Back

California Courts Apply the Three-Step Analysis in Consolidated v. Thea

April 6, 2022

California

,

United States of America

Issue

Is a contract for services valid if it does not contain a duration term?

Conclusion

California courts apply the three-step analysis set out in Consolidated Theatres, Inc. v. Theatrical Stage Emp. Union, Local 16 ("Consolidated") to determine a contract's duration term. First, courts will look for an express duration provision in the contract and, if one exists, enforce the provision. If the contract does not have an express provision, the courts will determine whether the intention of the parties as to duration can be implied from the nature of the contract and the circumstances surrounding it. If the courts find neither an express nor an implied term, they will construe the term of duration to be a reasonable time. (RMR Equip. Rental, Inc. v. Residential Fund 1347, LLC, Consolidated Theatres, Inc. v. Theatrical Stage Emp. Union, Local 16, Cal. Earthquake Auth. v. Metro. W. Sec., LLC, Water, Inc. v. Everpure, Inc., Zee Medical Dist. V. Zee Medical)

This analysis applies to contracts that call for continuing performance or forbearance, such as a contract for services. (Consolidated Theatres, Inc. v. Theatrical Stage Emp. Union, Local 16, RMR Equip. Rental, Inc. v. Residential Fund 1347, LLC, Cal. Earthquake Auth. v. Metro. W. Sec., LLC, Water, Inc. v. Everpure, Inc.)

Cal. Com. Code § 2309(2) specifically provides that a commercial contract that provides for successive performances but is indefinite in duration is valid for a reasonable time, but, unless otherwise agreed, may be terminated at any time by either party.

However, Cal. Com. Code § 2309 only applies if the Court undertakes the Consolidated, supra, three-step analysis and determines that no express or implied duration term exists. (Water, Inc. v. Everpure, Inc.)

In RMR Equip. Rental, Inc. v. Residential Fund 1347, LLC, the California Court of Appeal for the Second District found that the contract was a requirements contract and had an express duration provision. Under the express duration provision, the contract was to continue as long as the park needed water to supplement its well production. Thus, the Court found that the trial court improperly limited damages to an arbitrary three-month term instead of allowing the plaintiffs to recover roughly four years of damages, the period from the breach to the date of trial.

In Cal. Earthquake Auth. v. Metro. W. Sec., LLC, the United States District Court for the Eastern District of California explained that contracts including express terms of indefinite duration are valid in California. Thus, a contract that stated that the agreement was of no defined duration had an express duration term. The contract was to continue until a party terminated the agreement by written notice.

Law

In Consolidated Theatres, Inc. v. Theatrical Stage Emp. Union, Local 16, 73 Cal.Rptr. 213, 69 Cal.2d 713, 447 P.2d 325 (Cal. 1968) ("Consolidated"), the Supreme Court of California held that when a contract calls for continuing performance or forbearance but contains no express term of duration, courts first must determine whether the intention of the parties as to duration can be implied from the nature of the contract and the circumstances surrounding it. California courts have not hesitated to imply a term of duration when the nature of the contract and surrounding circumstances afford a reasonable ground for such implication. If the contract and the totality of surrounding circumstances do not suggest any ascertainable term, the law usually implies that the term of duration shall be at least a reasonable time and that the obligations under the contract shall be terminable at will by any party upon reasonable notice after such a reasonable time has elapsed (at 725, 727-728):

In construing contracts which call for continuing performance or forbearance but which contain no Express term of duration, it is first necessary to determine whether the intention of the parties as to duration can be Implied from the nature of the contract and the circumstances surrounding it (See Haggerty v. Warner, supra, 115 Cal.App.2d 468, 473, 252 P.2d 373; Mangini v. Wolfschmidt, Ltd. (1958) 165 Cal.App.2d 192, 199--200, 331 P.2d 728; 1 Williston on Contracts (3d ed. 1957) § 38, p. 112; 17 Am.Jur.2d, Contracts, § 486, p. 957; 17A C.J.S. Contracts § 385(1), p. 457.) Thus, in some cases the court by referring to the nature of the contract and the totality of circumstances is able to determine that the obligations of the contract were impliedly conditioned as to duration upon the occurrence or nonoccurrence of some event or situation.

