SHOULD EVERGREEN CONTRACTS LAST FOREVER?

Black’s Law Dictionary defines an 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.”

Unlike auto-renew contracts, which generally have an ultimate end-point, evergreen contracts can potentially auto-renew forever. That being the case, most evergreen contracts include a “before” or “within” termination clause to avoid being regarded as altogether unconscionable.

With a “before” termination clause, a party must opt-out of the contract before a certain point in time. This is the preferable option because one can simply elect to opt-out the day after the contract goes into effect and not have to worry about the contract renewing. The less desirable “within” clause requires a party to actively opt-out during a specific timeframe in the future, which is easier to overlook. If a party signs an evergreen contract in January and forgets to opt-out “within” a designated week in December, they are automatically bound by another interval of contractual obligation. In either case, evergreen contracts shift the burden from remembering to renew to remembering to opt-out for both parties.

Examples of contracts with evergreen clauses include leases, credit card agreements, purchasing contracts, advertising contracts, gym memberships, stock options, health care plans, insurance policies and service agreements for items such as elevators, HVAC and grounds maintenance to name a few. It’s no secret that evergreen clauses typically favor the service provider, but they can also benefit the customer.

In circumstances where a failure-to-renew can result in a catastrophic situation, an evergreen contract may offer a substantial advantage. In cases where a failure-to-opt-out can result in unacceptable expense or inconvenience, an evergreen contract is probably best avoided.

Evergreen contracts make the most sense where an ongoing supply of products or services are needed indefinitely. For the customer, they provide at least a measured term of stability and steady budgeting. For the supplier, evergreen contracts provide consistency and the ability to accurately forecast long-term business plans. While an evergreen contract allows the customer to lock in current prices, it also prevents the customer from taking immediate advantage of lower costs when market prices drop. Furthermore, when prices rise, suppliers have the same opt-out opportunity as the customer. So it’s unrealistic to think than an evergreen contract will ensure same-rate pricing forever.
 
If you are already locked into an evergreen contract you may be asking if they are enforceable? Depending on which state you live in, the answer can range in varying degrees from “no” for individual consumers to “yes” for businesses and community associations. The more cryptic or vague the language of an evergreen contract, the less favorably it is looked upon by the courts. However, evergreen contracts with clearly defined language and explicit opt-out clauses are usually enforceable under general contract principles.

That said, an evergreen contract may be canceled by default or through the mutual agreement of all associated parties. Since default may result in litigation, mutual agreement is clearly the better option. Although a supplier may not want to cancel or renegotiate an evergreen contract, the very real risk of losing the opportunity to do business with you and your organization over the long-term could very well outweigh the short-term margin gained in a single, and likely final, cycle.