In InsureOne Indep. Ins. Agency, LLC v. Hallberg, 2012 IL App (1st) 92385, http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1092385.pdf (Ill. App., 2012), the court held that a failure to pay approximately 2% of an earn-out, which was 1% or less of the agreed purchase price, was not enough to cancel a seller and his son’s noncompete obligations under the asset purchase agreements (APA’s) for sale of an insurance agency. The court also allowed damages for lost sales beyond the term of the noncompetes, since sellers had a head start over the end of that period in setting up their business, and in hiring back many of the employees of the agency sold under the APA, which was a violation of the nonsolicitation agreements in same. The court also determined that the non-paid earn-out was inappropriately awarded, denying attorney’s fees to the competing agency seller and his son.
The lesson to learn here: If you want to enforce an asset purchase agreement, you may want a clear formula in your APA for determination of damages if it is breached. Similarly, you need to recognize that courts will not invalidate an agreement even if the other party fails to fully perform, unless that breach is “material” – essentially, enough to deny the injured party the benefit of a bargain. If you want to be able to cancel an agreement for any breach, no matter how small, you need to put that standard in the contract terms.