Legal Memorandum: Liability for Cessation of Business

Issue: Is a company liable for payment of commissions for the remaining term of an agreement if the company has ceased doing business?

Case law indicates that cessation of business does not constitute a breach of contract.  The often-cited casein matters such as this is William S. Gray & Co. v. Western Borax Co., 99 F.2d 239 (9th Cir. 1938).  Under the terms of the agreement there, the plaintiff was appointed the exclusive agent for sale of “all the borax, crude or refined, boric acid and other products produced by [the defendant].”  99 F.2d at 241 (quoting contract) (emphasis added).  The contract was for a period of ten years and did not specify any minimum amount the defendant was to produce.  Just over two years after execution of the contract when it became apparent the borax industry was in decline and the defendant feared financial difficulties, it sold its assets “and thereafter ‘produced’ no more of the borax or its derivative products.”  Id.  The plaintiff contended that the sale of defendant’s business which prevented production constituted an anticipatory breach of the contract entitling it to anticipated commissions for the remaining life of the contract.  Id.

The court rejected this argument, noting first that “[t]he agreement contains no express promise on the part of [defendant] to produce a definite quantity, or, indeed, to produce any quantity.”  Id. at 242.  The court also observed:

[Plaintiff’s] contention in effect is that [defendant] not only must retain ownership of the borax properties but that it must continue to produce from them to yield a profitable commission to appellant no matter what […]

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