As with any industry, there is a lot of jargon and slang in transportation. Some words and phrases are used so often that people new to the industry might hesitate to ask their meaning out of the fear that it is something they are supposed to already know. In this installment of PARCEL Counsel we will consider one such term: evergreen contracts, and we will then explore why they are of such critical significance.
Black’s Law Dictionary defines an “evergreen contract” as follows: “A contract that renews itself from one term to the next in the absence of contrary notice by one of the parties”. Put another way, it is a contract that automatically renews for one or more additional terms.
The opposite of an evergreen contract would be a fixed term contract which is for a stated term, after which it expires. Another variation would be a contract which is renewable by one party giving notice to the other party. An example of this would be a commercial lease whereby a tenant could extend the lease for another term by giving the landlord notice prior to the expiration of the current lease term.
While a discussion of the terminology of contracts may seem rather dry or mundane to some, whether a contract is for a fixed term or is evergreen in nature can have substantial financial impact. This arises out of the manner in which Less-than-Truckload (LTL) carriers and parcel carriers such as FedEx and UPS provide pricing.
Prior to the demise of the Interstate Commerce Commission (ICC) on December 31, 1995, motor carriers were required to file their rates with the ICC…AND could only charge their customers the rates on file. Any discounts from those rates were unlawful.
Subsequent to deregulation, LTL carriers began offering their customers discounts from their standard published rates. Over the years the practice spread and the discount levels grew so that various surveys indicate that shippers are receiving discounts well over 50%, with discounts of 80% or more being quite common. This is obviously good for a shipper, but it comes with a pitfall…when a discount is given, it can also be taken away! The critical factor is that when any agreement for discounted rates expires, then the full undiscounted, standard rates would apply…and that’s the source of the concern in relationship to contracts.
To explain, the discount levels and pricing agreed to between a shipper-customer and a carrier are typically included in either a formal contract or a basic pricing agreement setting forth, amongst other things, the rates. Suppose a shipper and a carrier entered into a fixed term contract for really nice, low rates. On the day the contract is signed, the shipper’s personnel have clear in their minds that the contract will expire on a certain date and that they will have to either re-negotiate a contract or stop tendering shipments to the carrier when the contract expires. What then happens in the real world is that people get busy, details get overlooked, and the contract term expires without the shipper realizing it.
What happens next is that the carrier could, as has indeed happened in the past, go to the shipper seeking the difference between the rate contained in the expired contract and the carrier’s base rates. To translate into dollars and cents, suppose a customer had a monthly freight bill under the contract for $10,000 based on an 80% discount. After the contract expires, the same volume of shipments would generate charges of $50,000 per month! Thus, if for no other reason, a shipper should always seek to have an evergreen contract in place.
Unfortunately, it is not quite that simple. Some carriers will only agree to fixed term contracts and resist an evergreen contract. Another issue is that the rates are often obtained in schedules or appendices to a primary contract relating to matters such as payment terms, indemnification, loss & damage, etc., etc. Generally speaking, once completing those negotiations the parties would prefer not to have to repeat the exercise on an annual basis so the primary contract will be evergreen in nature.
However, carriers and shippers are often unwilling to commit to a certain rate level for more than one year so the pricing schedules or appendices themselves will have separate fixed terms. In such a situation, one solution is to add language to a pricing schedule stating that the rates will be in effect from a certain date to a certain date…after which time the rates will continue to be in effect until further agreement of the parties. The addition of this last phrase also makes the schedules evergreen in nature, just as the primary contract.
Brent Wm. Primus, J.D., is the CEO of Primus Law Office, P.A. and the Senior Editor of transportlawtexts, inc. Your questions are welcome at brent@primuslawoffice.com.
