Pav-Saver Corp. v. Vasso Corp.
97 Ill. Dec. 760, 493 N.E.2d 423, 143 Ill.App.3d 1013 (1986)
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Rule of Law:
When a partner wrongfully dissolves a partnership, the Uniform Partnership Act grants the non-breaching partner the right to continue the business and possess essential partnership property, overriding a conflicting contractual provision requiring the return of that property.
Facts:
- Pav-Saver Corporation (PSC), the owner of patents and a trademark for paving machines, formed a manufacturing partnership with Vasso Corporation.
- The partnership agreement stated it was 'permanent' and terminable only by mutual consent.
- The agreement granted the partnership an exclusive license to use PSC's patents and trademark for the term of the agreement, specifying that the patents and drawings were to be returned to PSC upon the partnership's expiration.
- The agreement contained a liquidated damages clause stipulating that a unilaterally terminating party must pay the other a sum calculated by a formula, payable in equal installments over ten years.
- After several years of operation, the economy slumped, and the partners disagreed on the future direction of the business.
- PSC sent a letter to Vasso unilaterally terminating the partnership agreement.
- In response, H. Moss Meersman, Vasso's owner, took physical control of the business premises and assumed day-to-day management.
Procedural Posture:
- PSC sued Vasso in the circuit court of Rock Island County for a court-ordered dissolution, an accounting, and the return of its patents and trademark.
- Vasso filed a counterclaim seeking a declaratory judgment that PSC had wrongfully terminated the partnership and that Vasso was entitled to continue the business and receive liquidated damages.
- The trial court found that PSC had wrongfully terminated the partnership.
- The trial court ruled that Vasso was entitled to continue the business and retain possession of the partnership assets, including PSC's patents and trademark.
- The trial court valued PSC's interest in the partnership at $165,000 and awarded Vasso liquidated damages of $384,612, to be paid in installments per the agreement.
- Both parties appealed the trial court's judgment to the intermediate appellate court.
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Issue:
Does the Uniform Partnership Act grant a non-breaching partner the right to possess and use essential partnership assets, such as patents and trademarks, to continue the business after a wrongful dissolution, even when the partnership agreement explicitly requires the return of those assets upon termination?
Opinions:
Majority - Justice Barry
Yes. The Uniform Partnership Act's provision allowing a non-breaching partner to continue the business and possess partnership property overrides a contractual clause requiring the return of essential assets upon termination. The Act was enacted to stabilize business, and this statutory right controls over the parties' contractual agreement when the two conflict. Because the patents and trademark were essential to produce and market the Pav-Saver machines, allowing their return to PSC would negate Vasso's statutory right to continue the business after PSC's wrongful termination. The court also held the liquidated damages clause was not an unenforceable penalty because the amount was reasonable in light of the financial risks assumed by Vasso's owner and the difficulty of proving actual damages at the time of contracting. Furthermore, the 10-year installment payout provision is an integral part of the clause and must be enforced as written, precluding an immediate, full setoff.
Concurring in part and dissenting in part - Justice Stouder
No. The explicit terms of the partnership agreement should control, and the Uniform Partnership Act's provisions should only apply as 'default' standards in the absence of a contrary agreement. The parties explicitly contracted for the return of the patents upon the partnership's expiration. The UPA provides that its rules are subject to any agreement between the parties, and courts should enforce the partners' intentions as expressed in their contract. The statutory option to continue the business does not guarantee its success or entitle the non-breaching partner to rewrite the contract to use assets that were explicitly to be returned. The existence of the high liquidated damages clause itself suggests the parties anticipated the withdrawal of the patents upon termination.
Analysis:
This decision establishes that a non-breaching partner's statutory right to continue a business under the Uniform Partnership Act can supersede explicit contractual provisions for the return of assets, particularly when those assets are indispensable to the business's operation. It prioritizes the legislative goal of business stability over the principle of freedom of contract in the specific context of a wrongful partnership dissolution. This precedent creates a significant consideration for partners contributing essential intellectual property, as it implies they may lose control over that property for the duration of the original partnership term if they are found to have wrongfully dissolved the venture.
