiration of the contract; however, it comes at a cost. The longer the notice period, the more likely it is that the needs of the parties will change during the notice period.
One other potential drawback to an evergreen contract is a lack of flexibility. If the parties want to allow for greater flexibility, and if desirable, the parties should include language allowing for cooperation or good-faith negotiations to amend the contract during the term. This will at least create a contractual obligation for the parties to attempt to renegotiate the contract to accommodate for changes. Of course, either party remains free to negotiate on its own, but if they cannot agree, the parties should avoid letting the evergreen contract operate as an avenue to enter into a new contract. In other words, the parties should not use the evergreen contract and a signed but non-operating new contract as a means of renegotiating their agreement. A court may view this as an attempt by one party to backdoor its way out of the strictures of the agreement.
Legal Considerations
When considering the legal terms for an evergreen arrangement, there are various considerations to keep in mind. Like any contract, there is the consideration of freedom of contract (the right for parties to agree to any term not prohibited by law) and enshrined in Contract law under section 1 of the Law Reform (Contracts) Act 1963 of Parliament (Ireland). For example, can the terms and procedures for permitting the party requesting the extension notice be disallowed or refused? Or do you intend to treat the agreement as continuing unilaterally until terminated? It is suggested that those terms be sufficiently and clearly set out in writing to reduce the ambiguity of interpretation.
Under the statutory rights provisions of the Consumer Rights Act 2015 ("CRA 2015"), if the agreement is with a consumer and is subject to an automatic extension, it may be required to provide the consumer with information prior to any period of renewal. Some contracts may provide that no further payments are required once the customer has paid a certain amount , but this may be an unfair term for a consumer contract. There are also stricter rules on automatic renewals in the European Union for services (e.g. gym, leisure centre, mobile phone) as consumers can cancel their membership one month (not the default of twelve months), unless the company provides ongoing services to the consumer. See the CRD 2014/92/EU (published May 2014).
The Financial Services Code of Conduct often requires for financial services agreements that the consumer’s needs and objectives have been investigated and a range of products offered. Likewise, the Consumer Rights Act 2015 makes it a requirement that fairness and transparency of terms is observed, and any changes or reductions in the cost of a service or product be documented and signed for by the consumer. Typically, evergreen arrangements are supplied in a B2B context, and accordingly, the Consumer Rights Act 2015 obligations may not directly apply.
How to Manage Evergreen Contracts
Effective management of evergreen contracts starts well before the renewal date. Keep a detailed log of all of your evergreen contracts in one place or on a central electronic system so that all team members can easily access them. It is also a good idea to have an index of the evergreen contracts so you can quickly determine when a contract is set to renew.
In addition to detailing the terms of the contract itself, make note of any significant upcoming deadlines within the agreement that precedes the renewal date, such as notice periods to facilitate a non-renewal or other key notice dates where consensus from both parties is necessary to ensure a smooth transition. Identify early on the points in time where you will need to assess the vendor’s performance under the contract prior to communicating your decision to renew or not. Obtaining accurate and complete information is key to making informed decisions in the best interest of your company.
Assign the task of tracking the renewal date to a team member or manager who has sufficient seniority to consider the strategic business objectives of the arrangement at the time of renewal. Consider including this task in managing the calendar in your organization, to help ensure time-sensitive deadlines are met.
Automate the reminder for the upcoming renewal date as much as possible, while allowing enough time for the manager to review the contract and the performance by the vendor. Ideally, the reminder should be sent to the manager in advance of the review period. This way, the manager has ample time to review the evergreen contract terms, assess the vendor’s past performance and if applicable, determine where changes may be needed for the next renewal period.
Make regular review of evergreen contracts a part of your organization’s calendar to ensure timely feedback, and allow enough room for discussions with the vendor on key issues that come up during the contract term and either need to be addressed right away or are particularly important to address for the next renewal period. If the vendor has been responsive to your concerns during the contract term, this may result in a simple, straightforward renewal. If serious concerns arise, this can provide for an early opportunity to terminate the relationship without incurring further costs.
Review all contract terms prior to submitting to the vendor for final signature and execution to verify that any changes you have made are accurately reflected in the final version of the agreement. Lastly, before renewing the contract, be sure you have a clear understanding of what specific actions need to be taken by both parties for a smooth renewal process.
Evergreen Contracts Examples
In the world of real estate, management agreements commonly roll over automatically unless terminated with prior written notice within a set period before the renewal date. In the telecommunications sector, services are often rendered for indefinite terms with automatic renewals unless the customer provides notice to terminate before a specified date. Mobile devices using cellular networks are typically provided to customers on reflective, ever-growing 24- or 48-month schedules . In the financial services industry, incentive compensation contracts for high-performing employees are commonly evergreen until one party provides timely notice of a desire to terminate. Finally, software licenses for cloud-based platforms and other software are also often evergreen until the customer stops the perpetual payment of subscription fees.