[...]

California courts have not hesitated to imply a term of duration when the nature of the contract and surrounding circumstances afford a reasonable ground for such implication. Thus, in Haggerty v. Warner, supra, 115 Cal.App.2d 468, 252 P.2d 373, it was held that a contract which provided that plaintiff was to receive 'Five Per Cent (5%) of all our billings' on certain units, but which contained no express term of duration, was subject to the construction that its obligations were to continue as long as 'billings' were made by defendants. (115 Cal.App.2d at p. 473, 252 P.2d 373; cf. Warner-Lambert Pharm. Co. v. John J. Reynolds, Inc. (D.C.S.D.N.Y.1959) 178 F.Supp. 655, affd. (2d Cir. 1960) 280 F.2d 197.) (See also Southern Pacific Co. v. Spring Valley Water Co. (1916) 173 Cal. 291, 159 P. 865, L.R.A.1917E, 680.)

While the initial effort of the court, in construing contracts of continuing performance or forbearance which contain no express term of duration, must always be that of implying a term of duration commensurate with the intentions of the parties, in some cases the nature of the contract and the totality of surrounding circumstances give no suggestion as to any ascertainable term. In such cases the law usually 12 implies that the term of duration shall be at least a reasonable time, and that the obligations under the contract shall be terminable at will by any party upon reasonable notice after such a reasonable[69 Cal.2d 728] time has elapsed. (See generally 17A C.J.S. Contracts §§ 385(1), 398, pp. 457, 480; Am.Jur.2d, Contracts, § 486, pp. 955--957; 1 Williston on Contracts, supra, § 38, pp. 112--117.) This rule is generally applicable, for instance, to exclusive sales agency and distributorship contracts. 13 (See J. C. Millett Co. v. Park & Tilford Distillers Corp. (D.C.N.D.Cal.1954) 123 F.Supp. 484, 492--493; San Francisco Brewing Corp. v. Bowman

Page 224

[447 P.2d 336] (1959) 52 Cal.2d 607, 613--614, 343 P.2d 1; Great Western Distillery Products, Inc. v. John A. Wathen Distillery (1937) 10 Cal.2d 442, 447, 74 P.2d 745; Connelly v. Venus Foods, Inc. (1959) 174 Cal.App.2d 582, 586, 345 P.2d 117; Mangini v. Wolfschmidt, Ltd., supra, 165 Cal.App.2d 192, 202, 331 P.2d 728; 9 Williston on Contracts, supra, § 1017A, pp. 137--169; see generally Annot., 19 A.L.R.3d 196.) It is also applicable in the labor field to jurisdictional agreements between competing unions (Green v. Obergfell (1941) 73 App.D.C. 298, 121 F.2d 46, 138 A.L.R. 258, cert. den. 314 U.S. 637, 62 S.Ct. 72, 86 L.Ed. 511), as well as to agreements between labor and management (Zimco Restaurants, Inc. v. Bartenders and Culinary Workers Union (1958) 165 Cal.App.2d 235, 331 P.2d 789) when the circumstances surrounding said agreements are not such that an ascertainable term of duration may be implied therefrom.

In RMR Equip. Rental, Inc. v. Residential Fund 1347, LLC, 65 Cal.App.5th 383, 280 Cal.Rptr.3d 6 (Cal. App. 2021), the California Court of Appeal for the Second District applied the three-step analysis for determining a contract's term of duration set out in Consolidated, supra. Under this analysis, courts will first look for an express duration provision in the contract and if one exists, enforce the provision. If the contract does not have an express provision, courts look to the intention of the parties to imply a duration. If courts find neither an express nor an implied term, they will construe the term of duration to be a reasonable time (at 393):

The controlling authority, according to the parties, is the Consolidated decision, in which the California Supreme Court set out a three-step analysis for determining a contract's term of duration. First, courts look for an express duration provision in the contract. If one exists, we enforce it according to its terms. Second, if the contract does not have an express provision, we look to the intention of the parties to imply a duration. Third, if we find neither an express nor an implied term, we construe the term of duration to be a reasonable time. (Consolidated, supra , 69 Cal.2d at pp. 723–731, 73 Cal.Rptr. 213, 447 P.2d 325.)

