© Dan Bar | Dreamstime.com

Many of our sales representative clients initially give very little consideration to the perceived “boiler-plate” clauses that appear near the end of their principals’ “standard” sales representative agreements. Their focus is on the granted territory, the commission rate, designation of house accounts and similar provisions which all reps deem of most importance. Nearly every sales representative agreement that I have seen contains an indemnification clause; but often the sales rep has not even read it, considering this clause to be just another unimportant “boiler-plate” provision. We counsel our clients that such perception is false. The existence and scope of the agreed-upon indemnification clause could result in saving or costing your firm enormously in the future. I cannot emphasize enough that reviewing, understanding, negotiating and drafting this clause at the outset of the relationship is well worth your time and effort.

An indemnity clause is a contractual agreement to transfer risk from one contracting party to another. The normal tendency is for contracting parties to seek a contractual indemnification clause that will protect them to the greatest extent possible; and in doing so they shift the risk to their contracting counterpart. In the context of the manufacturers’ sales representative agreement the principal, by way of its standard indemnification clause, may be seeking to shift to the representative the risk of all sorts of potential losses that could be suffered by the principal arising out of or relating in any way to their principal/sales representative relationship. Such a clause may read something like this:

Representative agrees to indemnify, hold harmless and defend Principal of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorney’s fees and costs arising out of or in any way related to the services provided by the Representative.

Insuring the Principal

When you agree to indemnify your principal, you are basically agreeing to act as their insurance company. The above clause is bad for the representative primarily because it is written too broadly. The language could be interpreted by a court to cover every possible type of potential loss, even losses in no way caused by the representative. Further, under the above clause the representative’s obligations commence with the demand and include attorney’s fees, thereby imposing upon the representative the obligation to defend and cover litigation expenses of the principal to defend even the most frivolous claim. Finally, almost always the sales representative agreement provides that the indemnification provision and the obligations of the representative stemming therefrom shall survive termination of the agreement. What that means is that long after the principal/rep relationship ends you may be called upon to indemnify the principal in accordance with the terms of the clause.

Fortunately it has been my experience that most principals are willing to make revisions to their standard unreasonable indemnification clause in order to make it reasonable.

• First, the rep should seek to limit its indemnification obligation to only those liabilities caused by its negligence. Such is accomplished by revising the standard clause as follows: “…arising out of or in any way related to the services provided by the Representative but only to the extent caused by the negligence or willful misconduct of the Representative.”
• Second, the rep may seek to cap its financial exposure. Adding a sentence as follows results in such a cap: “In no event shall the maximum amount of liability hereunder exceed $___________.”

Many additional reasonable revisions could be proposed. For example if the representative is being asked to defend against such claims, who will control the defense, the representative or the principal? As stated above the principal typically seeks a clause that requires the indemnification obligation to survive termination of the relationship. Such results in the possibility of the rep being required to indemnify years after the relationship has ended. Revisions that limit this future liability exposure are reasonable. The revision possibilities are numerous. The most important point is that the rep and its counsel should spend some time analyzing the proposed indemnification clause and through negotiation work to limit its scope and potential consequence to the representative.

Rep Protection

What about an indemnification provision that protects the representative? Rarely is such a clause included in the principal’s standard agreement. Therefore the representative should be prepared to propose the insertion of such a reasonable reciprocal indemnification clause. At a minimum the representative should seek to be indemnified by its principal against claims relating to design, development, supply, production and performance of its products. In addition, the representative should seek to be indemnified for claims alleging infringement of patents, trademarks, trade dress or trade names. Almost always the representative has no involvement in these areas and therefore should be indemnified. The representative must insist that the clause include attorney’s fees and litigation cost incurred in defending these types of claims. On occasion sales reps are joined with their principal as additional defendants in lawsuits alleging breach of warranty claims, product liability claims or patent infringement claims. The rep’s first reaction to such lawsuits may be, “Why am I being sued — all I did was solicit sales?” and their next questions directed to their counsel are most likely, “How much is it going to cost me to defend this lawsuit?” and “How much may I be required to pay if the lawsuit is lost?” The answer the rep receives from its counsel may be that because of your involvement in the sales process of the “alleged” offending product under the law it is totally appropriate to join you as an additional co-defendant, defending these lawsuits are very expensive and typically the amount of damages being sought are huge. At that point the rep may start to experience many emotions, almost all of the negative variety. However, with a well-written indemnification clause counsel’s follow-up statement may be that the principal will pay your defense cost and further will pay any resulting settlement or judgment sum. What a relief, right?

Danger of Insolvency

It must be remembered that the principal’s contractual promise to indemnify the representative from these types of claims has no value if the principal is insolvent. A bankruptcy filing by your principal could leave you holding the bag so to speak. The representative should put in place further protections in order to limit its risk and exposure. Requiring in the rep agreement for the principal to carry product liability insurance and naming the representative as an additional insured helps. Further the representative purchasing its own product liability insurance coverage is wise. Last but not least, if you are conducting your business as a sole proprietorship, consider instead incorporating your business. Incorporation helps to insulate the business owners from personal liability for the debts, liabilities and obligations of the business.

I understand the representative’s excitement when that new principal is obtained. However, take the time necessary to negotiate and have prepared a fair and reasonable sales rep agreement. In doing so do not ignore the perceived “boiler-plate” clauses — including and possibly most importantly the indemnification clause. It could save your business from a later catastrophic financial loss.