Contract Concepts: Giving a Contract a Perpetual Term
[Here's another in our occasional series that explores interesting issues in contract language. Once again, it's by our upstart intern Dave Zukowski! Ken Adams isn't going to like this …]
1997 was a great year for pop culture—Will Smith broke box office records in Men in Black, Jim Carrey played a lawyer who had to tell the truth in Liar Liar, and Echo and the Bunnymen reunited to record Evergreen. The first single on that album was a hit called Nothing Last Forever. I hate to quibble with the Bunnymen, but I’m not sure US courts would agree.
True, courts are skeptical of contracts with a perpetual term—in an ever-changing marketplace, it doesn’t often make sense to enter into deals that last forever. And many opinions observe that common law disfavors perpetual contracts. But disfavored is not the same as disallowed. What matters to courts is what the parties intend. If they unambiguously want a contract to have a perpetual term, usually courts will enforce it. But courts are unlikely to find enforceable a contract that imposes on an employee an obligation not to solicit or not to compete if that obligation has a perpetual term.
If it’s not clear what the parties intended, courts generally imply a reasonable term, after which either party may terminate whenever it wants. That’s what UCC § 309 says:
(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
Last year, in Compania Embotelladora Del Pacifico, S.A. v. Pepsi Cola Co. the Second Circuit said, “Under New York law, it is well settled that a contract of indefinite duration is terminable at will unless the contract states expressly and unequivocally that the parties intend to be perpetually bound.” The case dealt with a contract for exclusive bottling, sale, and distribution of Pepsi in Peru. Because the contract didn’t contain a “clear statement of perpetuity,” it was terminable at will.
Contracts with a perpetual term are uncommon, but they do occur. For example, one can invest in perpetual options or futures. In some jurisdictions, a perpetual lease might be preferable to conveying title. And if a contract providing for an ongoing relationship, for example a master services agreement, allows the parties to control what, if anything, they are committing, a perpetual term might offer convenience without risk. The law on perpetual contracts varies by jurisdiction. For example, the French civil code says that perpetual undertakings are prohibited.
Some US courts analyze the substance of the contract to see if it makes sense with a perpetual term. That’s what the Eighth Circuit did in Southern Wine & Spirits of Nevada v. Mountain Valley Spring Co., holding that a distribution agreement was for a perpetual term and not for an indefinite term and so couldn’t be terminated at will. But for other courts, it’s enough that a contract uses buzzwords like in perpetuity or for all time. In that spirit, the Supreme Court of North Carolina in Lattimore v. Fisher's Food Shoppe, Inc. said that a perpetual term must contain “customary words of perpetuity.”
The word perpetual might be used to say how long a software license lasts, but that’s different from the term of a contract. A perpetual term for a software license is analogous to allowing someone who buys something from you to use it for as long as they want.
So with all due respect to Echo and the Bunnymen, some things do last forever. But they just aren’t that common, and for them to work you have to keep your wits about you.
Once you’re aware of issues relating to contracts with a perpetual term, you can be on the lookout for the concept in contracts you review. But life would be simpler if you could upload drafts to LegalSifter Review and have our algorithms tell you what you need to know. The Sifter Term: Perpetual, like LegalSifter Review generally, saves you time, helps you make informed decisions, and reduces the risk of unpleasant surprises.