On March 18, retailer Sears Holdings Corp. was hit with a $5.5 million lawsuit in Illinois’ Cook County Circuit Court by clothing company Sprockets Clothing Inc. (which is now known as SCI Apparel Inc.). Sprockets alleges that Sears breached an exclusive vendor contract entered into in 2010 by cancelling nearly $4 million of orders after Sprockets already manufactured and shipped the orders.

Sprockets claims that Sears had no contractual justification for its actions and Sears’ cancellation was not “commercially reasonable practice” because the clothing that Sprockets produced was of a quality consistent with the requirements of the contract and there was no cancellation clause in the contract. Additionally, Sprockets alleges that Sears violated the contract by withholding $750,000 of Sprocket’s contributions to a joint project between the parties to launch a “store within a store” retailing concept, even though Sears never developed the concept.

Sears has not responded or commented on the Sprockets lawsuit.

Cases like this one illustrate how important it is for retailers to carefully review the cancellation and termination provisions in contracts to understand their rights and obligations if they decide to cancel orders or terminate the contract.