The Court found that in this case, the analysis ended at step one because the contract had an express duration provision. Under the express duration provision, the contract was to continue as long as the park needed water to supplement its well production: until it obtained another supply of water by connecting to some larger water system or by drilling more wells that obviated the need for trucks. Thus, the Court found that the trial court improperly limited damages to an arbitrary three-month term instead of allowing the plaintiffs to recover roughly four years of damages, the period from breach to the date of trial (at 393):

The proper analysis here begins and ends at step one. (See Zee, supra, 80 Cal.App.4th at p. 10, 94 Cal.Rptr.2d 829.)

This contract has an express duration provision: "RMR Water Trucks will be guaranteed water delivery to Paradise Ranch as long as the park needs water to supplement its well water production or another supply of water becomes available. " The italics are ours.

RMR had an exclusive deal the park could not circumvent by buying and using its own water truck. The trial court found the park breached the contract and the park has not appealed this ruling. We consequently confront no dispute over ratification; that was decided and was not appealed. Our sole issue is contract duration.

This contract was not terminable at will. It was to continue as long as the park needed water to supplement its well production: until it obtained another supply of water by connecting to some larger water system or by drilling more wells that obviated the need for trucks. Therefore it was error to limit damages for breach to an arbitrary three-month term. The court should have awarded damages for roughly four years, as RMR requested. (We do not consider the issue of interest, which is for the trial court on remand.)

In Zee Medical Dist. V. Zee Medical, 94 Cal.Rptr.2d 829, 80 Cal.App.4th 1 (Cal. App. 2000), the California Court of Appeal for the First District also applied the Consolidated analysis and determined that the contract at issue contained an express duration provision. The Court explained that the contract provided that it would continue until grounds arose for termination. This provision was a valid, express contractual term of duration despite the duration being an indefinite period of time (at 10-11):

Consolidated Theatres also discussed the consequences of a contract having neither an express nor an implied term of duration. When there is no express term, and the surrounding circumstances and the nature of the contract do not permit the construction of the contract to have an ascertainable term of duration, the contract is usually construed as terminable at will after a reasonable time of duration has elapsed. (69 Cal.2d at pp. 727-728.) Thus, Consolidated Theatres establishes a three-step analysis of contractual terms of duration. 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. (Id. at p. 727.)

The parties here differ only in which step they believe applies to the distribution agreements. Zee contends we may stop at the first step because the agreements have express terms of duration. The Association, with some suggestion that the agreements smack of purportedly disfavored perpetual contracts, argues that we must reach the third step and find the agreements terminable at the will of either party. Zee's position is correct.

The plain, unambiguous language that the contract "shall continue" until grounds arise for termination is a valid, express contractual term of duration similar to that upheld in Great Western, Noble, and Long Beach Drug Co. The contracting parties agreed in those cases that the contracts would continue as long as the parties performed. Since non-performance constitutes breach, a contract that lasts so long as the parties perform their obligations necessarily continues until breach and the corresponding right to terminate the contract. We conclude that under controlling decisions of the California Supreme Court, such express contractual terms for indefinite periods of time are valid in this state.6

In the unreported case of Water, Inc. v. Everpure, Inc., 2011 U.S. Dist. LEXIS 163928, 2011 WL 13174224 (C.D. Cal. December 19, 2011), the United States District Court for the Central District of California explained that when a contract is governed by the California Commercial Code, Cal. Com. Code § 2309 provides that 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. However, in order for Cal. Com. Code § 2309 to apply, the court must first undertake the Consolidated three-step analysis. In this case, the Court found that there was no express or implied duration term, so the contract provision at issue was effective only for a reasonable time (at 27-34):

