Beware of Evergreen Clauses

“Evergreen contract – A contract that renews itself from one term to the next in the absence of contrary notice by one of the parties” – BLACK’S LAW DICTIONARY 321 (7th ed. 1999).

Imagine that your business entered into a contract with a company to supply all of your paper needs for one year.  Towards the end of that year, you decide that you’d prefer to switch to a different paper supplier.  When you contact your current supplier to tell them that you’re going to be using another supplier, they inform you that your contract won’t allow you to do that.  In fact, you are contractually obligated to keep using the current supplier for another year!

The problem here is an “evergreen” clause in your contract.  Many contracts – particularly service or supply contracts, as well as leases – include a so-called “evergreen” clause.  This type of contract automatically renews at the end of the contract term, unless one of the parties notifies the other party that it does not want to renew the contract.  Often, this notice must be given within a specified time period prior to the end of the current contract term.

Here is a typical evergreen clause:

Term.  The Commencement Date will be May 1, 2009.  The Term of this Contract will be for five (5) years beginning on the Commencement Date.  The Contract will automatically be renewed at each fifth anniversary for an additional five (5) year term unless terminated by either party by giving written notice to the other party at least ninety (90) days, but no more than 120 days, prior to the end of the then-current five (5) year term.

Under this specific clause, the customer would have to notify the service company, in writing, that they did not want to renew the contract no less than 90 but no more than 120 days prior to the last day of the contract.  If the customer failed to notify the service company in writing within that time frame, the contract would automatically renew.

So how can your business avoid a scenario like the one above involving the paper supply company?  The simplest option is to review every contract before signing, and pay special attention to anything that could be an evergreen clause.  If you’re unsure whether a particular term is an evergreen clause, you should consult with an attorney.  If there is an evergreen clause in the contract, you should negotiate with the other company to try to get the clause removed before signing the contract.

If the company refuses to remove the evergreen clause, you have two options.  First, you can “calendar” the specific date or time period in which you would need to provide notice that you will not be renewing the contract.  That way, you will ensure that you won’t forget about the automatic renewal provision.  Second, you can simply refuse to sign the contract and choose another company that doesn’t require this type of provision!

To avoid getting stuck in a contract with an evergreen clause, we recommend you always consult an attorney before signing a supply or service contract, or any other contract about which you have concerns.

The small cost of due dilligence up front could save your company big money down the road.

This article was written by Melissa L. Demorest, Associate at Demorest Law Firm. Click here to view her professional resume.