When Evergreens Get Chopped

In Legal Interpretation, Minnesota Appellate Decisions by Joseph PullLeave a Comment

An “evergreen” contract is a contract which automatically renews at periodic intervals. Evergreen contracts are useful but can lead to problems if the parties become complacent.

Imagine Ingmar & Ingrid, Inc. enters into a contract for one year to receive a weekly delivery[1] from Antony & Cleopatra, LLC.  The contract includes an evergreen provision that each year the contract will automatically be extended for another twelve months unless Ingmar & Ingrid before December 1 sends a written notice of termination to Antony & Cleopatra.

The contract is convenient because it allows the parties to continue their relationship without the hassle of renegotiating every year. If Ingmar & Ingrid likes its weekly deliveries, it can continue receiving them without ever doing anything more than paying for each week’s installment, secure in the knowledge that it will get at least a month’s notice (and perhaps much more than a month) before the deliveries stop. Antony & Cleopatra gets the same assurance about its weekly sale.

However, an evergreen contract can also lull the parties into dangerous complacency. After five years of weekly deliveries, Ingmar & Ingrid may forget that its contract can only be terminated before December 1 each year. Ingrid & Ingmar may decide on December 2 that it no longer wants the weekly delivery – only to discover that it is bound by its contract to pay for another year of services it no longer wants. On the other side, Antony & Cleopatra may discover on December 2 that it can no longer make money on the weekly delivery, but it will be bound to continue making the deliveries for another year and losing money on each delivery, because it missed the deadline to terminate the contract.

Evergreen contracts are useful but can lead to problems if the parties become complacent.

In Tad Ware & Co., Inc. v. Schwan’s Home Service, Inc., the parties entered into a one-year contract in October 2010, in which Tad Ware was to create six catalogs for Schwan’s over the course of the year. The contract had a provision which might be referred to as a faux evergreen provision, since it stated that the contract would renew “for additional one-year terms after the Initial Term, renewal to be executed and recorded by mutual written agreement of the parties.[2] In other words, the contract (by its words) would not actually renew automatically; the parties had to agree in writing to extend it. The contract also stated that it could be cancelled by either party giving 120 days prior written notice “before the then expiration date of the Agreement.” Id.

Tad Ware and Schwan’s operated under their contract for several years. On June 30, 2015, Schwan’s gave written notice that it was terminating the contract in 120 days, and on October 30, Schwan’s terminated the contract. Tad Ware sued, and the trial and appellate courts both concluded Schwan’s properly terminated the contract. But the Court of Appeals’s opinion gets to that result in a rather questionable way.

The opinion acknowledges that the contract required written renewal which was never done by the parties. Given these facts, the contract never renewed at all after its initial one-year term expired, and Schwan’s should have been free to stop paying for catalogs from Tad Ware at any time after the initial one year. A contract requiring written renewal isn’t an evergreen contract at all. It does not automatically renew; further action is required.

However, that analysis is complicated by a 1976 Minnesota Supreme Court decision which held an employment contract requiring written renewal could be extended without a writing, where both parties behaved as if it was renewed.[3] Seeking to avoid resolving the thorny issue of whether the same principle applied to the Tad Ware/Schwan’s contract, the appellate court instead set the issue entirely to the side and  ruled that even if the contract had been extended, Schwan’s had properly terminated it by giving 120 days notice.

But the appellate court’s approach has a glaring problem. The contract expressly stated that termination must be given by written notice 120 days before “the then expiration date of the Agreement.”  Schwan’s gave its written notice only 93 days before the contract would have renewed on October 1, 2015. If the contract truly was in effect in 2015, then it would appear the notice given by Schwan’s was late, and the contract should have been extended through October 1, 2016.

The appellate court acknowledged this issue but disregarded it, explaining, “The relevant language does not state that the contract may only be canceled if notice is given 120 days before expiration of the term of the contract, and we will not add such a requirement to the contract.” Id. at 5. The relevant language says, “unless canceled in writing by either party upon one hundred twenty (120) days prior written notice before the then expiration date of the Agreement.” Id. at 2 (emphasis added).  It is rather difficult to reconcile the court’s characterization of the contract language with the actual contract language.

In any event, Tad Ware illustrates how an evergreen contract works, including the way that an evergreen contract can lead to unforeseen conflicts after the parties operate under it for many years.

[1] Perhaps a weekly truckload of widgets, or a weekly floral arrangement for Ingmar & Ingrid’s reception area.

[2] No. A18-0422 (Minn. Ct. App. Dec. 17, 2018) at sl. op. 2 (emphasis added).

[3] Id. at 4.

About the Author
Joseph Pull

Joseph Pull

Mr. Pull has represented clients concerning a wide variety of commercial and financial disputes, in state and federal courts inside and outside Minnesota. He provides counsel to owners of closely held businesses or partnerships, individuals involved in estate and trust disputes, businesses facing breach of contract or tort liability concerns, securities owners, and others. View Mr Pull's profile here.

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