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When Forever Became Whenever: (A "Do It Yourself" Contract's Defective Termination Clause Permits an Early Exit)
By David Goodman on July 14, 2014 at 11:59 AM

The case arises from circumstances in which Rico Industries, Inc. v. TLC Group, Inc., a recent decision by the Illinois appellate court, illustrates the adage pennywise, dollar foolish. A company negotiated an agreement to serve as the exclusive sales representative on behalf of another company. The terms of the agreement that was negotiated were documented by a short contract drafted by the owners of the two businesses without the assistance of counsel. The contract was not for any specific duration and provided that the contract could only be terminated in a writing signed by both parties. The two companies worked together under the contract for a number of years. But when one company sought to terminate the contract, it was unable to obtain the other’s written consent. The company seeking to terminate the exclusive relationship sought and obtained a judicial finding that the termination provision, as drafted, was defective and that the contract was terminable at will.

The objective of including a provision requiring mutual consent to termination may have been to avoid the prejudice and disruption resulting from termination of the relationship without notice. This objective could have been achieved through a variety of approaches. The Court found the contract potentially interminable making the termination provision void and the contract terminable at will. Thus, the contract, drafted without the assistance of counsel, failed of an essential purpose.

Rico Industries drives home two important points. First, it illustrates the value of obtaining legal review of contracts, even seemingly simple, straightforward sales representative contracts, before execution. A fundamental objective of a written contract is to manage and control transactional risk and the costs associated with a transaction. Pragmatic business counsel can help “play through” the circumstances the contract is intended to address to ensure that the contract achieves its intended objectives. The parties in Rico Industries, clearly sought to avoid the prejudice that could result from “at will termination” of the rights and obligations owed under the agreement. The provision could have been drafted in a way to protect against the prejudice and disruption that may arise from an at-will termination. The costs that the parties avoided by drafting the contract without counsel were ultimately incurred (and magnified) in the ensuing litigation.

Another lesson from this case is the importance of playing through the termination and dispute resolution provision of your contracts, even after execution, but before disputes arise. Here, the parties had enjoyed a lengthy relationship with little thought to how the termination provision would play out in practice. But the contract ultimately failed of an essential purpose: the facilitation of a smooth unwinding and termination of the relationship. The termination provision, as drafted, presented the possibility of a “perpetual” relationship. Neither party sought an agreement into perpetuity and, in any event, the courts will not enforce such a provision. Identification of this defect before the dispute arouse would have allowed the parties to negotiate resolution at a time when they were still working together. The incentive to cure the defect was gone when it was identified after the relationship between the parties had soured. The lesson: a periodic review of your contracts, especially your form agreements, can help avoid uncertainty, unintended consequences, and expense of litigation. Critically, this approach helps you to ensure that your contracts (still) meet your objectives.

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