Article

Beware Of Evergreen

August 2006, Auto Dealer Today - WebXclusive

by Donn Wray - Also by this author

An "evergreen clause" in a contract is an automatic renewal provision. Many service and vendor contracts include "evergreen clauses." Like an evergreen tree, which can be sticky with sap, such clauses are intended to stick you to the contract. By sticking the contract to you through this method, you can end up being the sap.

I. THE PROBLEM

It is very common for vendor and supply contracts to include "evergreen clauses." Such contractual language usually goes something like this:

Dealer and vendor agree that the initial term of this contract shall be one (1) year from the date of its execution, and that this contract shall automatically renew for successive one (1) year terms, in the absence of written notification of termination, which notification must be delivered to the address shown below, on or before sixty (60) days prior to the date of termination.

Here is an example of the translation of this legalese: Assume that you entered into the contract on November 1, 2005. If you don’t send written notice of intent to terminate by September 2, 2006, you have just entered into the contract for another year. This circumstance is bad for a number of reasons — it usually denies you the ability to renegotiate any term, deprives you of the leverage of being able to shop the competition, and requires you to purchase the full range of whatever you have contracted to purchase during the first year (even if experience has shown that you do not need the full range of services or products). The "evergreen clause" is a land mine planted in the contract by the seller, and is designed to catch the buyer (dealer) who is not vigilant.

"SPECIAL INTRODUCTORY OFFERS"

Another sneaky move used by vendors is the inclusion of an "evergreen clause" in a "special introductory offer." I was recently consulted by one of our dealer clients who had been given a three-month introductory offer to an advertising service. This three-month offer gave the dealer the option to cancel the contract at the end of the three-month period with 90 days written notice. No notice was ever sent, because the provision slipped past the dealer. However, even if the dealer had noticed the provision, as a practical matter it would have required that written notice of termination be sent the first day of the contract (because of the 90-day provision). That’s pretty sneaky. (It was this real life experience that suggested this article topic to me).

Even in the absence of such a super sneaky provision, one must be careful with "special introductory offers." More often than not, they seem to contain evergreen clauses. Why give somebody a great deal on an introductory offer if you are not going to make it up on the back end by sticking them to the contract?

II. MANAGEMENT CONTROLS ARE THE KEY

So what is a dealer to do? Management controls are the key. Every vendor and supply contract first needs to be read by someone with a discerning eye. Then, if an evergreen clause is present, a couple things must happen. First, you should decide whether you want to attempt to negotiate the evergreen clause out of the contract. Failing that, at a minimum you should note on your calendar the last date for giving notice of termination. Note this at the time you enter the agreement while it is on your mind and on your desk. I would recommend writing in your calendar all the information you need to give notice (address, contract reference, etc.) so that you do not have to go running around looking for the contract on the date the notice is due.

As a practical matter, even if you are satisfied with service and want to keep the contract, it is often a good idea to give notice of intent to terminate. In that way you can renegotiate from a position of strength to obtain any changes you desire.

III. THE PRE-EMPTIVE STRIKE — GIVE NOTICE EARLY

Another approach to the evergreen clause is to give notice early. Let’s assume that you tried to negotiate the "evergreen clause" out of the contract, but you couldn’t get the job done. No problem — enter into the contract, and give notice of intent to terminate the next day. You will still be obligated to the full initial term of the contract, but you will have effectively trimmed the evergreen clause by giving notice at the front end of the contract. This way you don’t have to worry about missing the date on your calendar, or on your manager’s calendar several months from now.

IV. ENFORCEABILITY OF EVERGREEN CLAUSES

The reason you need to pay close attention to these clauses is because they are enforceable. Parties are free to choose their contractual terms, and the courts will enforce those terms. There is no public policy against evergreen clauses. So it is very difficult — if not impossible — to void the provisions of an evergreen clause by litigating. Further, if the drafter of the contract was smart enough to put in an evergreen clause, the odds are the contract also has an attorney fee provision. Thus, if you unsuccessfully litigate against the automatic renewal, you will probably be stuck with the other side’s attorney fees in addition to whatever you owe under the contract for its breach.

Your Comment

Please note that comments may be moderated. 
Leave this field empty:
Your Name:  
Your Email:  

Blog

On-the-Point

Jim Ziegler
Objects in the Rearview Mirror

By Jim Ziegler
The past is right behind us and the future is coming fast. The Alpha Dawg plots a course for your store’s success and shares advice for Elon Musk, Johan de Nysschen, and pre-owned managers.

The Big Talent Drain

By Jim Ziegler
The Alpha Dawg tackles the shortage of talent in the managerial ranks and reflects on Amazon’s rumored foray into vehicle sales, the imminent used-car correction, Hyundai’s plan for the Genesis brand, and the untimely passing of Tammie LeBleu.

A Faster Horse

By Jim Ziegler

Strangers in the Mall

By Jim Ziegler

Opening Observations

Over the Curb