“PERPETUAL” CONTRACTS UNDER
CALIFORNIA LAW
At common law, contracts with no
express duration are terminable at the will
of either party. From a practitioner’s
standpoint, determining when parties are
no longer bound by a contract without an
express end date is thus a crucial task,
since if a court cannot construe a contract
to contain a definite duration, the
common law default rule kicks in.
A contract with an indefinite duration—often termed a
perpetual contract—generally has one of two characteristics.
Either the contract may call for successive performances without
specifying a final performance, or it may fail to specify a
duration. Contracts of indefinite duration commonly include
distributor and franchise arrangements, service contracts, and
real property agreements.
Conversely, contracts not governed by the California
Commercial Code that call for a set number of performances are
terminable upon completion of the set of performances. Such
contracts often involve a set number of deliveries or a specific
quantity of goods—for instance, a yield of a crop planted on a
specific plot of land, or all of the materials required to complete
a particular project. Contracts of this type that specify that they
continue until some event occurs are generally not indefinite:
courts determine that the contractual obligations of the parties
end upon occurrence of that specified event.
Even where a contract does not call for a set of performances
and is not terminable upon completion, California courts will
attempt to avoid construing the contract as perpetual. In
Consolidated Theatres, Inc. v. Theatrical Stage Employees
Union, Local 16, 69 Cal. 2d 713, 727 (1968), the California
Supreme Court created a three-step analysis to cabin the duration
of perpetual contracts. First, courts look to find an express term
of duration in the contract. Second, if an express term is absent,
the court looks to the intention of the parties in order to imply a
duration, if that is possible. In doing so, the court looks at
whether duration can be inferred from the nature of the contract
and the circumstances surrounding it. To show implied intent,
parties may introduce extrinsic evidence which the court can use
in construing the contract’s duration. See Am. Indus. Sales Corp.
v. Airscope, Inc., 44 Cal. 2d 393, 397 (1955) (“[W]hen the parties
have not incorporated into an instrument all of the terms of their
contract, evidence is admissible to prove the existence of a
separate oral agreement as to any matter on which the document
is silent and which is not inconsistent with its terms.”).
Third, if neither an express nor an implied term can be found,
the term of duration will be construed to be a reasonable time.
Obligations under the contract are terminable at the will of either
party after that party gives reasonable notice to the other party
and after a reasonable time has elapsed. However, California
courts go to great lengths to avoid such a construction for
multiple reasons. First, courts avoid this construction because it
is often either illogical or against public policy. See Cooper Cos.
v. Transcon. Ins. Co., 31 Cal. App. 4th 1094, 1103-04 (1995)
(deeming the “troubling ramifications” resulting from
interpreting an insurance contract terminable at will
“unreasonable”). Second, courts disfavor perpetual contracts
because they permit courts to infer the contractual intent of
parties for a contract of a “reasonable time”—often without any
evidence that such intent was shared by the parties themselves at
the time of contracting. Thus, where no express duration exists,
courts will usually imply a duration under the second step based
on the contracting parties’ intent. Courts conclude that a contract
contains a perpetual term only if such a reading is compelled by
the unequivocal language of the contract. See Zimco Rests., Inc.
v. Bartenders & Culinary Workers Union, Local 340, 165 Cal.
App. 2d 235, 238 (1958).
Despite their best efforts to avoid such a construction, there
are instances in which California courts have found that a
contract is perpetual. For example, in Zee Medical Distributors
Ass’n, Inc. v. Zee Medical, Inc, 80 Cal. App. 4th 1 (2000), an
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Olivia Powar
association of distributors brought an action seeking a
d
eclaration that its contract with the supplier lacked a definite
duration and was thus terminable at will. The Court of Appeal
h
eld that the plain, unambiguous language of the contract
expressly provided for a term of indefinite duration and that
the contract was therefore terminable at the will of either party.
Id. at 13-14.
