ABSTRACT: What is an "Evergreen Clause"? What are the benefits and potential pitfalls of the evergreen arrangement? Is the evergreen clause enforceable? Does it make sense?
ABC Corporation is in the business of producing widgets. In order to manufacture those widgets, ABC needs a regular supply of steel. So ABC enters into a contract with XYZ Corporation, a steel manufacturer, to purchase a one month’s supply of steel. The next month, ABC again enters into a contract with XYZ to purchase a one month’s supply of steel. This pattern continues for a few months, with ABC signing a new purchase contract every month.
This pattern of signing a new purchase contract each month continues for several months, until the purchasing officer at ABC forgets to place the regular monthly order with XYZ. As a result, ABC runs out of steel, and widget manufacturing comes to a halt. The purchasing officer quickly contacts XYZ to purchase a month’s supply of steel, but the damage has already been done: ABC loses a week of production and has to pay for expedited shipping of the steel.
To avoid having to remember to order steel every month, ABC’s purchasing officer asks XYZ if they can enter into a purchase contract that will automatically renew each month. XYZ agrees, and presents ABC with an “evergreen contract” to purchase steel. Just like the prior purchase contracts, this new contract is for ABC to purchase a one-month supply of steel from XYZ. However, this new contract also contains an “evergreen clause,” which says the contract will automatically renew each month, unless one of the parties gives written notice to the other party at least fifteen days before the renewal date that the contract will not be renewed.
Should ABC enter into this evergreen contract with XYZ? To answer that question, ABC’s purchasing agent needs to consider the benefits and potential pitfalls of the evergreen arrangement, whether the evergreen clause is enforceable, and ultimately whether it makes business sense for ABC. What is an “Evergreen Clause”?
Black’s Law Dictionary defines “evergreen contract” as “a contract that renews itself from one term to the next in the absence of contrary notice by one of the parties.”[1] The automatic renewal provision in an evergreen contract is often referred to as an “evergreen clause.” An example of an evergreen clause is: “This agreement shall be automatically renewed for the same period of time unless canceled in writing by either party, sixty days prior to its expiration.”[2]
Evergreen clauses can be used in many types of contracts, including leases[3] and service agreements[4]. For example, a contract to lease an apartment for twelve months might state that the contract will automatically renew for another one-year period unless the renter or the landlord gives notice of non-renewal at least thirty days before the end of the current one-year period. As another example, a contract to provide cleaning services to a business for two years might state that the contract will automatically renew for another two-year period unless one of the parties gives notice of non-renewal at least sixty days before the end of the two-year period.
What are the Benefits of Evergreen Contracts?
One of the main benefits to both parties of an evergreen contract is predictability. In the ABC-XYZ example discussed above, both parties can count on the shipments of steel continuing on schedule unless and until one party decides to end the arrangement. XYZ knows ahead of time that it will have a regular buyer for its steel, and ABC knows ahead of time that it will have a regular supplier of steel.
An evergreen contract’s requirement to give advance notice of non-renewal also provides a benefit to both parties. If ABC gives notice of non-renewal, XYZ will have at least fifteen days to find another buyer for the shipment of steel it was planning on sending to ABC. If XYZ gives notice of non-renewal, ABC will have at least fifteen days to find another supplier of steel and avoid a disruption in widget manufacturing. Depending on the nature of the parties’ businesses, a greater or lesser notification period may be required.
Of course, both parties need to pay attention to the terms of the advance notice requirement. If ABC forgets the fifteen-day requirement and gives notice of non-renewal on the last day of the month, that notice will be ineffective until the following month. In that case, ABC will be obligated to purchase steel from XYZ for one additional month; and, if ABC refuses delivery of the steel and/or refuses to pay for the steel that month, it will be liable for breaching the contract. Thus, while the advance notice requirement is a benefit that protects both parties, it is also a requirement that must not be ignored by the parties.
Are Evergreen Clauses Enforceable?
Some jurisdictions have limitations on automatic renewal clauses and/or heightened notification requirements in certain contexts (such as consumer contracts, residential leases, and collective bargaining agreements), so it is important to check local statutes and case law when analyzing a particular evergreen clause.[5] However, evergreen clauses in service contracts are usually enforceable under general contract principles.
For example, in Judson Roberts Company v. Seaboard Allied Milling Corporation, the Missouri Court of Appeals upheld the automatic renewal of a one-year service contract to provide a “Management-Employee Relations Program.”[6] The evergreen clause at issue in that case provided for automatic renewal “unless written notification is given by registered mail, either party to the other, not less than sixty days prior to any anniversary date of this order.[7] The court found that the defendant failed to give notice of non-renewal more than sixty days before the end of the first one-year term, so the contract automatically renewed for an additional one-year term.[8]
Similarly, in Dover Elevator Company v. Rafael, the Missouri Court of Appeals upheld the automatic renewal of a five-year contract to service and maintain elevators.[9] The evergreen contract at issue provided: “Either party may terminate this agreement at the end of the first five years or at the end of any subsequent five-year period by giving the other party at least (90) days prior written notice.”[10] The court found that the defendant failed to give notice of non-renewal more than ninety days before the end of the first five-year term, so the contract automatically renewed for an additional five-year term.[11]
Damages
If a party fails to cancel the Contract with a timely notice, and refuses to adhere to the Contract’s terms, that party is liable in damages. For example, in the elevator case, Dover, if the user of the services refused to allow Dove to service its elevators and used a different company, it would be liable for all of Dover’s lost profits for five years.
Conclusion
Evergreen clauses are common, useful, and enforceable in the context of service contracts. The automatic renewal provisions provide predictable continuity to the parties, while simultaneously allowing either party to cancel the automatic renewal with advance notice. Parties to an evergreen contract do need to be mindful of the advance notification requirements, to ensure they give notice of non-renewal within the required time frame. But in most cases, the burdens associated with giving advance notice of non-renewal are greatly outweighed by the benefits to both parties entering into an evergreen contract.
[1] CONTRACT, Black’s Law Dictionary (10th ed. 2014).
[2] Jetz Serv. Co. v. Chamberlain, 812 S.W.2d 946, 947 (Mo. Ct. App. 1991).
[3] See, e.g., Behlmann v. Weaks, 150 S.W.3d 153, 156 (Mo. Ct. App. 2004).
[4] See, e.g., Judson Roberts Co. v. Seaboard Allied Milling Corp., 435 S.W.2d 26, 28 (Mo. Ct. App. 1968).
[5] For example, Wisconsin has a statute regulating automatic renewal clauses in some business-to-business service contracts and leases of business equipment. Wis. Stats. § 134.49.
[6] 435 S.W.2d at 28.
[7] Id. at 27.
[8] Id. at 28.
[9] 939 S.W.2d 474, 476.
[10] Id. at 475.
[11] Id. at 476.