Transportation Executive Summary: When Does a Perpetual Contract for Transportation Services End?
When does a perpetual contract for transportation services end? The answer may not be as clear as one would think. Recently, the United States Court of Appeals for the Seventh Circuit decided Beach Forwarders, Inc. v. Service By Air, Inc. on August 7, 2023. 76 F.4th 610 (7th Cir. 2023). The Court was faced with questions related to a party’s ability to terminate a perpetual contract with no option to terminate the contract absent a breach.
FACTS
The parties initially entered into the contract in 2010. The contract was for a three-year term, but had continuous one-year renewals and provided a mutual nonrenewal provision. At some point, the contract was amended to “renew perpetually for consecutive one-year terms.” Id. at 612. The only party who was provided the option to terminate the contract was Service By Air (SBA), who was required to provide notice to Beach Forwarders within thirty (30) days of renewal. Although certain amendments were made, the 2010 cure provision, with no termination allowed in the absence of material breach of the contract, was left untouched.
Beach Forwarders gave notice of its intent to terminate the contract in August 2020. It stated the contract was perpetual, one that’s duration would continue indefinitely. Under Illinois law, perpetual contracts are terminable at will. SBA disagreed, believing the contract was only subject to termination following a breach.[1]
PROCEDURE
The dispute led to litigation on the matter, with the district court ruling in favor of Beach Forwarders, finding that the language of the contract was unambiguous and terminable at will pursuant to Illinois law.
ANALYSIS
In its appellate ruling, the Seventh Circuit engaged in the following analysis. The original contract lasted for a term of three years and provided a mutual nonrenewal option at the end of that term. The amended contract provided for continuous and automatic annual renewals and gave the option to terminate to only SBA. The Seventh Circuit agreed that the modification triggered the application of Illinois law governing perpetual contracts.
The Seventh Circuit examined its own precedent and cases from Illinois and Michigan. Even though Michigan Supreme Court came to the opposite conclusion, the applicable Illinois law is that perpetual contracts are terminable at will. In applying that law to the contract at issue, the Seventh Circuit examined the precise language of the contract and amendment. It determined the amendment was unclear and did not include explicit language that the only termination trigger was material breach. In fact, the contract did acknowledge it could be possible that Beach Forwarders would terminate without cause. But, the Seventh Circuit ultimately held that clear statements in a perpetual contract stating that termination may only be triggered by specific conditions or events are unnecessary when a court engages in interpretation of ambiguous language. In this case, the language actually used was insufficient to rebut the Illinois presumption of terminability applied to perpetual contracts.
THE IOWA ANALOG
While the Seventh Circuit did not consider Iowa law on the question, Iowa courts would likely reach the same result. The Iowa Supreme Court has come to the same conclusion, stating “A contract for services is ‘terminable at will only if we cannot ascertain a durational term.’” Johnson v. Associated Milk Producers, Inc., 886 N.W.2d 384, 390 (Iowa 2016) (quoting Shelby Cty. Cookers, L.L.C. v. Util. Consultants Int’l, Inc., 857 N.W.2d 186, 192 (Iowa 2014)). In short, it appears that if the contract is ambiguous on the termination trigger, the contract becomes terminable at will.
contact whitfield & eddy law transportation attorneys
For more information on trucking and transportation matters, contact John F. Fatino at (515) 288-6041 or fatino@whitfieldlaw.com. Anne M. Reser-Moorehead, associate attorney, assisted in the preparation of these materials.
[1] Service By Air was acquired by Radiant Logistics, Inc. by the time of oral argument. For the sake of readability, we will continue to refer to this party as SBA.