In Disney’s 1981 animated film, The Fox and the Hound, Copper and Tod promised each other, as puppies, that they would be friends “forever.” Unfortunately, Copper was a hunting dog, and Tod was a fox, and friendship between the two was destined for trouble, at least once they were exposed to society’s expectations. Indeed, when Copper was sent off to hunting school, Big Mama the owl warned Tod that Copper would change. Tod, however, was confident that Copper and he would “keep on being friends forever.” But Big Mama replied that “forever is a long, long time. And time has a way of changing things.” Well, if you were expecting the traditional Disney happy ending, it didn’t happen. While Tod and Copper made valiant efforts to keep their friendship, it simply wasn’t to be. Time did in fact change things.
The same thing is sometimes true of long-term contracts. As noted by the Illinois Supreme Court:
“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.
Some contracts are expressly terminable at will, of course. Yet many manufacturing and supply agreements contemplate much longer terms and would simply not make sense for the business if they were terminable at will. Some businesses are in fact anchored in a long-term contract to supply goods to a specific customer from a manufacturing facility built specifically for that purpose. And private equity acquirers are keenly focused on these types of agreements and the fact of their longevity during the diligence process. When the agreements actually specify a specific end date, that end date will govern under the common law’s freedom of contract principles. But what happens when the parties state that the agreement will continue “indefinitely,” or “until terminated by the mutual agreement of both parties,” or “until terminated as the result of a material breach by either party,” or “as long as one party continues to perform” by providing the designated services or goods? Well, that’s when the common law can intervene and potentially imply a term that is not otherwise stated or declare the agreement terminable upon notice by either party. Like Big Mama, the common law, as adopted in most U.S. states, is very uncomfortable with agreements that purport to last “forever.” Indeed, a nineteenth century decision summarized the common law’s concern with agreements that could potential continue forever as follows:
Perpetual contracts . . . will not be tolerated by the law, or rather will not be enforced as imposing an eternal and never-ending burden. An agreement to furnish a support or service, or a particular commodity, at a specified price, or to do a certain thing without specification as to time, will be construed either as terminable at pleasure, or as implying that the thing to be done shall be performed within a reasonable time, and the obligation will cease within the same limitation.
But the common law’s concern with perpetual agreements is not as absolute as this case, or Big Mama, suggests. Instead, what the common law does is imply a term for a contract that is “indefinite” as to its duration—and the implied term is that the contract is terminable upon reasonable prior notice by either party. On the other hand, if the parties have truly, and unambiguously, specified that an agreement is to last forever or perpetually, most courts appear prepared to accept the parties agreement in that regard as sacrosanct. In other words, a contract with an indefinite duration is not perpetual, but a contract with a clearly stated perpetual term is indeed forever. However, clear and unambiguous expressions of “forever” are difficult to find.
Thus, in a recent Minnesota Supreme Court decision, Glacial Plains Cooperative v. Chippewa Valley Ethanol Co., LLLP, the court held that a long-term agreement to supply grain to an ethanol plant, which did not otherwise contain an end date, did “not unambiguously express an intent to form a contract of perpetual duration, and [was] thus a contract of indefinite duration [that] . . . is terminable at will upon reasonable notice once a reasonable time has passed.” In Glacial Plains, the defendant (“CVEC”) notified the plaintiff (“GPC”) of its decision to terminate the grain supply agreement that had been entered into between CVEC and GPC almost twenty years before. When the agreement was entered into, GPC had agreed to invest in CVEC’s ethanol plant and CVEC had provided land next door to the plant upon which GPC built a grain processing plant. As part of that initial exchange, the agreement specifically provided that “GPC would be the ‘exclusive handler of grain to the [CVEC] ethanol plant, as long as it [was] complying with all warranties and agreements’ and ‘continue[d] to be able to handle the full capacity of corn’ CVEC required to run the plant.” And then the agreement further stated that “this agreement shall continue indefinitely until either terminated by the terms of this agreement, or by the mutual agreement of both parties.” The agreement did not otherwise specify an end date or provide for a mechanism for termination except in the case of a default in performance by GPC.
All was well for more than 10 years, until CVEC hired a new general manager and things went from bad to worse. CVEC tried to first claim that GPC was in default in its performance and submitted that claim to arbitration pursuant to the terms of the agreement. The arbitrators, however, did not side with CVEC respecting a right to terminate. So, CVEC then re-read the agreement and determined that it was actually terminable at will because it was an agreement with an indefinite duration. In response to CVEC’s purported termination of the agreement, GPC filed suit and prevailed at the trial court and the intermediate court of appeals. But the Minnesota Supreme Court reversed.
