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The negotiation of a manufacturers’ representative agreement is an essential step to begin the sales relationship of the principal and the manufacturers’ representative. While most every representative understands the importance of negotiating the terms concerning how their commissions will be calculated and paid, it is just as important to negotiate how the sales relationship can terminate. This is commonly referred to as a termination clause.

Negotiating the termination clause at the outset can be the most important term of the entire sales relationship for the manufacturers’ representative. Without a strong termination clause, a rep may find themselves with little to no protection or legal recourse if the principal decides to end the relationship without any notice. While many states have laws that protect the recovery of unpaid earned commissions, most state laws do not allow a manufacturers’ rep to recover commissions for sales that take place after the relationship is terminated. If a rep believes he or she should be entitled to commissions for sales that take place after the relationship is terminated, it is imperative that he or she negotiate the termination clause at the outset of the relationship.

A termination clause sets forth the terms and conditions of how the sales relationship will end by setting forth the obligations of both the principal and the rep in terminating the relationship.

One common way to determine how the relationship will end is by way of a voluntary termination clause. The right to voluntarily terminate the relationship can be provided to one or both of the parties to the agreement. The voluntary termination clause will usually include a notice provision that sets forth a transition period between the formal notice of a party’s intention to end the relationship and the effective date of the termination. By providing for notice and a transition period for the transition of sales, the rep can obtain some protection for future commissions on sales already or likely to be made for future shipment of product.

Set Period for the Agreement

Another option in structuring a termination clause is to agree to a set term for the relationship, such as one year, and have the agreement automatically renew for another term after a specified date. For example, a clause may include a one-year initial term, with automatic annual or semi-annual renewal. A contract for a specified term will also provide a period of time in which either one or both parties can terminate the relationship by notice, prior to the automatic renewal. Like a voluntarily termination provision, an agreement that includes a term for the relationship can protect a rep and ensure they are fairly paid their earned commissions.

A termination clause can also provide that the relationship can only be terminated for certain enumerated causes. “For cause” reasons can constitute anything that the parties agree upon, but some common examples include:

• Failure to meet sales quotas.
• Misconduct or willful neglect of duties or responsibilities.
• Death.
• Permanent disability.
• Bankruptcy.

A “for cause” termination clause that includes a principal’s ability to terminate the relationship for bad conduct or poor performance is not a desirable provision for the rep to include in the agreement. This is because a “for cause” provision that so allows gives the principal the ability to claim that the sales representative is not performing their obligations under the agreement as a basis for getting rid of them. Whether or not there is merit to this allegation will usually be a complicated, fact-sensitive question that could be difficult for a sales representative to refute. Moreover, regardless of the merits, disputes over performance often lead to expensive and time-consuming litigation. If a rep must agree to the inclusion of a “for cause” termination provision, it is recommended that — at minimum — they negotiate the precise definition of “for cause” in as much detail as possible. It is also in the representative’s best interest that any “for cause” provision includes advance notice of the purported “for cause” event and a period of time for the rep to cure it.

Entitlement to Commissions

Another important aspect of a well-drafted termination clause is a provision that establishes the manufacturers’ representative’s entitlement to commissions earned during the notice period and after the termination of the relationship. The method of how commissions are earned and due after the notice of intention to terminate should be agreed to at the outset of the relationship. As with all aspects of the termination clause, it is at the outset when the rep will be in the best position and have the most leverage to negotiate such a term. The amount of leverage any particular rep will have in negotiating for commissions above and beyond what is provided under applicable law obviously differs from one rep to the next. In certain situations, asking to be compensated for a period of time after the effective date of termination for sales to specific customers or of specific products is not unreasonable to ask for. Another common approach is to structure it as a payout equal to a percentage of commissions paid over the previous year, or some other period of time. One other possible approach is to provide for payment of a final flat rate similar to a severance in an employment contract.

Whether a rep has legal protections governing the termination of a relationship with a principal varies from state to state. Some states have no laws that specifically protect manufacturers’ representatives from recovering unpaid commissions, while others provide substantial protections afforded to them in the event of termination. While the commissions may not be governed by state laws, a rep can always negotiate the same protections as part of their written agreements.

In sum, it is important that a sales representative spend just as much time determining how their business relationships end as with the other terms of the agreement. By establishing relationships and developing sales contacts, a manufacturer’ rep can create a revenue stream that will sustain a principal for many years, yet without a strong termination clause, the independent sales representative could find themselves only sharing in the very initial fruits of their labor.

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