“Never Ending”(?) Contract Still Definite Enough to Be Enforced – 7th Circuit

Burford v. Accounting Practice Sales, Inc. 2015 WL2261108 (7th Cir. 2015), deftly handles some tricky and recurring contract interpretation and enforcement issues that arise where a business agreement lacks a clear end date.

In the case, the plaintiff sued defendant for terminating a written year-to-year (and automatically renewing) contract for the plaintiff to market defendant’s accounting practice sales services in various states throughout the Southern U.S.  The agreement provided that the defendant could not terminate the contract “unless it is violated by [plaintiff].”  The district court found this language signaled an indefinite (and therefore, at-will) contract and granted summary judgment for the defendant.  The plaintiff appealed.

Held: Reversed.

Q: How Come?

A: Because in Illinois, indefinite contracts – contracts with no objective termination date – aren’t favored but can still be enforced in certain cases.  This is because parties should be free to order their business affairs as they see fit and unless there is fraud, duress or undue influence, a written contract should be enforced as written.

Parties can get around indefinite duration provisions by specifically spelling out grounds for termination of a contract.  A contract that lacks a fixed duration and that can only be cancelled for a specific event or “for cause” can be enforced and won’t be treated as an at-will contract (one that can be ended at any time for any reason) so long as the event or cause can be objectively gauged.

Here, the contract language negated its at-will character.  It could only be terminated if the plaintiff breached (“unless” he violated it).  Otherwise, the contract kept renewing every year.  The court found this termination provision specific enough to be enforceable by the plaintiff.  Since there was no evidence that the plaintiff breached the contract – defendant unilaterally ended the contract – summary judgment for the defendant was improper.

Policy concerns also supported the court’s decision.  It noted that if the defendant was allowed to freely terminate the contract like it did here, it would deprive the plaintiff of the economic basis of his bargain.  Meaning the plaintiff could spend a lot of time and money developing and marketing the defendant’s brand and then once terminated, he could be replaced by someone who could capitalize on all his work.

Conversely, the defendant would suffer if the plaintiff could escape the contract with impunity since the plaintiff could leverage the good will and relationships he fostered over a several-year period and take that good will to another company or use it himself and against the defendant.  The defendant was protected from this contingency by inserting a one-year non-compete and by allowing for “good cause” termination; defined as poor sales performance.

Since the parties contracted around the indefinite duration problem by allowing for termination only if the plaintiff violated the contract, it wasn’t an at-will contract.

Afterwords:

1/ The case gives a good illustration of the problems that arise where parties don’t specify when and in what situation a contract ends.  By taking some pains at the outset to make clear when a contract starts and ends, and establishing what constitutes a breach of “cause” for termination, the contract participants can likely avoid future litigation when one side decides to walk away;

2/  Substantively, the case amplifies that a contract lacking an objective termination date will be treated as at-will contract and can be terminated by any party at any time;

3/ If a contract can be terminated for a single specified reason, this will likely make the contract enforceable even though the contract lacks an objective termination date.

 

 

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PaulP

Litigation attorney at Bielski Chapman, Ltd. representing businesses and individuals in business litigation, post-judgment enforcement, collections and real estate litigation.