Employment Law Contract

“Perpetual” Contracts May Actually Be Terminable “At Will”

Be careful how your “perpetual” contracts are written or they could really be terminable “at-will.”

The general rule in Illinois is that a contract “without a fixed duration” that does not clearly lay out an event that ends the business relationship—in other words, a perpetual contract—is in fact terminable at-will—i.e., for any reason or no reason at the option of either party. This rule was at play in the recent case of Burford v. Accounting Practice Sales, Inc. There, the parties’ agreement stated that it “renews automatically on each anniversary date . . . for another period of twelve months.” Because of this, the Court ruled that it was a contract of “indefinite duration” even though each period was for a specific 12-month length: “By its terms, the agreement would renew itself without the need for either party to take action, and there appears to have been no way for the parties to prevent automatic renewal.”

The agreement was not terminable at-will, however, because it contained language that one party could exclusively (not permissively) terminate the contract after a breach by the other: “There is a decisive difference between saying that A may terminate if B breaches [which would be at-will] and saying that A may terminate only if B breaches [which would not].” The court’s reasoning was that every contract can always be terminated by one party when the other breaches, so permissive termination for a breach is no different than at-will termination. The result of this exclusive termination language, then, was that the contract at issue in Burford overcame the presumption that it was terminable-at-will. Because the plaintiff had not breached the contract—the exclusive mode of triggering a termination—the defendant breached the agreement by merely walking away from what would have otherwise been an at-will business relationship.

The presumption that a contract is merely terminable at-will is easily solved—make sure that your contracts contain clear and unambiguous language regarding how they can be terminated, whether that is a date certain, specific notice provisions, a specified event, or some other occurrence that makes clear to both parties that their business relationship has ended. The Burford court noted some situations where contracts did contain such language—for instance, when specified sales goals were met, or when one party failed for a defined time period to purchase product from the other.

Making sure that your contracts do what you expect them to—including knowing when they can or cannot be terminated—is critical to successfully running your business. Contact us today to learn more about whether your contracts have been properly drafted.

 

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Charles Wentworth
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Charles Wentworth
Charles Wentworth
Charles is an attorney in Glen Ellyn, Illinois. After graduating from the University of Utah, he clerked for Chief Justice John T. Broderick of the New Hampshire Supreme Court. He then became a litigation associate at Kirkland & Ellis LLP before opening his own office and partnering with Rick Lofgren. He lives just outside of Chicago, where he participates in community activities, including Boy Scouts and little-league baseball.