Evergreen Contracts: Key Definition And Essential Information To Know

What Are Evergreen Contracts?

An evergreen contract is a repeating contract that automatically renews for a period of time after the termination of the previous term as long as one of the parties does not provide notice of cancelation. For a contract to be considered evergreen, the duration of the renewal period must be outlined and specifically state how it will be renewed. Evergreen contracts are common in employment contracts, but they can also be consumer contracts.
The defining characteristic of an evergreen contract is that it automatically renews for a specific term upon expiration without requiring a signature or affirmative action by either party. The renewal term is outlined in the original contract language. If a party wishes to terminate the contract , they must provide notice 30 to 60 days in advance of the renewal date. The contract would then terminate upon the end of the current renewal period.
For example, an individual agrees to work as an independent contractor with an advertisement agency. The agreement is for a term of 90 days, and in order to be terminated parties must provide 30 days’ notice of their intent not to renew. If the individual continues to provide their services after the 90-day term, then the agreement will automatically renew for another 90 days, and so on. The court in St. Paul Guardian Ins. v. Lido Maritime, Inc., defined the renewal period as the period of time between the parties’ respective notifications and the end date of the contract.

Pros of Evergreen Contracts

Evergreen contracts are advantageous for both businesses and employees alike. For businesses, they create a seamless continuity of service. Consider, for example, that most Internet service providers (ISPs) have evergreen contracts. If everyone had to re-sign every single month, people would lose (or misplace) the paper work and end up without Internet. That would be a disaster for most businesses. In this same vein, many businesses have long-term evergreen contracts with their suppliers or manufacturers. These contracts allow the continuing supply of necessary supplies and services and safety in knowing that your vendor or contractor will always be available when you need him or her.
For employees, evergreen contracts strip most of the negative uncertainty usually involved in employment contracts. Even those who do not care about job security still need to schedule vacations, stay on top of benefits changes, and properly prepare for retirement. With an evergreen contract, an employee knows his or her employment will extend beyond a given date so they can make the necessary arrangements.

Cons and Potential Risks

While evergreen contracts can be advantageous in certain situations, they may not always be the best fit for every scenario. One of the most common drawbacks is the limited flexibility they offer. A long-term commitment can be beneficial if you’re looking to establish stability and continuity in a long-term relationship. However, in a fast-paced business world, this lack of flexibility may be seen as a drawback, making it challenging to adapt to new circumstances or shifting market conditions.
Another significant downside is the potential for increased financial responsibilities at the end of the agreement term. Because an evergreen contract allows the agreement to automatically renew, the financial commitments associated with the ongoing agreement can grow over time. As the amount of money owed increases, it may become a significant burden to fulfill. Moreover, businesses should also consider whether the evergreen nature of the contract will require financial guarantees or surety bonds, which can carry more expensive repayment terms.
Evergreen contracts may not be the best option for businesses that need an adaptive and flexible agreement to respond to shifting market standards, particularly when there are significant changes within the organization. For example, the ownership of the company may change, new ownership may take over, or the company may be sold. In these situations, parties may prefer the ability to re-negotiate the agreement’s terms rather than be bound by a long-term commitment. Another example is a drastic change in the industry landscape that would require a modification to the agreement. Many businesses operate in rapidly evolving industries, where the terms of a long-term agreement may no longer be financially feasible under new market conditions.
In summary, while evergreen contracts afford several advantages to those who utilize them, they are not without their drawbacks or challenges. It’s important to consider all options before implementing an evergreen contract and weigh the advantages and disadvantages based on your business needs.

Where Are Evergreen Contracts Found?

Evergreen contracts are or can be common in any industry. However, they are more popular in larger, established industries and tend to be less common for smaller businesses or start ups.
As a general rule, any business that utilizes contractual parameters to insure a contracted product or service is a strong candidate for an evergreen contract. Evergreen contracts are often used for:
Tech. The tech industry uses evergreen contracts because in many situations technology needs continual fine-tuning, upgrading and monitoring. Another use in the tech industry for an evergreen contract is licensing software to another party. For example, a company may license a software product for a specific period of time, for specific volume licenses and additional fees for premium services. These licensing agreements often require annual renewal unless notice is provided.
Subscriptions/Perpetual Services. Subscriptions and perpetual services are typically evergreen contracts. An example would be a service like Netflix or a subscription service for search engine optimization.
Insurance. Insurance policies are good examples of evergreen contracts because they automatically renew unless canceled. Insurance contracts are a mixture of services and an extended use of property. If a client cancels an insurance policy, it must insure that the cancellation is submitted before the new billing cycle starts.
Maintenance agreements. Many businesses enter into maintenance agreements with another party to provide regular services to maintain leased or owned property. For example, a maintenance provider may enter into a contract with a commercial property owner to provide landscaping, security systems, energy efficiency maintenance, pest control, housekeeping services, etc.
Travel. Travel companies are another example of an evergreen contract. A travel agency often acts as a broker for a number of services that the traveler needs for a vacation, such as airfare, hotel, car, etc.
Professional Services. Professionals that provide ongoing services for clients, such as attorneys, psychiatrists, accountants, consultants, should craft an evergreen contract to govern their relationship with a client. These evergreen contracts should include provisions for withdrawal, termination for cause, notice and other terms and conditions.

