What is an Evergreen Clause?
Evergreen contracts are agreements that have automatic renewal clauses built within the terms. Instead of expiring at the end of the designated term, these contracts will continue to remain in effect for as long as both parties agree to the arrangement. The key point of an evergreen contract is that the parties are not required to re-sign the contract. Instead, the contract is renewed under the same terms as long as neither party asks for it to be terminated.
Usually, the terms for an evergreen contract are set for a period of time—often one year—at the end of which they will automatically be renewed. It is also possible for an evergreen contract to be set up so that it does not expire unless one party submits the appropriate paperwork. While it may sound like evergreen contracts provide for an unlimited amount of time, there are usually guidelines that help control the duration of the contract. For example, if one party asks for a modification in the terms, this could trigger a need for the contract to "renew" with new terms and conditions that have been mutually agreed upon. If the parties reach mutual agreement that the contract should end , the terms for the contract can be carried out to their logical conclusion. While some spoken contracts are evergreen in nature, most are written contracts. There are several situations where evergreen contracts are common: Some parties may prefer to work from an evergreen contract, because it allows them to focus on service and the execution of contract items under the contract instead of worrying about whether or not a contract is coming up for expiration. Instead of worrying about contract review during the course of the contract, the parties can continue working as long as the arrangements remain mutually beneficial. Sometimes, this is more of a consideration for contract managers or lawyers than it is for the actual signatories to the contract. On the other hand, sometimes contracts stipulate a specific duration so that the contract parties avoid becoming too familiar with one another. Renewing contracts after a short period of time puts a natural spotlight on any discrepancies or difficulties, allowing those issues to be addressed without a lot of delay.
Advantages of Evergreen Clauses
Evergreen clauses are beneficial in a number of contexts because they reduce administrative initiatives related to extending agreements and contacting parties about whether they wish to continue relationships. In some cases, relations between parties become routine, and parties might not be aware that their existing agreement has terminated or that they must bargain to extend it. A party who implements an evergreen provision does not need to make an effort to force its agreement to continue. Some parties, especially in commercial contexts, like for agreements to be perpetual, although that is not always the case in other contexts. Evergreen clauses tend to provide certainty by minimizing the point at which agreements could terminate. Parties do not need to make arrangements to find new suppliers for products and materials or keep track of when an agreement is about to end so that it can be extended or renegotiated. If parties have already agreed to the terms in an initial contract, they may be comfortable entering into a long-range contract structured as an evergreen agreement. In theory, an evergreen agreement should lead to fewer disputes and arguments about the length of time for which the agreement is valid.
Over time, an evergreen clause can decrease the number of drafts and negotiations that parties need to conduct over renewals or extensions. Because the clause ostensibly extends the agreement indefinitely, parties do not have to set aside time for negotiations, which can decrease costs and improve the business relationships between the parties. Despite the fact that evergreen clauses at times allow for a longer period of time to pass before an agreement must be renegotiated, parties who are satisfied with the terms of the agreement would not be inconvenienced when a long-range contract is structured with an evergreen clause. Such parties may set a specific timeframe with which the agreement would end on its own or include an indefinite term for the material but update the contract to reflect updated terms from time to time.
Disadvantages of Evergreen Clauses
There are a number of potential problems that can arise with an evergreen clause with the most notable being a lack of flexibility. Most business owners know the importance of having an adjustable and nimble approach to their contracts. For instance, in some situations a job may start taking longer than anticipated and you may need to expand upon the basics of a project. If the terms state that the contract will automatically renew unless canceled by a given date, there may be little recourse available so that you can adjust the terms in favor of you and your company.
Another concern with an evergreen clause is that it can make a contract difficult to terminate. Suppose for example that your contract states that it will automatically renew and then you forget to go about terminating the agreement. In this situation, you may be stuck with the contract for another term.
A final concern is the potential for unwanted automatic renewals. As mentioned earlier, contracts can be automatically renewed or have the option for renewal. Often times, an automatic renewal can be broken if sufficient notice is given, but it still may create problems. For example, suppose you have a contract for a new product in which the price is quite low. However, the terms state that the contract automatically renews and the price rises significantly. You could try breaking the contract, but that may lead to a dispute. It may also turn into a huge problem if the other party is manufacturing the product at the higher price and you are purchasing it for the now higher price.
