Anyone who has ever read a contract has likely encountered a provision stating something to the effect of “this Agreement may be terminated upon mutual agreement of the parties.” Businesses often find this provision in merger transactions, asset purchase agreements or in confidentiality agreements. In every-day life, consumers encounter them in contracts for the purchase of the family home or in the numerous click-wrap agreements one has to accept in order to use the latest version of Microsoft Word or Apple iTunes. These provisions are referred to in the legal profession as “mutual agreement termination clauses.”
At face value, these provisions provide that a contract cannot be terminated except by agreement of the parties to terminate the contract. At first glance, mutual agreement termination clauses seem fairly reasonable: as long as one party wants a fairly negotiated and bargained for contract to continue, the agreement continues. However, a mutual agreement termination clause can quickly turn into a nightmare for a trusting businessperson, especially in the situation where the parties have unequal leverage because one party can hold the other hostage indefinitely.
In Illinois, contracts that can only be terminated by way of a mutual agreement termination clause are considered to be perpetual contracts, because an exclusive mutual agreement termination clause provides no definite ending point to a contractual relationship. Jespersen v. Minnesota Mining & Manufacturing Co., 183 Ill. 2d 290 (Ill. 1998). Perpetual contracts are disfavored in Illinois as against public policy. Id. Instead of enforcing the clause, Illinois courts have held that such clauses transform the contractual relationship into one that may be terminated by either party, alone, at any time. Id.
Rico Industries, a retailer of licensed sports apparel for professional sporting leagues, such as the National Football League and Major League Baseball, quickly found itself at the wrong end of a mutual agreement termination clause in an exclusive sales representation agreement with TLC Group, Inc. In Rico Industries, Inc. v. TLC Group Inc., Rico Industries entered into a sale representation agreement with TLC Group, Inc. for TLC Group to be the exclusive sales representative for Rico Industries’ product placement with Wal-Mart Stores, Inc. and its affiliates. The representation agreement was two-thirds of a page long and contained a mutual agreement termination clause as the exclusive means to terminate the contract. Rico Industries attempted to terminate the agreement in 2012, and filed for a declaratory judgment asking that the agreement be found terminable at will. The trial court found that the agreement was not terminable at will and denied Rico Industries’ declaratory judgment.
Rico Industries appealed and certified a question to the First District of the Illinois Appellate Court. In its decision, the Illinois Appellate Court reversed the decision of the trial court, finding that a contract that was only terminable by mutual agreement could be terminated at will by either party. In doing so, the Appellate Court reaffirmed the Illinois Supreme Court’s holding in Jespersen v. Minnesota Mining & Manufacturing Co. that such contracts are perpetual contracts, that are disfavored under Illinois public policy, and that may be terminated by either party to the contract at any time. TLC Group argued that the mutual agreement termination clause changed the contract from a perpetual contract to one with a definite endpoint because the parties could agree to terminate the contract. The Appellate Court rejected that argument as previously addressed in Donahue v. Rockford Showcase & Fixture Co., since there was no foreseeable event at which the contract would be terminated. In doing so, the Appellate Court reaffirmed the Illinois Courts’ position that an exclusive mutual agreement termination clause transforms a contract into an at-will contract.
To avoid having a termination clause being interpreted by Illinois courts as an at-will contract, courts look to whether there are conditions that trigger a termination event such as sales falling below a particular level or the certain length of time after which the contract terminates. Donahue v. Rockford Showcase & Fixture Co., 87 Ill. App. 2d 47 (Ill. App. 2d Dist. 1967). Conditions such as those referenced above take a contract out of consideration as a perpetual contract and can be terminated based on the particular conditions set forth therein.
When reviewing contracts or considering new business relationships, consider what happens when things go wrong. How will your business extricate itself from the contract and at what cost? When you see a mutual agreement termination clause, ask yourself why the other party wants that type of contract. Is it because they haven’t thought through the contractual arrangement? Or is it because they are trying to get more from the relationship than you are? Are they trying to take unfair advantage of an unequal bargaining position? The answer will tell you a lot about who your business works with and how your business needs to protect itself.