Mountain Law: The use of ‘evergreen’ clauses in Colorado contracts
February 21, 2017
An automatic renewal provision in a contract is sometimes called an "evergreen clause." Are evergreen clauses enforceable in Colorado contracts? With some exceptions, the answer is "yes," as discussed in this article.
Evergreen clauses may be necessary and desirable to allow for the regular provision of goods and services. To give a few examples, an evergreen clause could permit a company to receive supplies without needing to reorder, allow an insurance policy to continue in effect without lapse in coverage, or enable a bank to issue a longstanding letter of credit for a customer. An evergreen clause could also prevent a lease or employment agreement from expiring by automatically renewing them for another term. In these circumstances, evergreen clauses are routinely upheld by the courts.
There are circumstances, however, where evergreen clauses are more restricted. One is so-called "negative option plans." In basic terms, a negative option plan is a contract under which a consumer automatically receives certain merchandise, and is billed for it, unless the consumer instructs the seller not to send the merchandise within a time specified in the contract. Under these contracts, the customer's failure to reject an offer is deemed assent. Commonly, a negative option plan includes a product offered on a "risk-free" trial basis that is then automatically charged if not canceled at the end of the trial period. Consumer complaints to the Federal Trade Commission and state enforcement agencies about negative option plans have risen with the growth of the internet. Consumers often claim that they were not adequately informed about, and did not agree to, such plans. This has led to increased federal and state enforcement agency actions, state legislation, and consumer class actions. In Colorado, there was notably a class action against a phone company that allegedly provided system maintenance under a negative option plan.
Many states that have adopted legislation addressing negative option plans create strict requirements for such plans and make their violation a "deceptive trade practice," thereby allowing for remedies such as restitution of payments made by consumers and recovery of attorneys' fees. Colorado does not have such broad sweeping legislation, although it does have laws that address some aspects of such plans. Colorado law provides that consumers who receive unsolicited goods can refuse to accept them and are not bound to return them. Moreover, if such goods are addressed to or intended for the recipient, they are deemed a gift. The sender of such goods is not permitted to send a bill or any collection letters.
If a consumer marks "cancel" on any magazine or other periodical invoice, or otherwise sends a written notice of cancellation, Colorado law requires that the sender must cancel the subscription. Within sixty days after notice of cancellation for prepaid subscriptions, the sender must refund any amount paid for the subscription less the amount owed for any periodicals, together with the postage thereon, if postage has been charged separately, received before the effective date of the notice of cancellation.
In the case of gym memberships, Colorado law indicates that they may generally not be for a "financial duration" longer than two years, including any renewal period. If certain requirements are met, they can be for a financial duration of three years.
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An evergreen clause in a contract raises an interesting question of when the statute of limitations begins to run if the obligor doesn't pay as required. In one case, the Colorado Supreme Court refused to enforce a farm equipment lease containing an evergreen clause where the creditor waited almost ten years before formally attempting to collect rent.
In sum, evergreen clauses are generally enforceable in Colorado unless specific consumer protection legislation applies or there are special circumstances rendering enforcement unfair. A person entering a contract should give due consideration to the advisability of any evergreen clause.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.
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