What is 'Evergreen (Contract Provision)'

Evergreen is a contract provision that automatically renews an agreement after the expiry date. The contract would roll over periodically until one of the parties defaults or gives notice to terminate the contract.

BREAKING DOWN 'Evergreen (Contract Provision)'

When two or more parties enter into a contract, one of the terms they sign off on is how long each party would be bound by the contract. The duration of contracts varies widely and all parties are required to fulfill their obligations for as long as the contract remains in force. However, some contracts have an automatic renewal clause or evergreen clause, which means if neither party terminates it on the expiry date, all parties will be held to abide by the contract policy for another similar duration.

Evergreen clauses can be used in many types of contracts including employee stock option schemes, dividend reinvestment plans (DRIPs), lease agreements, GICs, health care plans, insurance coverage policies, magazine subscriptions, revolving loans, and commodity distribution and supply agreements, etc. Let’s examine some of these examples below.

  • Some employee stock option plans provide an evergreen option where additional shares are automatically included in the plan annually. These plans are set to attract and retain great employees who would be incentivized to grow the company to the delight of shareholders. The evergreen options get renewed every year and will remain active unless the board of directors decide to terminate it.
  • A dividend reinvestment plan (DRIP) is an option given to shareholders to use dividend payments to buy additional shares in the company. This way, the investor is credited with shares to his account on dividend payment day, instead of cash. An investor who elects this option, in effect, would have an evergreen election which would continue to apply to his dividends until either party cancels the plan.
  • A lease term can be structured as an evergreen lease where the lease is automatically renewed at the end of the lease term and rolled over to another term with a similar period, or activated to a month-to-month basis. For example, an individual that enters into an evergreen lease with her landlord would have to use the leased property for a year, after which the contract becomes an indefinite month-to-month live-in arrangement. Of course, during the monthly auto-renewal period, either she or her landlord can break the agreement.  
  • A Guaranteed Investment Certificate (GIC) is an investment vehicle that locks in an investment for a period of time at a guaranteed rate of return. However, at the end of the term period, if the account holder does not provide the financial institution with instructions to not renew the contract, the institution will automatically renew and lock the funds for a similar period. For example, if an account holder invests $2,000 into a three year non-redeemable GIC, this amount will automatically be renewed for another three years after it matures on its set date.
  • Many insurance contracts have evergreen clauses. When a policy holder takes out a car or home insurance policy, the insurer will typically renew the policy for another year, unless explicit information not to do so has been communicated. If any terms of the policy are set to change in the new term, the provider would notify the insured. If the insured does not object or cancel the plan, it will be renewed by the insurance company.
  • A coal miner that enters into a contract with a power distribution company to deliver coal every quarter, may do so continuously, through the end of the agreed time period. The contract may be renewed, as with all supply chain vendors, unless either party decides not to continue with the business relationship.
  • A borrower with a revolving loan can use up the funds, pay it back, and use it all over again. Only borrowers that meet certain criteria are approved for these loans which are annually reviewed by the lending institution. The borrowers will indefinitely have access to the loan amounts unless they fall out of good standing with the bank. If this occurs, the bank may opt to withdraw the loan at the end of the contract period.

These examples are by no means an exhaustive list of evergreen contracts.

While an evergreen clause provides convenience for either party because they don’t have to renegotiate the terms of the contract on expiry date, one can find himself stuck with these types of contractual agreements if s/he is not satisfied with the dealings. In a case where a dissatisfied party forgets to cancel the agreement when it expires, they may find themselves or their investments locked in for another period of time. For example, an investor with some money in a 2% investment vehicle may have plans on the maturity date to roll over the invested funds into another vehicle with a different company offering 5%. If he fails to give termination notice within the reasonable amount of time stipulated in the policy, he may see his funds automatically renewed with the same fund company for the lower 2% rate. For this reason, due diligence should be carried out by all parties involved to know how and when to dissolve an evergreen contract.

RELATED TERMS
  1. Evergreen Option

    An evergreen option is a type of employee stock option plan in ...
  2. Evergreen Funding

    Evergreen funding is the gradual infusion of capital into a new ...
  3. Continuous Contract

    A continuous contract is a reinsurance contract that does not ...
  4. Evergreen Loan

    An evergreen loan is a loan that does not require the principal ...
  5. Renewal Option

    A renewal option is a clause in a financial agreement that outlines ...
  6. Advance Renewal

    Advance renewal is an agreement to continue utilization for another ...
Related Articles
  1. Managing Wealth

    How Do Futures Contracts Work?

    Futures contracts are one of the most important financial innovations in history, but they are often misunderstood. Find out how this contract is used to transfer risk between different parties. ...
  2. Investing

    What is a Forward Contract?

    A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.
  3. Trading

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  4. Investing

    Is USO a Good Way to Invest in Oil?

    The United States Oil Fund is better suited to short-term investors who actively manage their portfolios.
  5. Investing

    Housing deals that fall through

    Find why buyers back out, and what you can do if you're left holding the bag.
  6. Managing Wealth

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
  7. Investing

    Bank of America Shares Seen Rising 8% Short Term

    Shares of BofA have outperformed the broader S&P 500 in 2018, up by nearly 2%.
RELATED FAQS
  1. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  2. How does a forward contract differ from a call option? (AAPL)

    Find out more about forward contracts, call options, the mechanics of these financial instruments and the difference between ... Read Answer >>
  3. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
  4. What Is an Alienation Clause?

    An alienation clause when in reference to insurance policies, mortgages or commercial loans stipulates certain things to ... Read Answer >>
Trading Center