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One of the ways that an independent sales representative can safeguard his business is to utilize effective contracts that are updated as circumstances change. Conversely, conducting business without the benefit of a written contract or under one that no longer reflects reality are likely to put the sales representative and his business in jeopardy.

Contracts establish the rules of the game. The sales representative should regularly establish and document the rules of the game with those with whom he conducts business. I have worked with many clients who have had disputes and/or lawsuits with others that could have been avoided or at least made less painful, protracted and expensive had up-to-date contracts been in place.

Prudence dictates that each relationship that forms a part of a sales representative’s business has a written contract; that each of these contracts is up to date and reflect the current reality; and that the contracts accomplish the objectives that can be reasonably achieved in a clear and effective way.

Part of a clear and effective contract means that the sales representative has dealt with one of the hardest issues up-front when it might seem inappropriate: what happens when the relationship about to begin ends? In this sense, it is like negotiating before a wedding a pre-nuptial agreement that sets forth what happens when the couple divorces.

In each of these contracts, the sales representative and the principal must agree on the term of the contract, if any; who may terminate the contract and under what circumstances; and what notice is required under each circumstance. Of course, most of these contracts are at-will contracts. Under an at-will contract, either party may terminate the contract for any reason at all, usually with some notice, such as 30 or 60 days. As a result, these contracts have no practical term beyond the notice period. Additionally, under these type of contracts, the sales representative is left with no obvious recourse to challenge the termination of the relationship by the principal.

Agreeing to Terms

Of course, the contract must accurately reflect the scope of the appointment (the geographical areas and/or customers and products covered by it), the payment terms, what needs to be done to earn a commission, when the commission is earned and when the commission is to be paid, among other things. The contract must also be regularly updated to correct any prior inaccuracies and to reflect new circumstances, especially where it is an at-will contract that may only exist for a month or two. This is particularly important because a sales representative’s right to commissions earned before termination but that are unpaid as of termination and to commissions earned post-termination, if any, usually hinges on this very language.

However, providing for the payment of commissions that are earned but unpaid or earned after termination is only part of an effective contract for dealing with terminations.

Non-Compete Clauses

Many principals demand a non-competition clause that restricts the sales representative’s business both during and after the termination of the contract. Sometimes the principal shoots for the moon and insists upon an extraordinarily broad clause. These clauses seek to stifle any competitive activity by the sales representative for a significant period of time and anywhere the principal currently or eventually does business during the term of the non-compete undertaking, whether such competitive activity involves the customers or type of products the sales representative dealt with or promoted during the relationship with the principal, or uses confidential information the principal or its customers provided to the sales representative during the contract. Under this type of clause, and from a practical point of view, the sales representative’s ability to conduct business following termination is shut down in such a way as to exile the sales representative from the field he has worked in and to destroy his ability to ever carry a line that might compete with the principal. Sales representatives should absolutely avoid non-competition clauses that simply seek to stifle all competition.

A more reasonable non-competition clause ties the restrictions imposed to the scope of the sales representative’s appointment under the contract. This type of clause seeks to bar the sales representative for some period of time (sometimes becoming longer based upon the duration of the contract) after termination from soliciting customers with whom the sales representative worked under the contract, or from accepting business from such customers, whether solicited or not, for products that compete with the products the sales representative represented during the contract for the principal.

Regardless of the breadth of the non-competition clause, post-termination non-competition clauses can severely limit a sales representatives’ business. Sales representatives should strive to avoid agreeing to such clauses. Although courts do not always enforce non-competition clauses as they are written and sometimes seek to make them more reasonable in light of a number of factors, a sales representative cannot count on a court protecting his ability to continue to work in a field he knows and has worked in for a substantial amount of time or to authorize the sales representative to carry lines that fairly compete with the principal.

Of course, sometimes a sales representative makes the business decision that the contract as a whole is valuable enough to justify agreeing to a post-termination non-competition clause. Where this decision is made, the sales representative should strive to negotiate a clause that is both clear and tailored to the scope of his appointment while at the same time offering to the principal what the principal has a legitimate interest in protecting — competitive lines that are unfairly competing with the principal. Understandably, a principal does not want to compete with another line represented by its former sales representative whose competitive effort has been armed with the confidential information the sales representative received from the principal or its customers before termination.

Negotiating Exceptions

Equally important, the sales representative should strive to negotiate exceptions to the post-termination non-competition clause that recognize that the sales representative has a legitimate interest in protecting the work he performed before contracting with the principal and, to the extent competition occurs through the actions of the principal itself, after contracting with the principal. Such exceptions may include competitive lines the sales representative represented before doing business with the principal or lines that were non-competitive when the contract began but subsequently became competitive because the principal launched a new product that now is competitive with the line.

Of course, if there is a non-competition clause in the contract, the contract will need to be regularly updated, especially if the clause is a more reasonable one that is tied to the sales representative’s appointment; that bars unfair competition rather than all competition; and that is subject to a number of exceptions. In this circumstance, the sales representative will need to ensure that the contract is regularly updated, including for changes in geographical territories, customers, products, confidential information provided by the principal and other lines that qualify for exceptions. Further, in between the time that these changes occur and the contract is updated, the sales representative must document these changes through e-mail or other form of written communication.

Choice of Law Provision

Although there are more provisions in a contract that are important to safeguarding a sales representative’s post-termination rights and ability to conduct his business, I would like to conclude by referencing a contract provision which is critical to this undertaking — the choice of law provision. A choice of law provision declares that the contract is subject to the law of a state or a country, typically the law where the principal is located. This provision affects how the contract will be interpreted and enforced as to all subject matters, including how its post-termination commission and non-competition provisions will be interpreted and enforced. Obviously, different states have different laws and the law of other countries may be significantly different from the law of any state. Understanding what jurisdiction’s law applies to the contract is absolutely necessary to any understanding what the contract means and is the only way in which a sales representative can know what to expect if there is a dispute with the principal.

Another consideration is that the contract’s choice of law provision may affect what rights may be gained or lost outside of the contract, such as through Commission Protection Acts or judicial law on bad faith terminations and procuring cause. The choice of law provision in the contract substantially affects the legal rights and obligations of a sales representative and his ability to safeguard his business interests, both pre- and post-termination.

Of course, this column only contains general observations based upon my experience. What my experience has also shown me is that each relationship with a principal is unique and, therefore, each contract required should be reviewed on its own merits and then updated as appropriate, preferably with a legal advisor.