As a general rule, a contract may be terminated by either party unless they agree to a definite term. For example, if John Doe agrees to pay Jane Smith $500 per week for consulting services, this arrangement may continue indefinitely until either side decides to cancel the arrangement. However, if the contract states John Doe agrees to pay Jane Smith $500 per week for a period of six months, and Doe terminates the contract early without cause, Smith can then sue forbreach of contract.
Court Rules for Inventor in Decades-Old Royalty Case
A New York appeals court recently addressed a breach of contract lawsuit arising from an agreement entered into more than 35 years ago. The plaintiff is an inventor who designed and developed medical equipment. The defendant was a manufacturing company that hired the plaintiff as a consultant in 1979.
Under their original agreement, the defendant agreed to pay the plaintiff a percentage of sales on certain specified products (i.e., royalties). The parties amended the agreement in 1984 to cover several additional products. The plaintiff continued to work as a consultant for the defendant until 1990. But the defendant continued to pay royalties through the end of 1991.
The end of the royalty payments and other unresolved issues led to litigation between the plaintiff and the defendant, which was not tried until 2013. As relevant here, the defendant argued the plaintiff's royalties were extinguished once the consulting relationship ended. The plaintiff disagreed, arguing the 1979 and 1984 agreements did not restrict the royalty terms.
Following a bench trial in Suffolk County Supreme Court, a judgeruled in favor of the plaintiff on these claims. Not only was the parties' written agreements “silent” on their duration, the judge said, but the fact the defendant continued paying royalties for more than a year after the consulting relationship ended did not support the defendant's “purported understanding of the agreement.”
The Appellate Division, Second Department,agreed with the Supreme Court's reasoning. The appeals court noted “the duration of the parties' agreements was dependent upon the continued sale of the products designated in the subject agreements and, thus, the agreements could be terminated only upon [the defendant's] discontinuation of the sale of the designated products,” not the end of the plaintiff's consulting relationship. Even if, as the defendant claim, it maintained an “industry custom” of “only paying royalties to consultants while they were providing consulting services,” the evidence presented at trial did not establish this. Accordingly, the Second Department upheld the Supreme Court's judgment, which ordered the defendant to pay over $380,000 in damages plus interest.
Need Help Drafting a Business Agreement?The key lesson here is if you intend a contract to run for a specified term, make sure you state as much in the written agreement. You should not rely on an implied oral understanding or “industry custom” to establish a definite term. A qualified New York business attorney can assist you with drafting and revising all types of contracts and agreements. Contact the offices of Waldhauser & Nisar, LLP, today if you would like to speak with someone today.