Under California Commercial Code section 2309(2), "[w]here the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed [*28] may be terminated at any time by either party." For this rule to apply, however, the Court must undertake a three-step inquiry: first, it must look for an express term that sets a duration for the contract; second, if no express term exists, it must determine whether a duration term can be implied from the nature of the contract and the circumstances surrounding it; and third, if no express or implied term is ascertainable, "'the law usually implies that the term of duration shall be at least a reasonable time, and that the obligations under the contract shall be terminable at will by any party upon reasonable notice after such reasonable time has elapsed.'" McCaskey v. Cal. State Auto. Ass'n, 189 Cal. App. 4th 947, 966-67, 118 Cal. Rptr. 3d 34 (2010) (quoting Consolidated Theatres, Inc. v. Theatrical State Employees Union, Local 16, 69 Cal. 2d 713, 727-28, 73 Cal. Rptr. 213, 447 P.2d 325 (1968) (emphasis removed)). This approach "applies, in particular, to distributorship agreements." Varni Bros. Corp. v. Wine World, Inc., 35 Cal. App. 4th 880, 891, 41 Cal. Rptr. 2d 740 (1995).

a. Express or Implied Duration Term

The parties agree that paragraph 11 contained no express term of duration, so the Court must move to the second step to determine whether a duration can be implied based on the nature of the contract and circumstances surrounding it. Because the contract here was written, "this determination is a question of law for the court." Boland, Inc. v. Rolf C. Hagen (USA) Corp., 685 F. Supp. 2d 1094, 1105 (E.D. Cal. 2010).

Water claims that the implied duration of paragraph 11 was at a [*29] minimum ten years, which is the average life-span of the Everpure filter head, because paragraph 11 was intended to allow Water to purchase replacement cartridges from Everpure to then sell to customers who had already purchased an Everpure filter head from Water. However, neither the parties' conduct nor the circumstances of the contract demonstrate that paragraph 11 was intended to operate for ten years - or any other ascertainable period - so it was only effective for a reasonable time and terminable at will with reasonable notice.

The parties did not discuss the duration of paragraph 11 before signing the Termination Agreement, so there is no evidence that either party expressed any view on the clause's duration before agreeing to it. Water's president believed that the overall purpose of the Termination Agreement was to "allow for the orderly and fair separation of the two companies, essentially the objective of the lawsuit, without going through the expense and delay of a lengthy trial," which was consistent with both the overall purpose of Termination Agreement to end the parties' distributorship relationship as of August 1, 2008, and its specific provisions facilitating that [*30] orderly separation. Paragraph 3, for example, provided that Everpure could seek a new Master Distributor and Water could seek a new supplier before August 1, 2008, which would make little sense if Everpure had a ten-year obligation to supply Everpure cartridges to Water. Likewise, paragraph 2 relieved Water from the obligation of actively promoting Everpure products after August 1, 2008; paragraph 9 prevented Water from holding itself out as an Everpure distributor after August 2008; and paragraph 10 prohibited Water from using Everpure trademarks except in limited circumstances.

Water nevertheless relies on the fact that paragraphs 9 and 10 provided that Water could use Everpure trademarks "when promoting or selling Everpure cartridges pursuant to Paragraph 11 below" to suggest that paragraph 11 was intended to last for ten years. Yet, those references to paragraph 11 were consistent with Water's basic right to buy cartridges from Everpure, and they do not suggest any particular duration for Everpure's obligation to supply cartridges to Water. Nothing expressly stated in the Termination Agreement sheds any light on a duration for paragraph 11 and the undisputed evidence contradicts [*31] Water's argument that paragraph 11 was intended to prolong the parties' relationship for ten years.

Water also cites evidence dating from around the time of the Termination Agreement to suggest that a long-term, ten-year duration was agreed to, but that evidence merely recognized that Water could purchase cartridges pursuant to paragraph 11, not that there was any duration for Water's right do so. For example, Everpure's Master Distributor Agreement with Purcell Murray dated September 1, 2008, merely recognized Water's right in paragraph 11 to continue purchasing cartridges from Everpure, but did not indicate for how long. (Goldberg Decl., Ex. 9 ¶ 1.04.) Tom Boor also said in a September 25, 2008 email that "[a]s part of the separation agreement legal has given [Water] the ability to continue to purchase cartridges which are our top sellers" (Goldberg Decl., Ex. 32), and said again in the November 19, 2008 letter that Everpure "did agree to allow Water, Inc. to continue purchasing replacement Everpure cartridges (only) in order that they might be able to continue to fulfill the orders they have had over the years from consumers as part of the Water, Inc. replacement cartridge reminder [*32] program, which was a Water, Inc. program, not an Everpure authorized program" (Goldberg Decl., Ex. 12). Again, these comments do not suggest that paragraph 11 had any agreed-upon duration.

