What Happens When a Contract Expires
An expired contract is a contract where the time period in which it takes legal effect has passed. An expired contract is no longer regarded as legally enforceable by the law and is no longer binding on either party. Once a contract has expired, it no longer has any legally enforceable power. An expired contract is distinct from a contract that has been terminated, as a terminated contract no longer has legally enforceable power but remains in existence for non-legal purposes.
There are many ways a contract may expire. For example, a contract might be created for a specific time period, such as a month or year. It may occur that a contract went into effect on January 1st of this year but will not expire until January 1st next year. There may also be a contractual obligation that at specific intervals the contract must be re-upped, renewed, or revised in order to remain operational. However, when the contract is up for renewal or revision, the party obligated to renew or revise it sometimes chooses to simply let the contract expire and move on.
The legal implications of an expired contract can vary fairly widely, depending on the specific circumstances of the case. In some instances, parties may have continued to act under the expired contract, which may or may not be binding . Parties may end up signing a new contract, however, after the previous contract expired and that new contract may provide terms different enough that it is not actually a continuation of the previous contract.
If a contract has expired, and subsequently the parties have either acted under the contract or entered into a new contract, a discussion of how the expired contract is treated must take place. An expired contract alongside a new contract is subject to specific legal interpretations. It is important to understand what happened to that expired contract, whether the parties enacted provisions of that contract after it expired, and whether they entered into a new contract that supersedes the expired one.
There is also the possibility, depending on the circumstances of a particular case, that the parties will choose to continue to act as though there were still an existing contract after its expiration. Alternatively, the parties may enter into a new contract, after the expiration, that in fact does not supersede the previous one, but simply acknowledges that they continue to act under that contract. This can make a difference, as certain legal protections for contracts may no longer apply.
Continued Performance After Contract Expiration
Continuing Performance After Expiration
It is common for the parties to literally continue performing after expiration of a contract. The primary mechanism for such continuation, and thus avoidance of contractual liability, is the application of waiver and estoppel concepts. Other terms and conditions (e.g., limitations periods and cancellation) will generally govern an expired contract’s continuing post-termination operation, implementation, and enforcement. Terminating events, such as the passage of time, the satisfaction of conditions, or the harboring of claims, will generally trigger the termination of rights and obligations.
For example, a contract document may simply not vest rights, and their related obligations, in the non purchasing party until the document is executed. This is usually denoted by the use of language such as, "when signed by the parties below."
Another example of a limiting term is the incorporation of a condition. A contract that permits the right of cancellation in the alternative to performance is a common practice and a useful tool. For example, a service agreement may run through the end of the current quarter (calendar or otherwise) for as long as the external conditions remain met (e.g., funding, legal compliance, or the absence of harm to either party’s interests). In the event a party suffers some injury or harm during the period after expiration (e.g., in the context of a warranty or lien dispute), then a waiver may be requested, or an estoppel sought (especially if the continuing party refuses to cease operations). As will be discussed soon, working, transacting with and treating with the other party will usually be evidence sufficient to demonstrate waiver by the party continuing to perform. Waiver is a reasonable basis upon which to assert that the continuing contractual relationship was revived or extended after expiration.
Under commercial law, various issues arise when goods, documents, instruments or other tangible items are transferred, delivered, shipped, or received despite the expiration of a given contract. Contractual or documentary conditions may remain with the items. So too can the issuing party’s rights and obligations; accordingly, waiver and estoppel concepts may apply here as well. Additionally, analytical principles in this context commonly arise in the construction realm. This is so because construction law frequently involves trade practices (between the parties) that may complicate the simple notion of commencement, continuation, or cessation of a contractual relationship. For example, subcontractors may receive instructions or have their work inspected after expiration of a contract. This does not mean however that the subcontractor should expect direct compensation post-expiration, as a rule. Waiver and estoppel principles may apply in this context as above, as well. Additional legal principles may apply, however. For example, if a contractor recovers from an owner, then the contractor may, by subrogation remedy, collect pre-expiration direct damages from the subcontractor for which the contractor was made whole. Evidentiary concerns associated with commercial relations and construction practices are beyond the scope of this article.
Implied Contracts and Agreements
Another situation that can arise is when the parties continue to perform after the expiration of the contract. As outlined in Taitz v Ballon Stoll Bader & Nadler (NY App Div 1st Dept 2003), "[a]n implied contract is one which the parties, by their conduct, may ‘be found to have intended’". In this case: The court found that an implied contract was found when "…defendant’s acts and conduct demonstrated that it considered the original contract still in effect even after its expiration, and that, as a result, a new contract was created by the acquiescence of the parties". The Taitz v Ballon Stoll Bader & Nadler, decision was upheld in Spector Gadon & Rosner, PC v Rozmark, 248 A.D.2d 56, 56-57 (1998). In this case, the court held that even though the attorney in this case was only employed by the Plaintiff until 1998, there was an implied contract to continue the attorney’s employment, and award him bonuses at the end of 1998 and 2000, since the Plaintiff paid the attorney’s bonuses for both years. The Court also rejected the argument, among others, that because the Plaintiff only paid the attorney his legal fees when he asked for them, that an employment contract was not actually formed (because other evidence suggest that there in fact was a contract). If the parties continue their ongoing performance, but there is not specific pay structure in the contract, then a court may find that an implied agreement was reached and award back pay. It is implicitly understood that a court would also not find that an implied agreement of continued employment exists if certain deposits were not made, and/or certain penalties were not paid.
