Contracts are pivotal to personal and business relationships.
They outline the terms of agreements as well as the duration of enforceability.
Evergreen contracts are agreements that automatically renew those terms and clauses indefinitely until one or both parties move to terminate the contract.
Picture a scenario where both parties find it advantageous to have a contract that rolls over once the term elapses instead of negotiating a new one every time.
In this case, an evergreen contract is the best option because it continues in perpetuity, provided the terms remain agreeable to all involved parties.
In this article, we’ll discuss everything you need to know about evergreen contracts.
By the time you finish reading, you’ll find out how it works and when it is right for you.
Key takeaways:
- An evergreen contract renews automatically after the initial term without renegotiation.
- Evergreen clauses ensure that contracts roll over indefinitely until one of the parties decides to terminate the agreement.
- Evergreen contracts are used in business, rental agreements, healthcare plans, retail services, product subscriptions, and long-term cooperation.
- Signing an evergreen contract with a service provider guarantees coverage throughout the term unless you terminate it.
What is an evergreen contract?
An evergreen contract is a form of agreement that renews itself automatically after the expiration date elapses.
As the name suggests, an evergreen contract retains its validity until someone decides to cancel it.
Evergreen contracts are similar to fixed-term contracts, with the only key differentiator being the evergreen clause — which stipulates that the agreement rolls over to a new term automatically.
When do you need an evergreen contract?
You’re probably wondering who would want to sign an agreement that renews itself automatically.
Newsflash: such contracts are part of everyday life. Here are some real-life use cases for evergreen contracts.
- Rental lease agreements: Landlords and property managers employ evergreen rental leases in lieu of signed contract renewals with tenants — month-to-month lease terms stipulate that you just pay your rent on the first indefinitely.
- Employee stock options: Companies create stock option plans where additional shares enter your plan every year until you leave the company — or if the board of directors decides to terminate them.
- Insurance contracts: Insurers and insurance companies can renew healthcare plans and auto insurance for a new year unless the policyholder wants to end the coverage and switch to a new provider.
- Online subscriptions and memberships: Whether it is Spotify, Netflix, or Coursera, these services all use rolling contracts to ensure consumers have uninterrupted access to their services.
- Dividend reinvestment plans (DRIP): Companies allow shareholders to reinvest dividends in more shares using the DRIP plan. This plan is usually managed by the company, a third party, or a broker.
Other applications of evergreen contracts include purchase contracts, revolving loans, service agreements, guaranteed investment certificates, and magazine subscriptions.
How does an evergreen contract work?
To understand how evergreen contracts work, let’s use the Coursera subscription as an example.
When you agree to the “Terms and Conditions” and pay the first subscription fee, you are signing an agreement with Coursera that you want to get access to their services for a fixed price ($59) every month.
Now, you’ll receive a clause warning you that your subscription will auto-renew every month on a specified date unless you cancel it.
So every month — starting, say, on the 1st of January — you will receive an alert that Coursera has charged you $59.
But what if Coursera decides to change contract provisions and bump subscription fees to $65?
For starters, they’ll have to notify every paying subscriber beforehand following a notice timeline, usually from 1 day to 60 days before the next price bump kicks in, depending on the law and the type of agreement.
So if you decide to discontinue your Coursera subscription on the 5th of February, you will not get a refund because you’ve already been charged on the 1st of February.
So the agreement will terminate itself just before the next cycle kicks in (the 1st of March).
We’ll discuss how to terminate an evergreen contract in detail later.
Are evergreen contracts enforceable?
In general, evergreen agreements are enforceable and legally binding, provided the terms are clear, fair, and conspicuous.
The provisions and legality of evergreen contracts vary from state to state.
For example, the state of Illinois adopted the Automatic Contract Renewal Act in 2000, which outlines that evergreen clauses are enforceable only if the language is “clear and conspicuous.”
According to New York law, the service provider must serve a renewal notice at least 15 to 30 days before the notice timeline elapses.
If the notice of termination falls outside this period, the evergreen clause is deemed unenforceable.
Regarding fairness, states might reserve the right to annul agreements if they contain unfair and unconscionable terms.
This is sometimes a gray area, but once the law deems the agreement unfair, it becomes unenforceable by default.
On the other end of the spectrum, the court can uphold the enforceability of an evergreen clause, even if the defendant deems it unfair.
The Missouri Court of Appeals upheld the automatic renewal clause of a five-year service agreement because the defendant failed to provide a prior written notice of non-renewal at least ninety days before the end of the term.
Consequently, the defendant was mandated to renew the agreement for five more years.
Benefits of evergreen contracts
Individuals and companies can be skeptical about committing to evergreen contracts because of the unpredictable nature of life and business — COVID might hit again.
But despite these worries, here are some advantages of evergreen contracts.
They are convenient for both parties
Evergreen contracts are popular because of the convenience they afford service providers and consumers.
These automatic renewal contracts eliminate the redundancy of renegotiating agreements every term.
Instead of manually tracking when to renew your Netflix subscription, it just rolls over to the next month or year, and the charges go to your card.
They reduce the administrative burden
Another benefit of evergreen contracts is that it automates contracts and service agreement renewals.
Business owners and administrators can clear negotiations off their tables and focus on other profit-driven initiatives.
They help to arrange finances
Evergreen contracts help consumers manage their finances better.
Businesses can tailor their spending budget to the running agreements they have with other organizations or entities.
Also, consumers can easily track their expenditures because they have a clear view of upcoming expenses.
