Many otherwise sound rep contracts are subject to termination for any reason or for no reason. Even if the parties agree to an initial contract term of three or more years to give the relationship time to develop and to enable the rep to create demand for the manufacturer’s products, most reps understand that if their three-year agreement allows termination on 30 days’ notice, they don’t really have a three-year contract. Instead, they’re working on a 30-day contract.

Other agreements take the preferred approach of renewing automatically on their anniversary, unless either side gives advance notice of non-renewal. However, these agreements can often prove less than clear about the parties’ right to end their relationship. When such an agreement does not clearly spell out termination rights, just how does a party call it quits?

The relationship begins

This question arose after Service By Air, Inc., a shipping and logistics company, contracted with Beach Forwarders, Inc., back in 2010 to become its exclusive sales agent in Virginia. Their agreement had a three-year term and then renewed perpetually for consecutive one-year terms. In an unusual move, this contract gave only the principal, Service By Air, the right to terminate, in its sole discretion, by providing 30 days’ notice prior to the annual renewal date.

Beach Forwarders’ ability to terminate under the agreement was limited to if Service By Air materially breached. In such a case, Beach Forwarders was required to provide 30-days’ notice of a claimed material breach, and Service By Air then had the right to cure within an additional 90 days. If it did not, the contract stated Beach Forwarders “may terminate this Agreement effective ten days after delivery to Service By Air of notice of termination.”

Oddly, the contract’s termination clause ended with this sentence: “A termination of this Agreement by Agent for any other reason shall be deemed a termination by the Agent without cause.” No other language in the parties’ agreement addressed a termination without cause or explained what would happen upon a without cause termination.

The relationship sours

By 2020, the parties’ relationship deteriorated and Beach Forwarders wanted out. Taking a tough line, Service By Air informed its sales rep that any attempt to terminate would breach their perpetual contract. This led Beach Forwarders to file suit in the Chicago federal court seeking a judicial declaration that, because the one-sided language did not enable it to terminate and could lock it up in perpetuity, the parties’ agreement was terminable at will under the law.

As in many states, a contract of indefinite duration is indeed presumed to be terminable at will under Illinois law. Yet, Service By Air answered by urging the court to strictly adhere to the contract’s terms. Only it had the right to non-renew the contract, went the argument, and because Beach Forwarders failed to cite a material breach and provide proper notice, it could not validly terminate. Service By Air acknowledged the contract was for indefinite duration, but claimed the presumption that it was terminable at will was overcome by the contract language requiring notice of a material breach and a right to cure.

The trial court disagreed, and issued a declaration that Beach Forwarders could lawfully terminate. Service By Air appealed.

The relationship is appealed

Upon taking up the matter, a three-judge panel of federal appellate judges noted how the parties’ agreement “would renew automatically for an additional one-year term (presumably, without end) unless Service By Air stated otherwise.” The higher court determined this language “triggered the application of Illinois law governing contracts of indefinite duration, which has long recognized that such contracts are presumptively terminable ‘at the will of the parties.’”

However, the appellate court also noted that when an agreement is terminable only for cause or upon the occurrence of a specific event, then the specified event must occur for the contract to end, meaning it is not an “at will” contract. “Under Illinois law, a contract without a set term is terminable at will, absent a clear statement that the contract can only be terminated based upon the occurrence of certain conditions or events.”

The court cited an earlier decision that explained the rule by saying: “The presumption of terminability allows separation in the business world, unless the parties clearly provide otherwise. It is the business equivalent of no-fault divorce.”

In another cited decision involving a rep who sued a principal after getting terminated, the court ruled that: “There is a decisive difference between saying that A may terminate if B breaches and saying that A may terminate only if B breaches.” Naturally, Service By Air attempted to compare itself to the manufacturers in these earlier cases, but its contract was clearly different.

The appellate court pointed to the contract language stating that after the 90-day cure period, Beach Forwarders “may terminate this Agreement,” and remarked how conspicuous it was that the provision lacked “any language of limitation or exclusivity, such as ‘except as herein provided’ or ‘unless.’” Without such language, the cure provision does not “contain a clear statement that a material breach is the sole or exclusive basis for termination by Beach Forwarders.”

Also failing to escape the court’s attention was the incongruent sentence at the end of the termination provision providing: “A termination of this Agreement by Agent for any other reason shall be deemed a termination by the Agent without cause.” As the court recognized, “nowhere does the Agreement expressly state that it can be terminated only for cause, nor does it impose a penalty for terminating without cause.”

Finding that the parties’ agreement “lacks a clear statement that the contract can only be terminated based upon the occurrence of certain conditions or events,” the court felt the default rule that contracts of indefinite duration are terminable at will went unrebutted. Thus, Beach Forwarders properly terminated, even without an express right to do so set out in the parties’ agreement.

The relationship’s lesson

The upshot is that courts in Illinois and in many other jurisdictions will likely treat continuous or perpetual contracts without escape hatches as terminable at will by either party, unless they contain unusually clear language providing that the right to terminate is contingent upon the occurrence of certain conditions or events. Even then, many courts do not favor perpetual contracts and may well look for any grounds to deem them terminable at will.

Adam J. Glazer is a partner at the law firm of SFBBG and serves as general counsel to ERA. He is also a regular contributor to The Representor, and participates in Expert Access, the program that offers telephone consultations to ERA members.

You may contact Adam Glazer at 312-648-2300 or email him at [email protected].