Individual Evergreen Clauses

Fred Stutzman over at Unit Structures laments the issue of individual auto-renewing agreements (like those of any kind of subscription you may sign onto).  He’s rightfully upset about his individual circumstance, and even without reading the specifics of the ZipCar agreement (I’m sure there is one somewhere), the basic business practice is the issue – auto-renewing agreements, especially subscriptions, are problematic.

So what then of larger contracts of the evergreen sort?  The software maintenance renewals?  The never-ending services subscriptions?  The truth is that subscriptions are a benefit to both buyers and sellers – the trick is knowing what you’ve agreed to and how to get out cleanly when you are no longer interested.  Thus, as with almost every other contract term we discuss, renewal clauses are important post-contract terms to watch.

There are 4 parts to your basic renewal term:  mechanism of renewal (auto vs notice), length of renewal, cost of renewal and termination notice period.  Unfortunately, most contracts don’t put all of these things into one section and they try to use brevity in hopes that renewals will just “happen”.  Rather, make sure that each of these four areas is not only agreeable, but actually what you intend.

Mechanism – as we were just talking about evergreen clauses, the mechanism of renewal is the distinction between an automatic renewal (it’s continually green, like a pine tree) and one which requires some form of affirmation to renew.  As I mentioned in the term and termination discussion we had a week or so ago, the issue isn’t whether you allow it to auto-renew or not, the issue is whether you can TRACK it’s auto-renewing nature.  If a customer doesn’t have the ability to track these things, it’s better to have the contract terminate – the vendor will ALWAYS come knocking to get you to renew.

Length (term) – If you allow for an auto-renewal, I always suggest a relatively short term (about 1 year).  This is a reasonable time frame in which business decisions can be made, plans can change, etcetera.  Anything longer and you might find yourself stuck with a contract you don’t want – anything less and you’ll spend more time worrying about the renewals than in getting real work completed.

Cost – Agreeing to auto-renewing contracts should come with a price-break.  You should either have a continuation of the prior-years’ fees, or a SLIGHT increase based on the average increase in the cost of doing business.  In other words, the customer benefits from agreeing to the risk of auto-renewal.  On the other hand, customers should be prepared to negotiate cost increases if the contract no longer auto-renews.  (Actually, the customer used to always get a cost-increase-limiter on renewals… now this distinction seems to be taking root.  Pay attention.)  Oh, and if there’s NO renewal at all, the customer should not be surprised to see potentially large jumps in cost if they try to restart the services after some lapse/gap in service.

Termination period – Last, but not least, even with an auto-renewing agreement, there should be some amout of notice by which a party can terminate an evergreen contract.  As stated before, it’s usually some increment of 30 days – with longer periods of notice required for longer initial terms or larger-dollar deals.  As a buyer, I typically do not want my vendor to be able to terminate – even outside the notice period – because I want them to keep providing me service so long as I want it.  This is probably one of very few areas where I have felt justified in asking for such lop-sided terms.  Because what I don’t want is a situation where I’m willing to continue paying for service, but the vendor decides that they simply don’t like me anymore.  The only time I want a vendor to be able to terminate is if I don’t live up to my contractual obligations (such as paying ontime).

Oh, and as Frank unfortunately discovered, make sure there aren’t any other potential gotcha’s buried in the deal which would make termination difficult.

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2 thoughts on “Individual Evergreen Clauses

  1. James C. Roberts III

    Excellent explanation of the interaction of these elements of auto-renewal. In the context of licensing content or services (such as streaming capacity), there are a few things to note:

    Tracking is probably the most important point and it cuts both ways: when it renews and when it terminates.

    If you accept auto-renew then you should certainly accept a price cap UNLESS the price for the service is declining due to commoditization (e.g., declining prices in a market). One approach is to force an industry-based MFN clause.

    Reply
    1. Jeff

      Thanks for your comments James! In the software world, do you find MFN clauses still available? I haven’t seen one in ages. As for declining pricing, I have said before that I word my “change in price” language to be such that a decline would benefit you as well – so a negative CPI (if you’re using this metric) would result in a lowered annual cost. 🙂

      Reply

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