The Term of a Contract: Can a Party be Bound Forever?

According to soft law codifications and many national contract laws, long-term (commercial) contracts concluded for an indefinite period can be terminated on reasonable notice even without cause and irrespective of whether the contract provides for the latter. A corresponding right of termination is, inter alia, expressly recognized by Art. 6:109 of the Principles of European Contract Law (PECL) and Art. 5.1.8 of the Unidroit Principles of International Commercial Contracts (PICC), in both cases apparently based on the view that a ‘perpetual contract’ is contrary to the personal freedom and autonomy of the contracting parties (see the official comment to Art. 5.1.8 PICC). French law in turn expressly prohibits ‘contracts of perpetuity’ and accordingly provides the parties in this event with a mandatory right of termination upon reasonable notice (Arts. 1210, 1211 French Civil Code 2016). Other civil law jurisdictions, notably Belgium, Switzerland and Italy, follow suit to a greater or lesser extent: The Swiss Civil Code, for example, does not contain an overarching statutory right of termination without cause but recognizes (well beyond the scope of the English common law restraint of trade doctrine, which is less concerned with the personal freedom of the parties than with the public interest in free trade) that perpetual contracts or contracts concluded for an ‘excessively long period’ constitute even in commercial transactions an unacceptable surrender of freedom (Art. 27 (2) Swiss Civil Code).

A recent judgment of the English High Court (Zaha Hadid Limited v Zaha Hadid Foundation [2024] EWHC 3325 (Ch)) illustrates again that English law takes a different approach both with regard to the (non-)existence of implied termination rights on reasonable notice as well as their (non-)mandatory nature: In this case, the architectural firm Zaha Hadid Ltd (the ‘Company’) had entered into a trademark license agreement (the ‘Agreement’) governed by English law with the late Dame Zaha Hadid, the renowned architect. The benefit of the Agreement subsequently passed to the Zaha Hadid Foundation, which accordingly became the licensor and has since then been entitled to the agreed payment of a royalty of 6% of the Company's net income for ‘Licensed Services’ (this term being defined as to include all services provided by the Company regardless whether based on the use of the licensed marks) in consideration for the non-exclusive use of all registered trademarks of the name ‘Zaha Hadid’. As regards term and termination, Art. 12 of the Agreement stipulated as follows:

12. DURATION AND TERMINATION

12.1 This agreement shall commence on the Effective Date and shall continue indefinitely, unless terminated earlier in accordance with this clause 12.

12.2 The Licensor shall have the right to terminate this agreement on giving the Licensee not less than 3 months' written notice of termination.

12.3 Without affecting any other right or remedy available to it, the Licensor may terminate this agreement with immediate effect by giving written notice to the Licensee if: (…)

Notwithstanding the wording, which on its face appears to leave little doubt that the Agreement was intended to continue in perpetuity unless (and only unless) terminated by the licensor (not the licensee) in accordance with clause 12.2 and 12.3, the Company sought to terminate the Agreement on 12 months’ prior notice, relying on authorities interpreting perpetual contracts as being subject to a right to terminate on reasonable notice. Unsurprisingly, this argument was rejected by the High Court, which was also unpersuaded by the alternative invocation of the restraint of trade doctrine: Even though another clause in the agreement required the licensee to ‘use its best endeavors to promote the licensed services throughout the world’ (as a matter of fact, forever), the judge considered the latter to constitute an encouragement of rather than a restraint of trade.

Apart from the interpretation of clause 12 and the application of the doctrine of restraint of trade, the judgment sheds from an English law perspective light on the presumed legal basis (or lack thereof) of a unilateral right to terminate an agreement for an indefinite duration on reasonable notice in the absence of a specific contractual provision to that effect. Although it seems more appropriate to identify a termination right on reasonable notice in this event by way of implication (either in law or in fact) of such a term into the contract, English case law seems to prefer to rely on a ‘true construction of the contract’, albeit ‘not construction in the narrow sense of giving meaning to the language used by the parties, but in the broader sense of ascertaining, in the light of all the admissible evidence and in the light of (...) what was the common intention of the parties in the relevant respect when they entered into the contract’ (Winter Garden Theatre (London) Limited v. Millenium Productions Ltd [1948] AC 173, 203; Staffordshire AHA v South Staffordshire Waterworks Co [1978] 1 WLR 1387, 1395 ff.; Chitty on Contracts, General Principles, 35edn 2023, para. 17-033 with further references), probably (in the absence of express termination clauses) with a developing tendency towards a presumption in favor of a corresponding right of termination.

The apparent reliance on construction rather than implication may be intended to avoid the application of thresholds that are regarding implied terms in law likely to be considered too low (given that the latter operate as general default rules based on ‘broader statements of reasonableness rather than necessity’, see McMeel, McMeel on the Construction of Contracts, 3rd edition 2017, para. 9.08) or, regarding implied terms in fact, too high (as the latter require, based on the ‘business efficacy test’, a necessity in a stricter sense). However, it is difficult to overlook the incoherence of this approach against the background of traditional principles of English contract law, which still insist on ‘the fact that the construction of the words used and the implication of additional words are different processes, governed by different rules’ (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72 para. 26).

The apparent refusal to grant a right of termination on reasonable notice the status of an ‘implied term in law’ has also implications for the applicable rules of interpretation in relation to express termination clauses (see already Servicepower Asia Pacific Pty Limited v Servicepower Business Solutions Limited [2009] EWHC 179 (Ch) paras 25 ff.): In particular, the (rebuttable) presumption based on the ‘Gilbert Ash’ principle (Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689) that a party to a contract will not be deemed to have waived his legal rights in the absence of clear and express words to that effect cannot apply where that right is solely based on the interpretation (albeit in a broader sense) of the contract in question and, for that reason, does not constitute a legal right in the first place.

The lesson for contract drafting is clear enough: when drafting and reviewing term and termination clauses, parties should always apply the strictest scrutiny.

Patrick Ostendorf is a professor of commercial law at the HTW Berlin and of counsel at orka Rechtsanwälte, Berlin.