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When a sales rep receives notice from the principal that the principal is terminating the contract, especially when this notice follows the placement of a sizeable purchase order from a customer before termination or the customer has established a multi-year program of anticipated future purchases that are not submitted as of termination, the sales rep will generally ask his lawyer a series of questions.

Typically, the questions will include, but not be limited to, the three questions below:

• First, can my principal simply terminate my contract in bad faith to avoid paying me commissions on sales I have already made or that will be made based on the program just established by the customer?
• Second, is the principal obligated to pay me commissions on all orders it received before the termination, no matter when the product is released, shipped or paid for by the customer?
• Third, is the principal obligated to pay me commissions on orders received after termination if there was a program of anticipated purchases under a program that was established before termination, even though no orders were submitted before termination?

The answers to these questions will be case-specific. The analysis necessary to arrive at the answers will start with the contract between the principal and the sales rep. It will then proceed to a review of the course of communications and dealings between the principal and sales rep, as well as customers, throughout the relationship and, of course, to the research of applicable law.

Preserving Investment

The most effective way for a sales rep to preserve his investment in his relationship with the principal and to safeguard the commissions generated or to be generated from the business he has developed for his principal is to contract for these protections before he has started to do business with the principal. Lawsuits are a poor substitute for negotiating a contract that protects the sales rep from a bad-faith termination and safeguards the post-termination commissions from sales the sales rep was and is responsible for generating, whether the order is placed before termination or afterwards as part of program established before termination.

Types of Termination

Typically, there are two types of termination clauses. There is the “at-will” type of clause. It permits a party to terminate the contract for any reason or no reason upon a set number of days, such as 30 or 60. This type of termination clause means that the sales rep has, in effect, a 30- or 60-day contract with the principal.

The same is true of the other type of termination clause in the contract. Under this type of clause, the contract remains in effect for a period of time, such as a year, and thereafter automatically renews for another term unless a party notifies the other party that it does not want to renew the contract for another term upon a set number of days, such as 90 or 120 days, before the term ends. Typically, under this type of clause, there is no limitation restricting the reasons a party may rely upon not to renew the contract. This type of clause extends the effective life of the contract, but it does not contain in black and white a provision that prohibits the principal from refusing to renew the contract under any circumstance, even if its motive for doing so was to reduce its commission costs.

If a sales rep believes that a principal should not be permitted to act in bad faith in terminating the contract in general or specifically that the principal should not be permitted to terminate or not renew the contract to avoid paying the sales rep commissions on orders received before termination or on orders received after termination pursuant to a program established before termination, then the sales rep should negotiate for such a provision with a principal, however uncomfortable or contentious such negotiations become.

Hard Choices

If no agreement can be reached, the sales rep has a hard choice: does he walk away from the deal, negotiate for an enhanced benefit in other terms being negotiated in the contract, such as the commission rate, or simply hope that the good faith or bad faith of this principal will never be tested in the future.

The post-termination commission provision in the contract may also pose a hard choice for the sales rep. Typically, the post termination commission provision in a contract requires the principal to pay commissions on orders received before termination, but sometimes this right to commissions are cut-off if the customer has not paid the principal on the order within a certain period of time ranging from 30 days to a full year. If the sales rep seeks to be paid commission on all orders received before termination, the sales rep should negotiate for a provision that protects this right to commission on such orders, whenever the ordered product is released, shipped or paid for.

However, even if the sales rep has secured this right to commission on pre-termination orders, the post-termination commission provision in the contract may still lack explicit protection for the business that the sales rep generated for the principal before termination that has not resulted in pre-termination orders. If the sales rep believes that he is entitled to commission on orders the principal receives after termination that were based upon a program of purchases anticipated pre-termination, the sales rep should negotiate the right to commission under this circumstance in clear and unambiguous language. If he is unable to secure this right in negotiations, the sales rep may be able to negotiate a reduced or diminishing rate of commission on such post-termination sales or a buy-out or “severance” based upon some quantitative criteria placed in the contract.

If the termination and post-termination commission provisions in the contract are written effectively, the contract itself may dissuade a principal from attempting a bad faith termination of the contract or the denial of commissions on orders or business the sales rep generated or put in place. Effectively drafted termination and post-termination commission protections will also strengthen a sales rep’s case against the principal in the event the principal decides to act in bad faith or to refuse to pay commissions on the business the sales rep has generated or put in place for it.

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