Download Determining the Duration of 'Perpetual' Contracts under California Law and more Study notes Law in PDF only on Docsity! “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 SUMMER/FALL 2018 Olivia Powar
