Perpetual Contracts Enforceable: Everything You Need to Know
It depends on the type of contract you have signed, whether the courts may be discouraged from enforcing their views when freedom of contract comes into play.3 min read
Updated October 28, 2020:
The question, "Are perpetual contracts enforceable?" depends largely on the type of contract you have signed, and whether the courts may be discouraged from enforcing their views when freedom of contract comes into play.
What Is a Perpetual Contract?
A perpetual contract normally doesn't have a specified end date, nor does it outline any rights when it comes to terminating the contract. It's not always obvious, however, whether a contract is perpetual or finite. For example, consider a contract that doesn't include a specified time period or an explicit outline of rights pertaining to contract termination. The contract, however:
- Contains certain provisions which are designated "essential terms"
- Includes certain clauses that are expressed as "of the essence"
- States that breach of certain provisions constitutes a repudiation of the agreement
These clauses trigger what is known as "common law rights" pertaining specifically to contract termination. It can be argued, therefore, that clauses of this nature define the contract's term, despite the fact that a term has not been explicitly defined. In this case, the contract is not considered a perpetual contract, even though no term has been specified and it does not specifically outline rights pertaining to termination.
On the other hand, if an agreement specifically defines an initial term but then states the contract will renew automatically at the end of the initial term unless one or more of the involved parties gives a non-renewal notice before the term expires, it would constitute a perpetual contract. In scenarios such as this, unless a non-renewal notice is provided by at least one party within the time frame of the initial term, the contract becomes perpetual at the end of the contract's initial term.
When Can Perpetual Contracts Be Terminated?
When a contract can be considered perpetual, whether it can be terminated on the basis of notice depends on whether the contract contains any kind of implied term pertaining to termination. This requires the subject matter included in the contract to be closely examined, including the circumstances under which the agreement was made and any provisions to which the involved parties did or didn't agree. In most cases, because of the freedom of contract, the courts are reluctant to imply terms into an agreement based on their views regarding what the involved parties should or should not have considered when the contract was originally created.
If the contract in question, however, is a commercial agreement, courts are normally compelled to conclude that all involved parties must have had the intention that the agreement is terminable because of the nature of the business relationship to which the contract pertains. Accordingly, the courts are normally going to imply rights of termination in the event that a notice is given. The basis for implying these rights, however, might not arise until the contract has been in existence for what can be considered a "reasonable period of time."
Generally speaking, if the parties involved are in the beginning stages of forming an agreement and one or more parties has invested time or money in efforts that support the development of a business, it stands to reason that both parties have a reasonable expectation for the contract to continue for at least as long as it would typically take for the investing party to recoup his or her investment. Once a business has existed for what can be considered a reasonable amount of time, the lack of ability to profit from investments of this nature may be considered a business risk as it relates to entering into contracts that carry implied termination rights.
This means, in simple terms, that once a contract has existed for a reasonable amount of time, any party who wishes to terminate is entitled to do so, as long as he or she provides proper notice to the other parties involved in the agreement. However, whether the contract in question is required to have continued for a reasonable amount of time is a matter that needs to be determined in regard to the context of the contract.
Determining whether a perpetual contract is enforceable is a legally complex matter that will likely require the assistance of an attorney with significant knowledge and experience in this area.
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