They guarantee coverage
Consumers love the reliability that evergreen contracts offer when working with service providers.
That’s why they need an agreement that guarantees them coverage over a specified timeline.
As a business owner, you won’t have to wake up one day to discover that your website is offline because you didn’t renew your hosting.
With an evergreen agreement with GoDaddy or your hosting service provider, you will rest assured that your site will stay online during the agreement term.
Drawbacks of evergreen contracts
Although evergreen contracts guarantee coverage, they come with several drawbacks. Let’s discuss them in detail.
They can be difficult to terminate
Ending an evergreen contract can be difficult, depending on the jurisdiction and the conditions of the agreement.
For instance, you need to deliver the termination notice within a specific period of time. Otherwise, the agreement will renew automatically.
They might cost you money if you forget
Evergreen contracts are structured to continue as if on autopilot — which makes them easy to forget.
Imagine waking up to charges you’ve completely forgotten about because you didn’t cancel the agreement.
In extreme cases, you could end up in the same shoes as the Missouri man mentioned earlier, who had to pay for five additional years for services he didn’t even need.
How to terminate an evergreen contract
Now that you know the drawbacks of evergreen contract clauses, let’s show you how to end them.
Three general methods of terminating agreements include:
- Termination by mutual agreement: when both parties mutually agree to end the cooperation.
- Termination by default: when one of the parties breaches the contract, the other entity reserves the right to terminate it. For instance, if you are in an agreement to provide seasonal lawn mowing services, you can terminate the agreement if the client refuses to pay.
- Termination by law: If the terms no longer suit you, but the other party has not defaulted, you can hire a lawyer to help you find legal ways to terminate the contract.
Here are the steps to follow:
- Serve the other entity a termination notice.
- Make sure the notice arrives within the specified term before the renewal period starts.
- Outline your reasons for terminating the agreement.
- If you want to continue the contract with revised terms, recommend adjustments or renegotiation options such as price changes, scope of services, and deliverables.
- If both sides agree, end the contract.
- If the other side doesn’t agree, prepare to go to court with detailed records.
Alternatives to evergreen contracts
If you want to avoid evergreen contracts, then you must stick with fixed-term agreements.
These agreements have specific timelines for the start and end dates.
Businesses looking to avoid the stress of litigation can also use fixed-term contracts.
Also, individuals who want more granular control over what they are paying for and renewal provisions should use fixed contracts.
This will make renegotiation and cancellation easier.
Another alternative to evergreen agreements is a variable-term contract, which gives flexibility for renegotiating a new contract.
For businesses looking to scale and adapt their services to changing market demands, this agreement could provide the perfect balance.
How to manage and get the best out of evergreen contracts
Here are some tips and best practices to follow when signing evergreen agreements.
1. Review the terms
Spending time to peruse every page of a Terms and Conditions document might be a tedious task, but it could save you a lot of trouble.
You always need to read the terms of the contract to find out if the stipulations favor you.
Reading the details in the agreement will also help you find out about notice periods. If possible, hire legal aid to help you review the agreement.
2. Gather insightful reports
Tracking contracts helps you gather information about expenses and the quality of services you receive.
This information will inform your decision about termination, renegotiation, and renewal.
3. Notify the other party about terminations
Use automated alerts to send notifications to the other party over the agreed-upon timeline.
Some standard notice requirements demand the use of written notices sent by certified mail, email, or fax.
4. Confirm termination
After the other party agrees to terminate the evergreen contract, you need to follow up to ensure the cancellation has taken effect.
This will save you from paying unwarranted cancellation fees.
5. Use contract management software
Online contract management platforms help you track, draft, and store your contracts.
You can also use them to accelerate negotiations and terminations.
Keep your contracts evergreen with PandaDoc
Evergreen contracts provide convenience and flexibility by automating the renewal process.
They also help service providers eliminate redundant administrative tasks like tracking the end of the contract and the impending charges.
To ensure an evergreen clause is enforceable and valid, always keep the terms fair and straightforward.
Otherwise, you can start looking for ways to terminate the agreement and save yourself from ongoing aggravation.
With PandaDoc contract management software, you can draft and sign evergreen agreements in a few clicks.
Even if you don’t know how to create a contract, you can find ready-made templates with all the essential customizable fields.
Sign up for a free trial to all PandaDoc features.
You can also book a demo to get a sneak peek into how things work before paying.
Frequently asked questions
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An evergreen employment contract is a type of employment agreement that automatically renews at the end of a specified period. This contract remains valid as long as the employee stays with the company — or the employer decides to terminate it.
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The opposite of an evergreen contract is a fixed-term agreement. Unlike a standard evergreen contract, a fixed-term contract outlines specific start and end dates, after which the agreement is no longer valid.
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Businesses and individuals can use evergreen contracts for everything from lease agreements to service subscriptions. Some examples of evergreen contracts include:
- Rental leases
- Purchase agreements
- Service agreements
- Dividend reinvestment plans (DRIP)
- Guaranteed investment certificates
- Healthcare and insurance plans
- Magazines subscriptions
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An evergreen contract is a type of contract that renews indefinitely after each term, while an auto-renewal agreement renews automatically for a specific number of times before it becomes void. For instance, if you have an auto-renewal contract for daily newspaper delivery for two years, the company will have to deliver the paper to your doorstep every day until two years elapse. After that length of time elapses, it’s up to you to renew the agreement for another two years.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDocs services are governed by our Terms of Use and Privacy Policy.
