1. Evergreen Clause
Contract Fundamentals
Christopher Tompkins
November 29, 2012

2. ©2012 Christopher Tompkins and Jenner & Block LLP. 353 N. Clark
St. Chicago, IL 60654-3456. Jenner & Block is an Illinois Limited
Liability Partnership including professional corporations. This
publication is not intended to provide legal advice but to provide
information on legal matters. Transmission is not intended to
create and receipt does not establish an attorney-client relationship.
Readers should seek specific legal advice before taking any action
with respect to matters mentioned in this publication. The attorney
responsible for this publication is Christopher Tompkins. Attorney
Advertising. Prior results do not guarantee a similar outcome.
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3. Agenda
1. Contract Time Issues.
2. Drafting Effective Evergreen Clauses.
3. Restrictions On Evergreen Clauses.
4. Wrap Up, Questions & Answers.
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4. CONTRACT TIME ISSUES
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5. Contract Time Issues
• A basic understanding of the legal principles governing
time contracts is important when considering evergreen
clauses.
• These issues include:
– When must goods be delivered or a service performed?
– To extent the contract contemplates ongoing relationship,
how long will it continue and how may it be terminated?
• Failure to address these timing issues can create
uncertainty about the parties’ obligations.
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6. Time Of Performance
• Contracts can specify when a delivery should take place or a
service should be rendered, but often do not.
• Where a contract does not specify a time for performance:
– Under common law performance must occur within a
“reasonable time.”
– For the sale of goods UCC § 2-309(1) provides: “The time for
shipment or delivery or any other action under a contract if
not provided in this Article or agreed upon shall be a
reasonable time.”
• If a specific time of performance is important, the parties should
specify when performance should occur and that “time of the
essence.”
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7. Contracts Of Indefinite Duration
• What about contracts contemplating a continuing
relationship but which do not specify a duration?
– Under common law contracts of indefinite duration are
terminable at will be either party.
– UCC § 2-309 – Absence of Specific Time Provisions:
Subsection (2): Where the contract provides for successive
performances but is indefinite in duration it is valid for a reasonable
time but unless otherwise agreed may be terminated at any time by
either party.
– There is conflicting case law whether UCC § 2-309(2) requires
the contract to continue for reasonable time before right to
terminate arises.
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8. What Is An Indefinite Duration Contract?
• Indefinite contracts have two primary
characteristics:
– Call for successive performances.
– Do not specify a duration.
• Examples of contracts which are often indefinite
include:
– Distributor/franchise arrangements.
– Service contracts.
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9. What Is An Indefinite Duration Contract?
• Contracts calling for single performance or set number
of performances are definite. Other examples include:
– A set number of deliveries.
– A specific quantity of goods even if delivered over time.
– The yield of a crop planted on a specified plot of land.
– All concrete required to complete a specific construction
project.
• Contracts that specify they continue until some
“objective event” occurs are generally not indefinite.
– The presence of a termination for cause provision does not
necessarily make a contract definite.
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10. Indefinite vs. Perpetual Contracts
• Contracts of perpetual duration are disfavored and
usually require explicit language.
– Contract stating it would continue “so long as distributor
continued to deliver to customers” was indefinite and could be
terminated at will.
– Contract stating it “shall continue in force indefinitely” unless
terminated due to event specified in termination clause
considered indefinite.
– Contract explicitly stating it terminates “solely” upon certain
events may be perpetual.
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11. Post-Term Performance
• Some courts have found that continued performance of
a fixed term contract after expiration transforms the
arrangement into a contract of indefinite duration.
• However, provisional performance while the parties are
discussing the terms of an agreement and clearly have
not reached agreement does not bind them to the
terms of proposed draft agreements.
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12. Terminating An Indefinite Duration Contract
• Termination of an indefinite contract requires
reasonable notice.
• UCC § 2-309 – Notice of Termination:
Subsection (3): “Termination of a contract by one party except on the
happening of an agreed event requires that reasonable notification be
received by the other party and an agreement dispensing with notification
is invalid if in its operation would be unconscionable.”
• The good faith obligation informs the obligation to
provide reasonable notice but courts do not impose
good faith requirement to require justification for
exercising right to terminate at will.
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13. Timing & Method of Notice
• Both timing and method of notice of termination must
be reasonable.
– UCC § 1-205(a): “Whether a time for taking an action required
by the Uniform Commercial Code is reasonable depends on
the nature, purpose, and circumstances of the action.”
– Important consideration in termination of indefinite contract
is adequacy of notice to provide parties the opportunity to
make other arrangements.
