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Can Parties Enter Into a Perpetual Contract?

Logo for Quora, where Dana Shultz answered a question about entering into a perpetual contractThis post is about whether parties may enter into a perpetual contract (one that never ends).

It is adapted from my answer to a question on Quora. See Is it possible to structure a contract with no end date?

It turns out the the answer depends, to some extent, on which state’s law applies.

California: Perpetual Contract Can Be Terminated

For example, in California a perpetual contract can exist, but any party may terminate it at any time. In Zee Medical Distributor Assn. v. Zee Medical, the California Court of Appeal for the First District discussed a three-step analysis concerning contractual terms of duration. (Emphasis added.)

The court first seeks an express term. If one is absent, the court determines whether one can be implied from the nature and circumstances of the contract. If neither an express nor an implied term can be found, the court will generally construe the contract as terminable at will.

Illinois: Perpetual Contract is Unenforceable

Illinois, in contrast, has determined that any perpetual contract violates public policy and, thus, will not be enforced. In Jespersen v. Minnesota Mining and Manufacturing, the Illinois Supreme Court made the following points.

[P]erpetual contracts are disfavored. [Citation omitted.] “Forever” is a long time and few commercial concerns remain viable for even a decade. Advances in technology, changes in consumer taste and competition mean that once profitable businesses perish-regularly. Today’s fashion will tomorrow or the next day inevitability fall the way of the buggy whip, the eight-track tape and the leisure suit. Men and women of commerce know this intuitively and achieve the flexibility needed to respond to market demands by entering into agreements terminable at will.

“Evergreen” Contracts are Different

A perpetual contract should be distinguished from the so-called “evergreen” contract. The latter typically has an initial term of one or more years. It automatically renews for successive terms of a specified number of years unless a party provides notice of non-renewal.

Evergreen contracts are enforceable. Here is an example of an evergreen provision.

Each Term will 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 30 days prior to expiration of the then-current Term.

In summary, a perpetual contract is not a good idea from the business perspective, and a court will not enforce it in perpetuity – so you might as well not enter into it.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
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