The only document that refers to any type of duration was Laurence Purcell's notes from his August 13, 2008 call with Tom Boor, which merely indicated that paragraph 11's end date was "unclear" and "may not exist." At most, this shows that paragraph 11 was indefinite in duration and no end date was contemplated, not that an implied long-term duration term was contemplated. Thus, Water has offered no evidence that could support implying any duration, let alone a ten-year duration, into paragraph 11.

b. Reasonable Time

Because there is no express or implied duration term, paragraph 11 was effective only for a reasonable time. McCaskey, 189 Cal. App. 4th at 967. A "reasonable time" is defined as "such period of time as is reasonable in the nature of the business contemplated by the agreement, and such reasonable time is defined as that which is reasonable in light of the course of the dealing and all the circumstances of the case and the reasonable contemplation and expectation of the parties." San Francisco Brewing Corp. v. Bowman, 52 Cal. 2d 607, 613, 343 P.2d 1 (1959) (internal quotation marks omitted). In assessing [*33] the parties' course of conduct, often "'actions speak louder than words,'" so "[w]hen the parties to a contract perform under it and demonstrate by their conduct that they knew what they were talking about the courts should enforce that intent." Crestview Cemetery Ass'n v. Dieden, 54 Cal. 2d 744, 754, 8 Cal. Rptr. 427, 356 P.2d 171 (1960).

Here, the undisputed evidence demonstrates that a "reasonable time" was only until Water could transition to a replacement supplier for cartridges. Avignon understood that the Termination Agreement was intended to "allow for the fair and orderly separation of the two companies," including allowing each party to find new business partners. Consistent with that understanding, Water undertook significant efforts to transition to a new supplier even before signing the Termination Agreement: it began discussions with Cuno as of mid-2007, more than a year before signing the Termination Agreement; it provided Cuno with a sample H300 cartridge so that Cuno could design a replacement cartridge to fit Everpure heads; it provided Cuno with sales data from Everpure products; and it told Cuno that as of January 2008 it was "fully committed" to Cuno's line of products. Water then signaled it was terminating its agreement with Everpure on May 22, 2008, [*34] intending not to source products directly from Everpure after that point. And Water signed with Cuno on August 11, 2008, only days after it signed the Termination Agreement, which both enabled Water to officially begin distributing Cuno's BG-3000R replacement cartridge and precluded Water from purchasing H300 cartridges directly from Everpure as the manufacturer. In light of Water's actions, the only reasonable duration for paragraph 11 was a period that would enable Water to transition to a new supplier.

Cal. Com. Code § 2309(2) specifically provides that a commercial contract that provides for successive performances but is indefinite in duration is valid for a reasonable time, but, unless otherwise agreed, may be terminated at any time by either party:

(1) The time for shipment or delivery or any other action under a contract if not provided in this division or agreed upon shall be a reasonable time.

(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.

(3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

In Cal. Earthquake Auth. v. Metro. W. Sec., LLC, 712 F.Supp.2d 1124 (E.D. Cal. 2010), the defendants argued that in construing contracts that contain no express term of duration, the duration is implied from the nature of the contract, and the circumstances surrounding it. The United States District Court for the Eastern District of California explained that only if no express provision as to the term of duration exists the court will determine whether the intention of the parties as to duration can be implied from the nature of the contract and the circumstances surrounding it (at 1131):

Munger further argues in its written opposition that the contract terminated because “[in] construing contracts ... which contain no express terms of duration,” the duration is implied “from the nature of the contract and the circumstances surrounding it.” Consolidated Theaters, Inc. v. Theatrical Stage Employees Union Local 16, 69 Cal.2d 713, 725, 73 Cal.Rptr. 213, 447 P.2d 325 (1968) (emphasis added). Munger argues the nature of this contract and the circumstances surrounding it show that the Munger/CEA attorney-client relationship ended long ago by virtue of the inaction of the parties and the lack of a specified duration of performance.