While the three-step analysis applies generally to all
perpetual contracts, special issues present themselves in
certain areas. For example, contracts governed by the
California Commercial Code are subject to a different
analysis. The California Commercial Code states that where
a contract provides for successive performances but is
indefinite in duration, the agreement is valid for a reasonable
time, but unless otherwise agreed, the contract may be
terminated at any time by either party. It also provides,
however, that termination of a contract by one party, except
on the happening of an agreed event, requires that reasonable
notification be received by the other party. An agreement
dispensing with notification is invalid if its operation would be
unconscionable. See Cal. Com. Code § 2309 (West 2002).
Contracts addressing periodic payment situations also
bedevil California courts. In determining whether a party must
make periodic payments under a contract that provides no
fixed date for termination of the party’s obligation, the court
looks at whether there is an ascertainable event that may
supply a basis for implying a termination date. For example,
in Lura v. Multaplex, Inc., 129 Cal. App. 3d 410 (1982), an
individual sued a corporation for breach of a contract under
which he agreed to secure customer accounts for the
corporation in exchange for commissions based on the
corporation’s sales to those accounts. The contract contained
no provision specifying how long these commissions would
be paid. The California Court of Appeal reversed the trial
court’s holding that the obligation was terminable at the will
of either party so long as reasonable notice was given. Id. The
plaintiff’s only duty under the contract was to secure accounts.
Once he had done so, the only obligation remaining was that
of the corporation to pay the agreed-upon compensation.
Because the plaintiff had already performed the services he
was contractually obligated to perform, the defendant was thus
obligated to continue paying the commissions to the plaintiff
as long as it continued to benefit from the accounts plaintiff
secured. The Court of Appeal thus held that the corporation
could not terminate the agreement by simply giving reasonable
and sufficient notice of its intent to cease making commission
payments because the contract already contained an
ascertainable event under which the termination would
necessarily be implied: the corporation’s termination of sales
t
o the accounts plaintiff procured. Id. at 415.
Another area in which California courts have addressed the
i
ssue of perpetual contracts is exclusive distributorships. In
Kolling v. Dow Jones & Co., 137 Cal. App. 3d 709 (1982), for
example, the California Court of Appeal held that, absent a
provision requiring cause for termination, an agreement
creating an exclusive distributorship is, much like contracts
with an indefinite duration, terminable by the supplier at will
upon reasonable notice.
Real property contracts present another instance in which
the perpetual contract issue can arise. In the landlord-tenant
context, perpetual leases are complicated by both public policy
and statutory guidance. For example, California Civil Code
section 718 prohibits leases longer than ninety-nine years.
However, more recent decisions have rejected the use of
section 718 to limit the term of a lease unless it extends beyond
ninety-nine years by its express terms. Further, courts also
note that provisions allowing perpetual renewal of leases are
disfavored because they potentially “put[ ] it in the power of
one party to renew forever, and [are] therefore against the
policy of the law,” even if perpetual renewals would not violate
the rule against perpetuities. Ginsberg v. Gamson, 205 Cal.
App. 4th 873, 884 (2012).
Even though perpetual leases are disfavored, California
courts may interpret a lease as perpetual where there is
“peculiar and plain language” showing that parties intended to
create such a lease. Id. at 885. Ginsberg is an example of a
case that did not meet that standard. There, the California
Court of Appeal stated that a lease containing language
allowing extension of the lease for additional five-year periods
failed to “demonstrate a clear intent to create a right to
unlimited extensions.” Id. at 890. The court noted that the
ambiguous language referring to “additional periods” did not
clearly show an intent to create the right to unlimited renewals.
Id. at 891.
Without evidence of intent which can supply a basis to
imply a duration or express language stating a definite
duration, a contract may unintentionally become perpetual, and
thus terminable at the will of either party. Accordingly, it is
critical that attorneys drafting or reviewing contractual
language ensure that their clients are aware of the duration for
which the contract binds them.
O livia Powar is an associate in the Los Angeles office of
Skadden, Arps, Slate, Meagher & Flom LLP.
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