State court rules spirits company cannot terminate distribution agreement absent event of default – agreement with no defined time period can't end?
BY ASHLEY BRANDT · FEBRUARY 17, 2020
Few Spirits (fun fact, the F.E.W. stands for Francis Elizabeth Willard president and founder of the Woman’s Christian Temperance Union) brought suit (complaint) to terminate its spirits distribution agreement with UB Distributors arguing that because the agreement had no term defined by years/months/length, it was terminable at will. The complaint against the spirits distributor (linked above) asked for a declaration that the lack of a timed term made the agreement terminable at will (many states have this codified in their case law – that a contract without a specified term is terminable at will).
The alcoholic beverage distributor disagreed, arguing that plenty of agreements leave time out of the term of the agreement making them contingent on acts or occurrences rather than for a defined period of months/days/years. For instance, you can have a contract that says it is in place until someone takes some action or some even occurs. Interestingly, the distributor used the existence of a beer franchise statute stating that beer distribution agreements, by statute can only be terminated upon the occurrence of certain events and cannot be terminated nor fail(ed) to renew otherwise, as the counterpoint in its argument that the legislature’s silence on the matter for spirits meant that state law did not preclude a term measured either in time or by events.
It went further to state that the agreement did have a term, it was a term that was to last until one of the events of default occurred with the distributor or the company:
5.1 Default Defined. The following will be considered a default and good cause to terminate this Agreement:
5.1.1 A material breach of this Agreement continuing for a period of 120 days after receipt of written notice from the other party, unless the notice specifies a longer period;
5.1.2 An assignment for the benefit of creditors; the institution of involuntary or voluntary proceedings under the United States Bankruptcy Code or state insolvency laws that is not dismissed within 90 days; or the appointment of a receiver or trustee, unless vacated within 90 days;
5.1.3 Discontinuation of normal service to customers for a period of 60 consecutive days;
5.1.4 Determination by a court of competent jurisdiction that a party made a material misrepresentation, or false statement, or materially misled the other, in order to procure a benefit or advantage.
In response, the spirits company argued that if the contract would run perpetually it is terminable at will. Otherwise, the agreement, absent one of the bad acts that allow for termination, would require FEW to distribute in New York to UB “forever.”
You can read the court’s opinion here (the trial court). It sided with UB and didn’t just dismiss the lawsuit, it converted the motion to one for summary judgment and granted judgment in favor of the liquor distributor. In essence agreeing that FEW was locked in to UB forever.
That is an incredibly rough ruling and Few has appealed.
Lesson: Even if you’re up against a franchise statute that states you cannot terminate but for good cause, you may want to have an agreement with a defined term that you “renew” continually to ensure that should laws ever change – you have a defined term and don’t end up on the wrong end of forever.