Evergreen contracts; often called automatic renewal clauses,they operate to automatically extend existing contracts for additional time,with silence or inaction deemed to be consent. Often appearing in the service industry, what once seemed a convenience can turn into a hidden liability for small businesses when they look to negotiate a new contract or terminate their existing agreement.
So how do they work? An example of an evergreen contract clause would be:
This agreement will automatically renew at the end of each Term for a subsequent period of the same length unless either party gives the other written notice of the termination not less than 30 days prior to expiration of the then-current Term.
Renewal clauses can have advantages; they provide continuity and reduce the administrative burden associated with contract renewals and negotiations. That said, the risks can often outweigh the positives.
If the appropriate termination notice is not given within the required period, which is easily overlooked, then you are locked into the contract for another term, possibly a year or more. This can be a powerful deterrent against contract parties shopping around for a better offer or more competitive services, in circumstances where attempts at early termination could put them in.
Unlike in the United States, there is currently nothing in the Australian legal framework to prevent the enforcement of automatic renewal clauses.However, the recent passage of the treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 through the Senate signals a change. The Bill extends existing consumer protections against unfair contract terms to small businesses with under 20 employees, where the standard form contract and value thresholds are met. The Bill, slated to take effect in early in 2016, could offer some statutory protection against evergreen clauses.
In the meantime, there are some strategies you can take to limit the effect of existing or proposed evergreen clauses:
• put in place arrangements to remind you of any looming notice periods, so you don’t miss an opportunity to terminate;
• consider whether you can insert a shorter renewal term into the contract, or it can be varied by agreement to a fixed-term arrangement;
• insert additional clauses making the automatic renewal clause contingent on your service provider giving you written notification of the upcoming termination window.
Pending statutory protections, it’s important for small business to keep an eye out for these clauses in order to avoid getting locked into contracts they don’t need. Similarly, providers relying on these clauses in their customer arrangements should revisit their terms as legislative change looms large, to ensure they don’t fall foul of the new restrictions.