Have you ever tried to terminate a contract with a supplier only to have them tell you that the contract rolled over for a new term last Friday, and you are now stuck there for another 3 years?
Evergreen contracts and rollover clauses are a source of constant annoyance to finance and purchasing departments, because often the clauses aren’t discovered until it is too late, and the contract has rolled over for another term.
Read on for an outline of what evergreen contracts and roll over clauses are, why they can be dangerous and why they can also be useful …
What is an evergreen contract?
An “evergreen contract” is a term often used to refer to contracts with a clause that causes the contract to “roll over” for new terms – with wording that reads something like this:
This agreement will automatically renew at the end of each term for a further term of 3 years unless either party serves a written termination notice on the other not less than 60 days prior to the end of the prior term.
[I have added bold to make it easier for you to see the problem terms – but your suppliers won’t be so helpful!]
More nasty versions of the clause might make termination even harder, providing that you can only serve your notice of termination in a small window – for example:
… unless either party serves a written termination notice on the other, not more than 120 days and not less than 60 days prior to the end of the prior term.
In the instance of this latter type of clause, you can only validly terminate the agreement in a small window of 60 days!
What is the issue with a rollover clause in our contract?
Quite simply, the real issue that raises its ugly head time and time again is that the dates for terminating are often missed. When you have numerous people managing many contracts over time, it is far easier to miss these critical dates that you might think.
So if you find that your supplier isn’t providing services to the standard you require, or you find that you can get much more competitive pricing elsewhere (or worse still, you no longer require the quantity of products/services you are locked into) if you have missed one of these roll over dates you may find termination very difficult and expensive! Your supplier may threaten to take action against you for breach of contract, or invoke the large calculation of damages clauses that are often in these agreements for “early termination”. I have seen both of these tactics used ruthlessly by suppliers to keep customers locked in.
I have known of suppliers who have strategically held off sending invoices until after the end of the “termination window”, to try to ensure that your contract isn’t “front of mind” during the critical time period when you have the ability to terminate before the contract automatically renews for another term.
The sad reality is that if a supplier is utilising this tactic, it is often because they know they have a service or product that you are likely to want to terminate! And this is precisely the kind of supply arrangement where you don’t want to be stuck with this type of clause.
Are roll over clauses always bad?
Sometimes roll over clauses can perform a useful function. They can be useful to simply ensure the continuity of service at the end of a contract. Or to ensure that the parties are still protected by a written contract until they have had the opportunity to negotiate a new contract, or formally renew the old contract it for a new term.
If you are dependent on a supplier to meet other contracts, it may be important to you to know that the contract will continue to renew even if you miss a renewal date.
But the risks created by these clauses more often than not outweigh the potential advantages they may bring, so it is important that you consider your own contract management processes and your requirements at the end of the contract term, and negotiate in some flexibility for your organisation.
In our next edition we will provide a number of tips on what negotiation and drafting strategies you can use to make rollover clauses more palatable and less risky for your organisation. We will also discuss some strategies to employ if this advice is coming to you a little too late, and you are now stuck in a contract that you need to get out of …
If you can’t wait for the next edition, or have a specific contract clause you would like us to look at, just pop an email to us at [email protected] or call us on 02 8006 0830 to set up a time for a discussion.
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