Contract Period: Everything You Need to Know
A contract period, also known as contract time, is the number of days between a specific start date and a specific end date, as outlined in a contract.3 min read
2. About Evergreen Contracts
3. Optional Renewals
4. Auto-Renewal Agreements
A contract period, also known as contract time, is the number of days between a specific start date and a specific end date, as outlined in a contract.
Because many contracts renew when a term ends, the end date isn't always an end date. Renewals come in different varieties.
Contracts that have automatic renewals may just renew for a certain period. Renewals might automatically happen for more than one period as well.
Why wouldn't contractual parties simply use an auto-renewal period's end date as an end for the whole contract? The most common reason given is that auto-renewals often have some type of wrinkle in them.
About Evergreen Contracts
It seems some contracts aren't designed to end. Instead, they're written so that they continue on as long as possible. In an evergreen contract, renewals continue automatically without notice. The agreement may continue until one party decides to terminate it.
Many businesses and lawyers try to avoid indefinite contracts. However, evergreen clauses still frequently survive in the following instances:
- Purchasing contracts
- Service agreements
Evergreen contracts create significant long-term opportunity and risk. They aren't the same thing as long-term contracts. For instance, a 100-year lease may sound like an evergreen agreement since the end date is so far away, but this long-term lease still has an end date. It's a definite term contract.
With this definition in hand, you can see that an evergreen contract isn't the same as an auto-renewal agreement. Auto-renewal contracts renew automatically but only for a specific number of times. An auto-renewing four-year lease, for instance, may include a one-year renewal provision.
Contracts often give one party the right to renew the contract or not.
Consider this example: Parties A and B enter into an agreement that grants Party A the right to renew for two-year periods. Party A decides to exercise that right for four years and then stops.
The contract's language may state something like the following: "Party A has sole discretion to choose to renew this agreement for successive two-year periods. It must exercise its right 30 days before the current period ends."
In an agreement, you may also find a specific number of renewal options a party is entitled to. For example: Party A may renew for a maximum of four (4) additional terms.
In the above optional renewal example, Party A states that it's exercising its right to renew the contract.
Contracts can also renew automatically for succeeding periods with no explicit exercise option. In these instances, the contract usually states that it renews for a specific period of time for a set number of times.
It may read something like this: "The Agreement will renew for one (1) year upon current term's termination. It will renew for a maximum of four (4) successive terms."
Why wouldn't parties simply provide an end date that's four years in the future? The reason is that auto-renewal agreements often give either party the right to terminate a renewal before the renewal starts. The parties have the option of a long-term deal without a solid, long-term commitment.
They may include language such as the following: "This agreement will renew for one (1) year upon the current term's termination, provided that neither party gives notice of termination at least 30 daysbefore the end of the current term. This agreement will renew for a maximum of four (4) successive terms."
In general, contract managers and lawyers don't care for auto-renewal contracts because these types of agreements can be filed and easily forgotten. When this happens, the contract renews before anyone involved has the chance to review it. Therefore, parties end up locked into the agreement for whatever amount of time the renewal period is. To avoid this problem, some parties elect to use contract management software.
Many people don't want to be locked into automatic renewals. It's too easy to get busy and forget to review a contract. While notification software can help with this, not everyone will take advantage of it. It's usually best to avoid these types of contracts whenever possible. Look for agreements that have a set beginning and end when possible.
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