An evergreen clause refers to the automatic renewal of a contract. But is this legal in South Africa, and what can either party do if they are unsatisfied with a contract’s renewal or cancellation?
What is an Evergreen Clause?
Evergreen clauses are automatic renewal clauses found in contracts, especially rental contracts.
These clauses have been in the firing line of consumer advocates for a number of years. Various countries “outlawed” these clauses as “unfair contractual terms” and have even been described as “nasty practices” by the local South African media.
These clauses continue to be widely used in various industries such as office machine rentals and the private security industry, and is often included in fixed-term contracts.
An instant renewal – is it legal?
An “evergreen” clause refers to the instant renewal of an agreement upon reaching its expiry date unless proper cancellation has been given by the Consumer prior to expiry, for example:
“At the expiry of each contractual term, this Agreement shall automatically renew for a further period of 12 months unless the consumer has given written notice of termination at least 90 days before the expiration of such term.”
Ineffective contract management or failure to appoint a commercial attorney can easily lead to the consumer being “locked-in” into another contractual term with an unwanted supplier.
A contracting party may, however, cancel an agreement where the service provider is in breach of its obligations if the agreement allows for cancellation and if the required processes have been followed.
Notwithstanding the growing resistance against it among consumer advocates, evergreen clauses are generally not barred by South African Law in transactions between juristic persons.
So, yes, evergreen clauses are legal in South Africa.
Suppliers will be able to claim financial or patrimonial loss from the consumer for any breach of the automatically renewed agreement. These losses will be limited to either damnum emergens (loss actually incurred because of the breach) or lucrum cessans (prospective damages or loss of profits that would, because of the breach, have been made in the future).
Evergeen clauses and the Consumer Protection Act
Section 14 of the Consumer Protection Act provides for the cancellation of any fixed term agreement by a natural person by giving the supplier 20 business days’ notice in writing. The consumer will remain liable to the supplier for any amounts owed and for a reasonable cancellation penalty.
It further provides that upon the expiry of any fixed term agreement, it will automatically continue on a month-to-month basis unless the consumer expressly agrees to a renewal of the agreement for another fixed term.
The Service provider will have to inform the consumer, not more than 80 days and not less than 40 days before the expiry date of any material changes to the agreement as well as the consumer’s options as far as the renewal is concerned.
Section 14 does not apply to transactions between juristic persons, including body corporates, partnerships, associations, and trusts.
