Evergreen clause

Evergreen clause allows automatically extend the contract for a specified period of time, if it is not previously renegotiated or canceled at the appropriate time. Contracts which include evergreen clause can create sizable long-term risk.

General terms

The general conditions shall include contract's start and expiry dates, evergreen clauses and termination clauses. There are many reasons to properly understand the contract, termination clause and the dates of its commencement and completion. If in the contract that has been concluded, there is no termination clause, it will not be possible to change suppliers until it is resolved.

However, the evergreen clauses may require that within a specified period of time the notice of termination will be delivered before the contract expires. If the written notification is not delivered not later than sixty days before the contract expires, the evergreen clause automatically renews the agreement for one year.

Evergreen Clauses can exist in consumer agreements but also in commercial contracts, including:

• Residential Lease Agreements
• Advertising Contracts
• Gym Memberships,

and many others agreements.

Automatic renewal

Evergreen clauses require a letter of termination before the contract ends, they are often proposed to entities with whom a long-term contract is concluded. It is very likely that the party of the contract will set a new counter-contractor between the agreement implementation and the last few months of the contract. Not sending a letter about the deadline to the contractor will result in an automatic extension of the contract, even in the absence of staff changes.

The contracting entity seldom receives benefits from the evergreen clause, so when it is detected by specialists, they should question the clause during the negotiations. An evergreen clause extending the contract for additional years is very common.

Effective annulment of the clause is possible by sending a notice immediately after the contract has been executed. Such important letters should be sent to the contractor by registered post with ordering confirmation of receipt, which is proof that the recipient has received the letter. It is very important to keep all the most important documents, because the complete contract files (when the dispute develops) are decisive for the contracting entity.

Examples of Evergreen clause

• An Evergreen clause in a lease agreement can allow the tenant to extend their lease for a set period of time, such as six months, unless the tenant chooses to move out or the landlord chooses to terminate the lease.
• An Evergreen clause in a software license may allow the customer to extend their license agreement for a set period of time, such as one year, unless the customer chooses to terminate the license or the provider chooses to terminate the license.
• An Evergreen clause in an employment contract may allow the employee to extend their contract for a set period of time, such as two years, unless the employee chooses to terminate the contract or the employer chooses to terminate the contract.

Advantages of Evergreen clause

An evergreen clause provides many advantages to both parties in a contract. It ensures that the contract is automatically renewed or extended at the end of the specified term, unless one or both parties choose to renegotiate the terms or end the contract. Here are some of the advantages of including an evergreen clause in a contract:

• It eliminates the need for parties to continually renegotiate or extend the contract, which can be time consuming and costly.
• It allows for continuity and stability in the contract, as it automatically renews and therefore does not need to be renegotiated.
• It provides flexibility for parties to renegotiate the terms of the contract, or end the contract, if desired.
• It allows both parties to plan for the future, as they can be confident that the contract will be extended.

Limitations of Evergreen clause

Evergreen clause has certain limitations that should be taken into account before signing a contract. These include:

• Unclear/ambiguous terms: Without detailed and clear contractual terms, the evergreen clause can be difficult to understand and enforce.
• Costly: The evergreen clause often requires the parties to continually renegotiate the contract, which can be time-consuming and costly.
• Unexpected consequences: An evergreen clause can lead to an unexpected result if the parties do not plan for the changes in the terms.
• Unbalanced power: An evergreen clause can give one party more control over the other, as one party may be able to push through changes more easily than the other.
• Lack of incentives: With an evergreen clause, there is no incentive for either party to keep the contract up to date, as they know it will automatically renew.

Other approaches related to Evergreen clause

Aside from allowing contracts to automatically extend, there are several other approaches that can be taken to manage the duration of a contract.

• Auto-Renewal Clause: This clause allows for a contract to be automatically renewed after its initial expiration date, typically for a period of the same duration as the initial contract.
• Termination Clause: This clause allows for a contract to be terminated either through mutual agreement or through the breach of contractual terms.
• Renegotiation Clause: This clause allows for a contract to be renegotiated after its initial expiration date, typically to reflect changes in the market or in the parties' needs.
• Extension Clause: This clause allows for a contract to be extended after its initial expiration date, typically to allow more time for the parties to fulfill their obligations.
• Option Clause: This clause allows for either party to have the option to extend the contract after its initial expiration date, typically with the agreement of both parties.

In summary, aside from allowing contracts to automatically extend, there are several other approaches that can be taken to manage the duration of a contract such as auto-renewal, termination, renegotiation, extension, and option clauses.

Footnotes

Evergreen clause — recommended articles

Delivery Notice — Inchoate instrument — Commencement date — Construction management contract — Executed agreement — Retention bond — Supplemental agreement — Periodic tenancy — Deed of surrender

References

• Bholat M. (2012), Practice Management, An Issue of Primary Care Clinics in Office Practice, Elsevier Health Sciences, p. 675
• Kowalski J. T. (2012), The School Superintendent: Theory, Practice, and Cases, SAGE Publications, p. 382
• Payne J. and others (2011), Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing, John Wiley & Sons, p. 38
• Sims Curry W. (2008), Contracting for Services in State and Local Government Agencies, CRC Press, p. 154.

Author: Monika Sojka