Negotiating An Evergreen Clause
When contemplating the use of an evergreen clause, both parties should make it a point to discuss its inclusion early on in negotiations and in the context of the overall contract. For example, if a contracting party is negotiating for a term of 12 months, it may have an uphill battle when seeking to defeat a proposed evergreen clause because it could appear that the contracting party is not acting in their own best interest. In negotiating the length or conditions of the evergreen clause, contracting parties should consider how the evergreen clause will interact with other provisions of the agreement.
Another consideration is whether the form of documentation is appropriate for either party to exercise termination rights. A statement of work may be appropriate depending on who holds the contractual right to terminate for convenience .
If the parties agree to an adjustment of the term for the evergreen clause, the parties should negotiate the duration of and any preconditions to extended rights of termination. Will the renewal period commence automatically or will it be dependent on the provision of notice? Will a party have to make a request to exercise its rights under the evergreen clause?
Another point of negotiation for the evergreen clause is whether termination rights are solely by contract, or whether rights also exist at common law. Similarly, the parties should carefully consider whether there are applicable equitable considerations, such as unconscionability.
When negotiating an evergreen clause, the parties should also take into account whether they are protected by statutory notice requirements which may ameliorate circumstances where an evergreen clause provides limited protection.
Legal Issues and Compliance
When it comes to contract law, the governing body for U.S. federal contracts and employee protections is the Federal Acquisition Regulations (FAR), which are issued and managed by the Office of the Federal Procurement Policy (OFPP). For government documents and guidance relating to evergreen clauses, there’s the OFPP’s "Guidelines for Obtaining and Maintaining Contractor Performance Information" (the PIF guidelines).
While evergreen clauses are not directly addressed in the OFPP guidelines, they are treated the same as any other non-linear contract term, meaning they can’t be exercised unless they are in accordance with the FAR and OFPP regulations outlined below.
Clarifying contract language is important to contractors in order to meet government compliance requirements, and also avoid contract terminations and defaults leading to debarrment or default. This is why has recently published a newsletter titled "Contract Management: Evergreen Clauses and Other Linear Contract Terms."
FAR Subpart 32.7—Contract Funding provides additional details about linear contract terms. Here’s an excerpt pertaining to evergreen clauses: An agency may include an evergreen clause in a cost-reimbursement or incentive contract only when the extent of duration is consistent with the minimum needs of the Government and is determined to be in the best interest of the Government. A determination that an evergreen clause is appropriate may be made any time prior to the issuance of the solicitation.
Non-federal procurement regulations may defer the responsibility for regulation of evergreen clauses to the state and local jurisdiction under consideration. In those localities with no specific regulations or limitations, the foregoing standards are applicable.
The contracting officer is responsible for determining whether a particular contract term involving its respective agency is in the best interest of the government as a whole. When such a term is implemented, FAR guidelines must be followed to avoid federal crackdowns.
The Federal Relations and Policies section of the OFPP guidelines—for feedback and comments on government procurement practices—further provide examples of linear contract terms in general, with no mention of evergreen clauses: Linear terms are permissible in certain limited circumstances. For example, a contract may include a minimum purchase clause whereby the agency may reorder the item(s) during the contract term, but does not obligate a minimum dollar value at the outset. Use of linear terms should be justified by the agency. However, the absence of any kind of timetables is not permissible, as time is a crucial component in the analysis of reasons for the respective contractual agreement.
Federal procurement regulations for the use of evergreen clauses are strict, and the benchmark for what is acceptable and not acceptable are typically located directly in the FAR and OFPP guidelines. State and local jurisdictions may have their own integrity, term and termination requirements that could differ from the federal guidelines but generally cover the same areas.
It’s important for government and contractor insurance and compliance professionals to be aware of the federal and interested state/local laws as they apply to the weights, measures and timing of contract terms such as evergreen clauses.
How to End An Evergreen Clause
To terminate or opt out of an evergreen clause, a party must generally provide advance written notice to the other party in accordance with the terms of the contract. In many agreements this amount of notice could be as long as twelve months . However, some contracts only require notice a few weeks beforehand. Regardless of the amount of time required, both parties in a consumer agreement and a B2B agreement should be aware of the renewal date and the amount of notice that needs to be provided in order to avoid automatic renewal.