The Scenario

Having represented sales agents in contract negotiation and litigation since 1989, I have seen a wide variety of contracts addressing the principal-agent relationship. Most often, reps will settle for contracts completely lacking in long-term commission protection. There seem to be several reasons for this. The rep:

• is new to the industry, has no true book of business, and will take anything to get in the door;

• does not understand there is no long-term protection;

• is so dependent on the commissions from this principal that they would rather accept a one-sided agreement than risk termination.

Although the leverage to negotiate is often in favor of the principal, the rep sometimes has one huge weapon: The Procuring Cause Doctrine. Simply put, this doctrine has been in affect for decades, is followed in nearly all U.S. jurisdictions (consult an attorney for its specific application in your state, as the use may vary) and means, depending on the exact jurisdiction:

If a principal does not have a written contract with a sales rep, or if the written contract does not include a clause specifying when commissions are earned & payable, even as to post-termination commissions, then the rep can make a valid claim to commissions on post-termination sales attributable to his/her pre-termination efforts.

Recently, I was retained by a highly successful sales agency which was having difficulty re-negotiating a contract with its most important principal. The agency had all but made this principal a household name in the industry. This was accomplished through the agent’s wherewithal in the industry and hard earned, long-term customer relations. A recommendation by the agency’s CEO to its customer base was virtually a Good Manufacturing Seal of Approval for a new product or line. Through this, the agency was able to put in place long-term programs that were worth huge sales for its principal, and large commissions for the agency.

However, as oftentimes happens when a sales agent is so successful, in order to continue forward the principal requested several contractual concessions by the agency, which our client was not amenable to, especially in light of some issues the parties recently had over certain parts being non-commissionable in the principal’s eyes, for various reasons.

The parties, therefore, continued to work together under the status quo, while a new contract was being negotiated. This was due to the fact our client was earning substantial commissions, would continue to do so for the long term, and did not want to rock the boat too much. While the principal did not want to lose the invaluable liaison that this agency had with the customer base. However, one year later, our client was still dissatisfied with the lack of progress on a fair contract that offered some protection for the long-term sales in the pipeline. The principal was also seeking to inject a 30-day termination at will clause with no post-termination commissions, except for orders received within the 30-day notice period. This is a typical — but horrible — provision in any industry where sales may take a long time to develop; but once put in place yields long-term results.

Instead of accepting that contract, our client retained us to assist with negotiating and preparing a fair and reasonable agreement.

The Negotiation

Without giving away all my trade secrets, the negotiating we conducted began with a letter informing the new principal that the contract presented was nearly entirely unacceptable (there were also many other less critical but still unacceptable provisions). We also informed the principal that it was our firm’s opinion they would be liable for long-term commission payments to our client, even if they terminated, under the Procuring Cause Doctrine as the result of the absence of an operable contract term (meaning an agreement the parties were working under) that addressed when commissions were to be paid, and what the agency’s rights were if terminated.

The principal’s counsel responded with a letter, and stated the contract presented was a take-it-or-leave-it proposition. However, after further correspondence and our citation of the well-established and followed case law pointing to its long-term liability, further negotiations ensued.

Ultimately, after many long months of back and forth offers, counter offers, demands, ultimatums, threats, and a little crying by both sides, a contract acceptable to all was hatched. Gone was the 30-day termination provision and in place was a guaranteed minimum duration contract. Gone was the lack of post-termination commission terms, and in place was a buy-out provision if the agency was terminated after the initial term was up. Gone was the principal’s right to re-classify products to designate them as non-commissionable, and in place was an Exhibit list for the concrete classification of all items the agency was selling and for which it was entitled to commission.

All in all, the result was the type of contract which acknowledges the respect these parties had for their mutually beneficial long-term relationship. It also made for a clear understanding moving forward; while also acknowledging that the rep was entitled to some type of long-term protection both based upon the law and the success the agency had achieved.

Conclusion

The primary lesson reps and their principals can learn from this is that where the rep’s value is truly important to their principal, the parties should give great thought in preparing an equitable contract. With limited or no protection for post-termination commissions, most reps are exposing themselves to great risk; at least when they are in an industry where the cultivation period for a sale is substantial. On the other hand, the principal may lose its most valuable asset, your agency, if there is no protection for the long term. Loyalty works both ways.

Likewise, if straightforward contractual terms with specific exit provisions are not drafted, both parties run the risk of disagreement and ultimately increase their chances of litigation. Tens of thousands of dollars can be saved if only parties give thought to and draft well-intentioned and articulated contracts.