– Informed by course of performance, course of dealing and
usage of trade as provided by UCC § 1-303.
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14. EFFECTIVE EVERGREEN
CLAUSES
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15. Type of Evergreen Clause
• Two common types of evergreen clauses:
– Automatic renewal for additional term(s) unless a
party provides notice of non-renewal prior to end of
initial or renewal term.
vs.
– Agreement continues indefinitely after initial term
unless a party provides notice of termination.
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16. Example Evergreen Clause
• Renewal absent notice:
This Agreement shall have an initial term of four (4)
years from the Effective Date. Upon expiration of the
initial term this Agreement shall automatically renew
for successive additional terms of one (1) year unless
either party provides notice of nonrenewal no later
than sixty (60) days prior to expiration of the initial
term or any successive renewal term.
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17. Example Evergreen Clause
• Agreement continues absent notice:
This agreement shall continue in force for a period of
one year. Upon expiration thereof, this agreement
will continue in force until either party notifies the
other party in writing of its intent to terminate this
agreement in which case it shall terminate ninety (90)
days from the date of the notice.
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18. Should You Agree To Evergreen Clause?
• May be appropriate where a long-term ongoing
relationship is contemplated.
• Evergreen clause may reduce burden of periodic
negotiations of renewals or extensions.
• However, auto renewals also provide less opportunity
for renegotiation and present a danger of unintended
extension of the contract.
– It is important to track contracts with evergreen clauses and
calendar deadlines for notices to ensure opportunity to
terminate if necessary.
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19. Should You Agree To Evergreen Clause?
• Pricing considerations:
– Price protection for buyer.
– Seller may want mechanism for price adjustments in
contract with evergreen clause.
• Future ability to perform:
– Can seller continue to meet demand?
– Can buyer continue to use the goods or services?
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20. Key Evergreen Clause Components
• Length of initial term.
• Length of renewal term(s).
• Number of renewal terms.
• Timing of notice of nonrenewal.
– Minimum/maximum time before renewal date.
• Ability to terminate early.
• Form and content of notice of nonrenewal of
termination.
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21. Notice Requirements
• Pay careful attention to defining notice
requirements.
– Some courts have required strict compliance with
notice provisions, particularly in labor agreements
and letters of credit.
• Statements indicating desire to renegotiate may not be
sufficient to prevent auto-renewal or to terminate.
– Other courts have excused strict compliance with
notice provisions where there is no prejudice and no
indication that strict compliance is required.
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22. Notice Timing Considerations
• Notice period considerations:
– Minimum notice period provides time for parties to make
other arrangements.
– Maximum notice period prevents premature decision not to
renew.
– Timing may impact ability of parties to use notice of
nonrenewal as negotiation tactic.
– Parties may have concerns concerning performance after
notice is given.
– Buyers may wish to consider provisions for ensuring orderly
transition to another supplier.
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23. Form and Content of Notice
• To whom notice must be given?
– Same or different person than other contract notices
and communications.
• How notice must be transmitted?
– Email, facsimile, courier/messenger service, mail.
• What must notice contain?
– Clear statement of intent to end agreement.
– In cases of clause permitting termination rather than
notice of nonrenewal, a termination date.
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24. EVERGREEN CLAUSE
RESTRICTIONS
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25. State Laws Can Restrict Evergreen Clauses
• Parties must be aware of potential state law
restrictions on evergreen clauses:
– Consumer protection statutes.
– Laws governing franchises and distributorships.
– Landlord and tenant regulation.
– Regulation of personal property leases.
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26. Restrictions on Auto Renewals
• Illinois Contract Renewal Act: 815 ILCS 610/10:
– Applies to contract for sale of goods or services to
consumers of more than a year which automatically
renews for a period of more than a month.
– Renewal clause in contract must be conspicuous.
• Similar to warranty disclaimers, need contrasting typeface
or other mechanism that ensures a reasonable person
ought to have noticed it. UCC 1-201(10).
– Must provide conspicuous written notice of auto-
renewal 30 to 60 days before deadline.
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27. Restrictions on Auto Renewals
• New York: General Obligations Law § 5-309:
– Contract for service, maintenance or repair of personal
property.
– Service provider must provide notice of the auto renewal
provision 15-30 days prior to right to cancel.
• Wisconsin Statutes § 134.49:
– Contract for lease of business equipment used within the
state.
– Must make conspicuous disclosure of auto renewal provision
at the time of the contract and notice 15-60 days prior to
deadline for notice of nonrenewal.
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28. Questions?
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