In Consolidated Theaters, the Court “observed that the memorandum makes no reference to the duration of the agreement.” Id. at 724, 73 Cal.Rptr. 213, 447 P.2d 325 (emphasis added). As a result, the Court contemplated three possibilities lower courts will face in determining the duration of such a contract. Id. at 724-25, 73 Cal.Rptr. 213, 447 P.2d 325. First, a court must determine whether the contract contains an express term of duration. Id. at 724, 73 Cal.Rptr. 213, 447 P.2d 325 (The Court approvingly cites Judge Learned Hand's statement: “Had the parties expressed the intention to make a promise for perpetual maintenance, we should, of course, have nothing to say.” Town of Readsboro v. Hoosac Tunnel & W.R. Co., 6 F.2d 733, 735 (2d Cir.1925).). If, and only if, no express provision as to duration exists, “the court must determine whether the intention of the parties as to duration can be implied from the nature of the contract and the circumstances surrounding it.” Id. at 725, 73 Cal.Rptr. 213, 447 P.2d 325. Lastly, if the term of duration cannot be implied from the nature and circumstances of the contract, the court “implies that the term of duration shall be at least a reasonable time, and that the obligations under the contract shall be terminable at will by any party upon reasonable notice after such a reasonable time has elapsed.” Id. at 727-28, 73 Cal.Rptr. 213, 447 P.2d 325.

This case involved a contract for legal services between an attorney and a client. The defendants argued that the contract was terminated. The agreement did make reference to the contract's duration by stating when the agreement began and that the agreement was of no defined duration. The agreement left it up to the parties to decide when the agreement terminated. The Court explained that contracts with express terms of indefinite duration are valid in California. Thus, the contract was to continue until a party terminated the agreement by written notice. The court would not void the express terms of an otherwise valid written agreement (at 1131-1132):

Here, the Agreement does make reference to the contract's duration. It states that the “term of this Agreement commences August 1, 2002, and is no defined duration.” (Marshall Decl., Ex. 1, ¶ 2.0.) The Agreement leaves it up to the parties to decide when the Agreement terminates. This is neither uncommon nor unenforceable, as Munger suggests. Contracts including express terms of indefinite duration have long been held to be valid in California. See, e.g., Great Western etc. v. J.A. Wathen D. Co., 10 Cal.2d 442, 74 P.2d 745 (1937); Zimco Restaurants v. Bartenders Union, 165 Cal.App.2d 235, 237-38, 331 P.2d 789 (1958) (“The general California rule appears to be that a contract is not fatally defective merely because it does not specify a time presently definite for its termination.”). Following Consolidated Theaters, California courts enforced express terms of indefinite duration without

[712 F.Supp.2d 1132]

looking to the nature of the contract and the circumstances surrounding it. See Zee Med. Distrib. Ass'n v. Zee Med., Inc., 80 Cal.App.4th 1, 10, 94 Cal.Rptr.2d 829 (2000) (“We conclude that under controlling decisions of the California Supreme Court, such express contractual terms for indefinite periods of time are valid in this state.”). As such, the CEA/Munger contract duration must be read to continue until a party terminates the Agreement by written notice.6

Neither Munger nor CEA gave written notice of termination before Munger undertook representation of defendants in the present litigation against CEA. Nor were the terms of the Agreement modified as required in writing. Munger is thus left with the untenable position it presented at oral argument: The court should simply void the express terms of an otherwise valid written agreement because compliance with the written agreement is trumped by the passage of time, inaction, and the practicalities of the legal profession. The court finds this argument without merit and further finds that Munger simultaneously represents CEA and defendants, who clearly have interests adverse in this lawsuit.

Alexsei publishing date:
139