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



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.





Insurance Co’s Substantial Compliance With Termination Notice Defeats $20M Suit

Life Plans v. Security Life of Denver Insurance Company, 2013 WL 4052678 (N.D.Ill.2013), presents high-dollar contract dispute involving two insurance companies.

The plaintiff insurance agent entered into a written agreement with the defendant, a multi-national insurance company.  The plaintiff agreed to market defendant’s life insurance products on a nation-wide basis.  The contract term was “indefinite” and terminable on 30-days’ written notice delivered by certified mail.

Four months into the contract, the defendant terminated the plaintiff by written notice delivered by UPS and not certified mail.  Plaintiff, expecting a multi-year arrangement, sued for breach of contract and sought damages of nearly $20M.  The parties filed cross-motions for summary judgment.

Held: The Court granted defendant’s motion and denied plaintiff’s.


(1) The Termination Notice Issue

The defendant didn’t strictly comply with the contractual termination notice provision.  Instead of sending the cancellation by certified mail, defendant sent it via UPS.

This was good enough though. “When confronted with less than literal compliance with a notice provision, courts have required that a party substantially comply with the notice provision.”  *2.  Since the plaintiff admitted receiving defendant’s termination notice and even signed a receipt acknowledging as much, the Court found substantial compliance with  the notice provision.  It would undermine the notice provision’s purpose and exalt form over substance if it found that defendant breached by sending the notice UPS rather than certified mail.

(2) Was the Insurance Co.’s Right to Terminate Absolute?

Aside from challenging the defendant’s method of terminating the contract, the plaintiff also argued that the defendant’s termination of the contract was wrongful.  The plaintiff claimed that defendant’s cancelling the contract only a few months into its term was a breach because at one part, the contract referenced premium payments over a twelve-month period and additionally, defendant sent e-mails which referenced projected premiums over a three-year period.   *3.

According to plaintiff, these contract references to twelve months and three years clearly demonstrated that the parties contemplated a multi-year agreement.

The Court rejected these arguments.  On its face, the contract was terminable on 30-days’ written notice.  The parties’ right to terminate was unqualified.  Because the defendant substantially complied with the contractual notice provision by sending the notice via UPS, plaintiff couldn’t prove the defendant’s breach.

(3) Breach of Good Faith and Fair Dealing Claim

The Court granted summary judgment for the defendant on plaintiff’s breach of good faith and fair dealing claim.

The implied covenant of good faith and fair dealing isn’t a substitute for express contract terms. A contracting party can’t use the implied covenant to create contractual rights that don’t exist in the contract language. are absent from the contract.

Here, since the contract termination clause was clear, the Court had no basis to imply any conditions or qualifications on defendant’s right to cancel. *4.

Take-aways: Drafting precision is critical.  Parties should clearly delineate the grounds for termination and method of providing termination notice.  If in the insurance agent’s (plaintiff) position, I typically request a cure period or “for cause” provision as a condition to termination.  This mitigates the harshness of an unexpected termination.

I also may propose a liquidated damages term in situations where it’s conceivable a party may prematurely terminate a lengthy contract.

Life Plans also presents a good example of court refusing to elevate form over substance by finding the contract’s notice provision’s purpose was served even without literal compliance.