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Sales representatives can find themselves between a rock and a couple of hard places following termination by a principal. The sales rep may have not only lost a profitable line of business integral to his ongoing business model, but the principal may have failed to pay him all pre-termination and post-termination commissions the sales rep believes are owed to him and may have reminded the sales rep that the terminated contract contains a post-termination non-compete which the principal will not hesitate to enforce. Under these circumstances, does the principal get to have its cake and eat it too and continue to fail to pay the sales rep the commissions owed and enforce a post-termination non-compete, or is the principal hoisted on its own petard (blown up by its own bomb) and prevented from enforcing the non‑compete because it has failed to pay the sales rep all of the pre-termination and post-termination commissions owed?

Of course, before doing anything, the sales rep should contact an attorney and get legal advice. The first question, which is not the subject of this article, is whether the non-compete is enforceable at all, regardless of whether the principal has paid the sales rep all commissions owed. The law applicable to the enforcement of a non-compete varies by state. For example, some jurisdictions do not enforce non-competes or only enforce them under limited circumstances. Others enforce them but only to extent that they are reasonable and then essentially “rewrite” them to be reasonable and enforce the “rewritten” non-compete.

For purposes of this article, we will assume that the law applicable to the non-compete will permit the non-compete to be enforced against the sales rep post-termination for a year or two. Will the principal then be able to enforce it? Enjoin the sales rep from representing a competitive line? Collect damages from the sales rep if the sales rep decides to represent a competitive line, notwithstanding the non-compete contained in the now terminated contract?

Not necessarily so. By failing to pay the sales rep the commissions owed before the sales rep has begun competing against it, the principal may have jeopardized its ability to enforce the non-compete. Generally, the mere breach of a contract committed by a party who has substantially performed its obligations under the contract does not relieve the other party from performance. However, if a party fails to perform an essential or material element of a contract, the party can be liable for damages to the other party and the other party can be excused from further performance of its obligations under the contract. When the party breaches an essential or material term of the contract, the party has failed to perform an element of the contract that is so fundamental to the contract that its single failure defeats the essential purpose of the contract. Thus, if the principal’s failure to pay the sales rep all the commissions owed is considered to be essential or material to the contract, the sales rep may be excused from honoring the post-termination non-compete.

Courts look at a number of factors to determine whether a breach of contract is a material breach of contract that excuses further performance by the non-breaching party. A few of the factors courts look at are discussed below.

How Serious is the Loss?

One factor that courts look at to determine this issue is the extent to which the injured party will be deprived of the expected benefit under the contract. Obviously, the payment of commissions is the expected benefit of a sales representative contract. Unless the principal has simply made some errors in the payment of pre-termination commissions, or the amount owed for commission is insubstantial, it may be likely that a court will find this breach to be a material breach, especially if the principal has intentionally breached the contract, such as by taking territory, accounts or products away from the sales rep without his consent notwithstanding a contractual requirement that all amendments be mutually agreed to. Similarly, the failure to pay post-termination commission would also appear to be material. Post-termination commissions are provided for a variety of reasons, including that the sales rep is working to procure orders, programs and customers during the contract term but is only compensated for his efforts when the customer orders product and pays the principal for the filled order, which may occur after the contract is terminated. Thus, a court may find that a principal’s failure to pay pre-termination and post-termination commissions deprives a sales representative of the fundamental benefit of the contract.

Can the Sales Rep Be Compensated for the Loss?

Another factor that courts look at to determine this issue is whether the injured party can be compensated for the lost benefit. Obviously, if the principal is required to pay the sales rep all the commissions owed eventually, it would appear that this factor cuts in the principal’s favor. However, the sales rep can point to other losses that may not be easily fixed by a belated payment of commissions. For example, the failure to timely pay the sales rep all commissions owed may have required the sales rep to lay off people, which might impair his ability to pursue other opportunities, or to make long-range investments of time and money in securing new lines or replacing the lost business that do not arguably violate the non-compete rather than simply trying to make his monthly nut.

Will the Loss Be Fixed?

Courts also look at the likelihood that the breaching party will cure its breach. Unless the breach is a group of simple errors that the principal might be willing to fix, or the principal has said it will do an accounting for the sales rep, the sales rep should be able to make a credible showing that the principal is unwilling to pay the disputed commissions.

Good Faith, Fair Dealing?

Whether the breaching party acted in good faith and dealt fairly with the injured party is another factor courts look at to determine this issue. This factor can center on many questions, including how clear is the principal’s obligation to pay commissions to sales rep; whether the principal knew that it was breaching the contract by failing to pay commissions or did not care one way or the other; and whether the principal had some ulterior motive for withholding commissions, such as withholding commissions to get the sales rep to agree to a lower amount owed or to extract something else of value from the sales rep.

Thus, it is quite possible that the sales rep may be excused from honoring a post-termination non-compete if the principal has previously breached the contract by failing to pay all commissions owed or by announcing its intention not to pay any post-termination commissions. However, be clear that there is no undeniable “right” of the sales rep not to honor a post-termination non-compete because the principal has failed to pay him a substantial amount of commission previously. Whether the sales rep can or should take this course of action is a judgment call. It is a fact-sensitive and legally complicated determination that should only be made with the assistance of legal counsel.

MANA welcomes your comments on this article. Write to us at [email protected].