According to the Minnesota Supreme Court, “contracts of perpetual duration are disfavored” and, therefore, contracts without a specified end date will be construed as having an indefinite duration unless the parties have clearly and unambiguously specified that the contract is to continue into perpetuity. Although the court stated that no “magic words” were required to accomplish this result, this agreement failed to do the job: “indefinitely [is] not ‘forever,’ not ‘perpetually,’ and not ‘permanently.’” And “[a] contract of indefinite duration is terminable at will upon reasonable notice to the other party after a reasonable period of time had passed.” The court then remanded the case back to the district court to determine whether a reasonable time had passed given that this agreement had already lasted almost twenty years.
In contrast, in an earlier case, Burford v. Accounting Practice Sales, Inc., the Seventh Circuit held that an agreement not otherwise specifying an end date was not indefinite where it provided that one party to the agreement was expressly precluded from terminating the agreement “unless it [was]
violated by [the other party].” Therefore the agreement was allowed to continue forever unless and until it was terminated by the party holding the termination right as a result of a violation of the agreement by the other party. And distinguishing other cases where the courts had declared indefinite an agreement not providing an end date but specifying that it “may” be terminated by one party if the other party violates the agreement, the court held that “[t]here [was] a decisive difference between saying that A may terminate if B breaches and saying that A may terminate only if B breaches.” The former case results in an indefinite agreement terminable by either party upon reasonable notice and the later constitutes a potentially perpetual agreement the termination of which is in the hands of only one of the parties.
To further confuse things, a contract without a specified end date may be neither an indefinite contract terminable at the will of either party upon reasonable notice, nor an enforceable perpetual agreement. Rather, if the surrounding circumstances or other language in the contract can “fairly and reasonably” provide the missing end date, the court can supply one by implication. Thus, it would appear that it is only when an end date cannot be deduced by implication, that the perpetual versus indefinite distinction even becomes relevant.
So, what does this all mean for those performing due diligence respecting the material customer and supply contracts of a target company? A contract with an express end date means what it says. The end date for a contract without an express end date, or one that purports to continue indefinitely, or even forever, may in fact be subject to early termination, or have an implied end date, depending on the particular approach of the courts of the state governing that particular contract. Unlike the purchase agreement, where you can negotiate for a particular law to apply, you are stuck with whatever choice of law was made in the existing target contracts. If the target contract is important, you had better understand the chosen state’s common law overlay to that contract’s terms. Simply reading the agreement and concluding that indefinite is the same as forever, or that there is not a built in implied end date not otherwise stated, is not enough. And even when you are confident of the agreement’s actual term after taking into account the common law’s overlay, consider Big Mama’s warning that time changes things and factor that warning into your evaluation of the acquisition.
Special thanks to summer associate Patrick Hosch for his research assistance.
- Jespersen v. Minn. Mining & Mfg. Co., 700 N.E.2d 1014, 1017 (Ill. 1998).↵
- See Glenn West, Selling Your Portfolio Company Subject to a New York Law Governed Contract—Identifying a Hidden Term Built-In by New York’s Common Law: the Mohawk Doctrine, Weil Insights, Weil’s Global Private Equity Watch, June 10, 2019.↵
- Echols v. New Orleans, Jackson & Great N.R.R. Co., 52 Miss. 610, 614 (1876).↵
- See, e.g., Serpa Corp. v. McWane, Inc., 199 F.3d 6, 14 (1st Cir. 1999).↵
- See, e.g., In re Provider Meds, LLC, 907 F.3d 845, 856 & n.48 (5th Cir. 2018), cert. denied sub nom. RPD Holdings, LLC v. Tech Pharmacy Servs., 139 S. Ct. 1347 (2019)↵
- Glacial Plains Coop. v. Chippewa Valley Ethanol Co., LLLP, 912 N.W.2d 233, 235 (Minn. 2018).↵
- Burford v. Accounting Practice Sales, Inc., 786 F.3d 582, 587 (7th Cir. 2015).↵
- Coelho v. Grafe Auction Co., No. 654404/2013, 2018 WL 801547, at *4 (N.Y. Sup. Feb. 9, 2018); see also City of Homestead v. Beard, 600 So. 2d 450, 453 (Fla. 1992).↵