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Automatic renewal clause
From Wikipedia, the free encyclopedia
An automatic renewal clause (also referred to as an evergreen clause), is activated towards the end of the contractual period whereby it automatically renews the terms of an agreement except when the contract is terminated (through mutual agreement or contract breach), or one of the contracting parties has sent a letter of contract cessation to others prior to the end of the period.[1][2][3] An example of the clause is illustrated in the following quote: “Each Term shall automatically renew for subsequent periods of the same length as the initial Term unless either party gives the other written notice of termination at least thirty (30) days prior to expiration of the then-current Term."[4]
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Firms that are involved in contracting for multiple years generally use this clause more often when compared to other firms.[3] Also, firms engage in this legal process to gain economic benefits and reduce their costs.[1] Examples of industries in which it is generally used include insurance, digital media, healthcare, telecommunications, fitness, mining and so forth.[1][5]
Legal complications of the clause inculcate the advance notice time period, extent of contract transparency and grounds for contract termination.[1][6] The clause may be unfairly used by businesses for increased revenues and profitability.[2] Thus the regulation of these clauses is imperative, however, the process of implementing it and the penalties of its misuse vary across different countries and at times, states as well. Countries such as the United States, United Kingdom and Australia have enacted laws governing this clause.[1]