Risks and Legal Implications
The act of continuing to perform after a contract has expired or terminated raises legal risks and complications, and so disputes can arise. In such a case, the parties have a responsibility to assert the terms under which they will perform. If they do not, disputes over the terms and conditions of performance can arise. In addition, there can be risks to contracts on the whole. For example, if one party is continuing to perform under an expired contract, that may suggest that the contract is still in effect. A court may interpret that performance as an extension of the agreement if no new contract has been signed , or it may be assumed that the parties have modified the terms and conditions of performance. Courts are permitted to read modifications into contracts if they find that was the intent of the parties. If a contract has not been properly renewed and one party is continuing to perform, a court could find that the contract has not expired at all and the original contractual obligations liabilities remain in effect until a new contract is executed. In sum, there is a risk that if one party continues to perform after a contract expires that the contract itself will be deemed to be in effect. Absent a clear intention to modify or terminate a contract, any continued performance may be assumed to be under the terms of the contract despite its expiration.
Managing After a Contract Expires
In order to avoid problems once a contract has expired but performance has not, companies and individuals are advised to carefully manage the renewal process. Best practices in this regard include the following:
- (1) Parties should memorialize any communications, agreements, or silence by either party that can be considered an acceptable form of consent to the continuation of the contract. Ideally, if specific terms are agreed to, a formal amendment or new agreement should be drafted and executed by both parties.
- (2) It is important to note the performance of the contract that occurred during the time the parties had not executed a written amendment or new contract does not affect the ability of the party to go back and take a legal position contrary to the performance. Subsequently, the performance of the contract that went beyond the expiration date was done under the terms of the expired contract and is therefore valid as it was performed under the contract that both parties entered into.
- (3) If a company seeks to modify or enter into a new contract after the expiration date, it must be cautious of the business judgment rule and demonstrate the necessity and benefits of entering into a new contract.
- (4) If a contract has expired, a subsequent contract cannot waive certain terms that are subject to statute of frauds, for example, because those terms have already expired and no longer bind either party.
- (5) A contract that has expired cannot be reformed unless the original contract would also be subject to reformation.
- (6) If a contract has expired and any payment is to be made after the contract has expired, a subsequent payment can be considered as partial consideration for the successor contract.
- (7) A contract that has expired can be ratified if one party who has knowledge of the expiration of the contract has accepted the position of the other party as it existed under the contract.
Case Law and Examples
A number of notable cases have addressed the issue of whether contractual terms are extended when the parties continue to perform after a contract’s expiration.
One approach taken by a court in such situations is to find an implied contract without express consent if such an agreement would further the interests of justice. In Sifontis v. Philadelphia Pictures, Inc., the court found that an implied contract existed when two companies continued operating a film company after the expiration of their partnership agreement. The court explained that "[t]he legal fiction of a new contract is a necessity as between the parties, for they have in fact a continuing business relation, and if there is no new agreement their rights must be determined under their original agreement to the extent that is possible." In reaching its decision, the court cited 22 Corpus Juris Secundum 439, a legal treatise which notes that "the performance of a contract beyond the prescribed time may constitute a waiver of the provisions of a stipulation of that nature where there is no new agreement or evidence of a contrary intention, and the other party acquiesces in the situation."
In other cases, courts will allow a contract to be orally renewed under certain conditions. In Teric Constr. Corp. v. Clyde Rotary, Inc., a party asserted that when the plaintiff stopped performing work on a construction project after its contract expired, the work could be considered an extension of the contract without the necessity of a signed written agreement because the defendant continued paying for the project work after the expiration of the original agreement. However, the court held that "a contract for the construction of a building cannot be extended by parol beyond the time specified therein for an oral extension or modification, especially where the contract requires an express written modification, unless [the defendant] had suffered a material change of position (in reliance on the alleged oral extension) before the plaintiffs objected thereto . " Also, the court found that although "some ambiguities are present in the contract specifications", the contract nonetheless "demonstrates the necessary degree of clarity and precision to create a binding obligation on the part of [the plaintiff] to complete [the project]." As a result, the court granted judgment to the defendant.
More recently, in Algonquin Gas Transmission, L.L.C. v. Governor and Company, the U.S. Court of Appeals for the First Circuit found that a Pipeline Capacity Release Agreement (PCRA) was not extended when the parties continued to perform under it after its expiration. In this case, the court reviewed the district court’s interpretation of and reliance on extrinsic evidence of the parties’ joint course of dealing, which it used to determine their obligations under the PCRA. This course of conduct consisted of two iterations, the first being ten iterations of six months each. In the second round, three iterations occurred, but the last of these three iterations was one year in length. The district court found that because the parties had followed a course of conduct in the prior iterations that "the parties had agreed to extend the term beyond the set period in the absence of any written modification", the last iteration necessarily extended the term by one year. The First Circuit, however, found that the parties had not necessarily modified the contract, but, instead, "had entered into a year-to-year rental agreement whose length, like the preceding iterations, was subject to renewal." Therefore, the court found that the district court had erred and remanded the case to the district court for further proceedings.