‘Perpetual’ Sales Distribution Contract Is Terminable At Will; It’s Too Indefinite

 

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The First District recently considered whether a contract that could only be ended on both parties’ written consent was too indefinite and “perpetual” to be enforceable.  In Rico Industries v. TLC Group, Inc., 2014 IL App (1st) 131522, the parties entered into a sales contract where plaintiff would sell products to Wal-Mart through defendant – the retailing monolith’s exclusive distributor.  The agreement could only be terminated by the parties’ mutual agreement.  About five years into the contract, the plaintiff decided to sever the relationship and filed a declaratory judgment action seeking a court ruling that the contract was too indefinite to be enforced.  Defendant  countered by filing a motion for judgment on the pleadings that the contract was enforceable and also sought money damages for sales commission it claimed it was owed from the plaintiff.  The trial court agreed with the defendant distributor and entered judgment in its favor.  Plaintiff appealed.

Held: reversed.  Contract that can only be terminated on consent of both parties is too indefinite to be enforced.  The contract is terminable at will.

Q: Why?

A: In Illinois, perpetual contracts violate public policy because they are too indefinite.  A private contract will not be declared void and against public policy unless it clearly violates the constitution, Illinois statutes or caselaw or if the contract is injurious to the public welfare.  Rico, ¶¶ 15-17.  And even though Illinois safeguards freedom of contract, contracts of indefinite duration are terminable at the will of the parties because perpetual contracts are disfavored.  (¶¶ 18-19).

The courts’ stated reason for invalidating perpetual contracts is because “forever is a long time” and that businesses don’t stay viable for very long.  Because of the short shelf-life of many commercial enterprises, never-ending contracts violate Illinois public policy, which prefers contracts with definite start and ending dates.  A contract without a specific end date or terminating event, could conceivably never end.  (¶¶ 27-34).

Take-away: A good result for those that like contractual certainty.  The case’s lesson is that contracts should have a specific start and end date to avoid future disputes of enforceability and definiteness.  Rico also illustrates that contracts with permissive, equivocal termination provisions will likely be deemed perpetual and therefore void on public policy grounds.  Prudent contract drafting dictates that parties should formalize start dates, end dates, as well as termination methods and events.

 

 

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.