© Sean Nel | Dreamstime.com

As business and business litigation attorneys our office has reviewed numerous written sales representative agreements. One of the most common questions asked by our clients is, “How can we protect ourselves in our written agreement?”

Some clients are only concerned about the post-termination provision. This provision dictates how long a representative will get paid commission after the termination of the agreement. In the OEM industry, the widely held post-termination commission provision is for the representative to be paid life of part/life of program commissions. While post-termination commissions is without question one of the most important provisions in a written agreement, every provision must be given thought and consideration.

If you are considering entering into a written agreement with a principal, there are several important provisions you may want in that agreement. And, those important provisions will depend upon many factors, including the products being sold, the structure of the relationship, and the location of the parties. Too often, the written agreements reviewed by our office have unintended escape clauses or omit clauses the parties deemed important but failed to include in the written agreement. We also often find that clauses are omitted that are critical to a fair and balanced written agreement or that the agreement is plainly one-sided. While you should be aware of these issues, to address all of them goes beyond the scope of this article.

This article focuses on the often overlooked agreement provisions regarding term, notice of termination and method of notice of termination.

Term of the Agreement

The term of the agreement is an important provision. The term is the length of time that the agreement will remain in effect. The term can have a fixed-end date, a perpetual life or a condition or conditions that may trigger an end date or an extended life.

An example of what many believe is a two-year term agreement may be based upon an improper reading of the contract. The contract language will read something like:

• “The term of this Agreement will last for two (2) years from the above stated effective day.”

In the same or different paragraph, the agreement will provide:

• “This Agreement can be terminated at any time by either party on 30-day notice to the other party.”

Despite the fact that the agreement indicates it is a two-year term agreement, it really is a 30-day term agreement. Most independent manufacturers’ representatives would agree that there are very few instances in which a 30-day rep agreement would make sense.

Both the amount of time notice is required to be given before the effective date of termination, and the method of notice of termination can be a beneficial tools for both the representative and the principal.

Notice of Termination

In written agreements, we often see that the prelude to termination is overlooked. The prelude is the notice of termination. A good question to ask is, “How long should the notice of termination be?”

The best way to come to an appropriate time line for the notice of termination is to determine how long it generally takes a representative to place a piece of business. In many instances in the OEM arena, it takes a manufacturers’ representative over a year, and oftentimes longer, to place a piece of business. In such cases, a 30-day or 60-day notice of termination can be an unjust amount of time to learn that you are being terminated. Remember, the representative has a relationship with its customers.

A principal who is an industry leader, not looking to opportunistically reap the benefits of a representative’s work will not only suggest but demand that there is a substantial notice period before the effective date of termination. The time from the date of notice of termination to the effective date of termination allows both the representative and principal to determine the proper course to conclude its relationship. In most instances, both the representative and the principal want to make sure that the customers the representative calls on are not adversely affected by the end of the relationship. In order to maintain the integrity of the relationship the representative should be given the opportunity to tie up loose ends and to inform the customer that the representative will no longer be representing the principal. In addition the added time allows the representative to place as much business at is can before the effective date of termination.

Method of Notice of Termination

The method of informing the other party of the termination is another often overlooked provision. In the example above, the parties can terminate the agreement on 30-day notice. The provision however does not state that the notice of termination is required to be in writing. Nor does the provision state how the notice is to be given. For example, e-mail, first class mail, certified mail, registered mail or overnight delivery service, i.e., FedEx. If a specific method of notice of termination is specified in the agreement the parties should ensure it is followed.

Parties are cautioned to read and understand every provision in the agreement.

Courts will largely look to the written agreement to determine the parties’ rights. If you are signing an agreement with a principal or a representative I cannot impress upon you enough the value of having your contract reviewed by a sales representative lawyer. Sales representative law is a very specialized area of law that is unlike other business contracts. The cost of having a lawyer review your contract could save you hundreds of thousands, even millions, of dollars. If you are planning on being successful and generating business protect yourself before you sign the agreement.