What is an evergreen clause?

Have you ever signed up to a service contract that you just can’t get out of? This is known as a self-renewal or evergreen clause. In this blog we explain more about the evergreen clause and whether it’s legally enforceable in Australia.

How does an evergreen clause work?

An evergreen clause continually renews a contract if notice to terminate is not provided within a generally specific and relatively small window of time – such as 30 days prior to the end of the contract term. This type of clause certainly favours the service provider, and can be quite difficult for a customer to actually terminate.

They become difficult for customers to get out of because often they are found to be used in long term service contracts. The longevity of these contracts means that the expiration period is either forgotten about or goes unnoticed until the customer wants to cancel it, but they find themselves locked into another long-term and unsatisfactory service agreement. This complacency could be missed opportunity to secure a better deal either through renegotiation of a better deal or signing up to a new contact with a separate provider.

Many insurance contracts, and paid-TV contracts like Foxtel, will have evergreen oclauses in place.

Are evergreen clauses legally enforceable?

The enforceability of the evergreen clause will very much depend on the jurisdiction and the specifics of the contract itself. In most instances, they are typically long term service contracts or business in low value, high volume transactions as the parties are unlikely to re-negotiate contract terms. As a result, this subjects the clause to a lot of scrutiny and criticism.

In Australia, consumers are protected by the Australian Consumer Law (ACL), and while the evergreen clause is not prohibited from being included in contracts, unfair contract terms for consumers will be looked at carefully and can help to protect consumers if a case is brought forward.

A contract term is considered to be ‘unfair’ if:

• It would cause a significant imbalance in the parties’ rights and obligations under the contract; and
• It is not reasonably necessary to protect the legitimate interest of the party who is or would be advantaged by the term; and
• It would cause detriment (financial or otherwise) to a party if it would be enforced.

However, in the commercial world, this clause is quite frequently used. It’s therefore important that businesses are particularly mindful when entering into contracts that may contact an evergreen clause. They could face wrongful termination of the contract if they do try to terminate outside of the expiration window.

In the last few years, an amendment to the Commonwealth’s Treasury Legislation Amendment (Small Business And Unfair Contract Terms) Act 2015, small businesses can be protected from this, claiming it is an unfair term of the contract. To qualify for this protection, the small business must not have more than 20 employees and the contract must not exceed $300,000 (or $1 million for contracts longer than 12 months).

Ways to avoid getting caught up in an evergreen clause

Termination of a service contract during a renewed term can be both difficult and costly.

• The first piece of advice to avoid getting stuck in a contract that you can’t get out of is by not signing a contract that has one.
• If an evergreen clause is part of the standard contract proposed to you, it’s always useful to ask if that clause can be removed entirely.
• If this isn’t possible and you do need to enter into this specific contract with that provider you could also consider:
• If the renewal term could be reduced; or
• That a new condition is added which makes the automatic renewal clause subject to written notification by the service provider of the upcoming termination window; or
• Setting a reminder in your phone or calendar when the termination window is approaching to allow you to provide notice to terminate the contract if you need to.

What to do if you do need to terminate

It’s useful to highlight that all is not lost and there are options available to you once a service contract automatically renews. The remedies that can be taken depend very much on the circumstances surrounding the entry into the service contract in the first place. There are some common laws – for consumers and small businesses in particular, as highlighted earlier – which could give rise to a separate right to terminate the service contract.

Alternatively, it can sometimes be possible to enter into negotiations to vary the service contract for the remainder of the renewed term.

More information

Evergreen clauses are tricky to navigate. If you are a small business or consumer and want to avoid an automatic renewal clause, contact our team of experienced team of lawyers for professional advice. Similarly, if you are a business looking to incorporate an automatic renewal clause into your contract, get in touch with our team today to find out how to implement this is a way that is not misleading and could land you in negotiations later on.