How to Navigate an Evergreen Contract

One of the biggest advantages to an evergreen contract is that keeping up with dates is as simple as reading and following the terms of the contract. Because the initial term begins upon execution and the renewal period begins thereafter, you will never be surprised by the renewal deadline. Careful attention should be paid to review and cancellation provisions under the agreement to ensure that annual reviews are timely conducted and that renewals can be timely and properly canceled . Calendar reminders can be useful in keeping track of the initial term and the renewal term. When entering into an evergreen contract, consider setting the calendar reminders for the last possible moment you are able to cancel the contract in order to provide you the greatest possible flexibility and protection. If you do intend to cancel the contract, you should of course document the cancellation in writing, including the date of cancellation.

Legal Guidelines and Considerations

"The general rule of statutory construction is that the specific operation of a law must then govern the general: that if something is plainly included in any of the provisions of a statute, or excluded, it must be held to have been so because it was an object of the law, and not because it was in conflict with its terms. What is clearly within the intention of the law cannot be defeated by the mere fact that it has not been expressly provided for." – R. v. Isleworth Crown Court, ex parte DPP [2006] EWHC 1221 (Admin) The evergreen contract is generally disfavored in many legal circles, not the least of which was the motivation behind the American Bar Association’s Model Rules of Professional Conduct Rule 1.17(c), urging lawyers to be "mindful of the order of the courts against perpetual continental division practice agreements, with regard to breaching contracts within a three-year time window." Evergreen contracts do not invoke ideal client-lawyer relationships, nor are they encouraged in the employment of international agents under the Bribery Act with potential vertical and horizontal issues. But why? Twenty-year agreements offer little recourse to parties in emerging markets where enforcement of a contract is tenuous at best. If the agreement is broken, the courts will only be willing to award the market value of the services provided. So why are they drafted? Well, it appears as if evergreen contracts remain, in the perceived absence of a competition authority willing to take on the role in developing nations, as a tool to stifle competition. It may be permissible under local laws for a monopolist to contract directly with a competitor, or the parties may believe their particular agreement is sufficiently rare that it would not attract the attention of competition authorities. However, when it comes to an evergreen license agreement, the trick lies in remaining compliant with local laws, including, as above, the Bribery Act, as well as the Foreign Corrupt Practices Act, banking regulations, and tax laws. So it comes down, ironically, to which law is king. Providing clear clauses regarding termination, renewal, and period review are essential to the equitable enforcement of evergreen agreements. Although there are different views as to what constitutes "reasonable notice", and how this notice should be made, courts have been willing to infer reasonable notice when drafting is imprecise. Further, the termination and/or review date may be particularly useful in providing some semblance of fairness. For example, provision can be made to either specific remedy for breach that allow the party to issue a warning before starting litigation, or an agreed notice period to be invoked in order to settle any disputes before one party approaches the courts. Further, it may be worthwhile, especially in relation to compliance with the Bribery Act, to inject escrow provisions into agreements, requiring the competitor to deposit all materials into a court for a set period before they are released.

Real World Examples and Case Studies

Real-life examples and case studies are vital to fully understanding the concept of evergreen contracts. While the above-mentioned benefits sound good in theory, do they hold up to the test of time when placed into a practical scenario? Understanding all of the terms and verbiage can be overwhelming, which is what makes using real-life examples all the more critical.
To bring things into perspective, let’s say XYZ Ltd. has two different contracts – one with Service A and the other with Service B. XYZ Ltd. has been using Service A for over two years and is currently very happy with the services being provided. Services B on the other hand, have not been up-to-par in terms of quality, responsiveness, etc. With its evergreen contract clauses in place, XYZ Ltd. has already requested the vendor of Service B to improve terms on their end. While improvements were noticed for a short period of time, things returned back to the way they once were, poor service. Without evergreen contracts, XYZ Ltd. would have had to sit idly as Service B continues to fall short of expectations , unable to terminate the agreement.
Now, imagine another scenario. ABC Corp. is very pleased with its choice of vendor in Service C since they have always met their commitments. Since its evergreen contract has been in place for a while, ABC Corp. has outgrown their initial contract requirement. If not for their evergreen contract, they would be stuck paying for outdated terms, but because of the foresight displayed in having an evergreen contract, ABC Corp. has been able to negotiate new terms and has saved money in the process.
The above-mentioned examples show both sides of the coin, some clients are satisfied with their vendors, others are not. The important question to ask before entering into an evergreen contract is how long am I willing to be under contract with a specific vendor, and if for any reason the relationship was to sour, how quickly would I want out of the agreement? Understanding these key points, will allow you to work with your attorney to get the most out of your evergreen contract.