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Lawyers rarely tire of advising their clients of the importance of contracts. After all, the contract establishes the rules that both parties are supposed to honor and, in the event that there is a dispute between the parties, the contract gives the court and jury a list of rights and responsibilities that each party has.

Of course, and as an example, this list of rights and responsibilities will be the starting point that a court and jury will use in deciding whether the sales representative is entitled to the disputed commissions it claims it is entitled to receive or the principal is entitled to enforce a non-compete against the sales representative after it has terminated the sales representative contract. It may also be the ending point of the decision by the court or jury.

The negotiation of the contract (or any proposed amendment to an existing contract) between a sales representative and its principal is also important. Its importance does not merely rest with the fact that the contract will contain this list of rights and responsibilities. Through this negotiation, the sales representative can also take the measure of the principal. Taking the measure of a principal is a critical function that a sales representative must undertake. After all, the sales representative works for a principal on a commission basis, and therefore, every relationship with a principal represents a substantial investment of the sales representative’s time, energy and money.

I would suggest that the responsibilities (beyond the obvious responsibility of paying the sales representative all commissions earned) that the principal proposes should be in the contract or is willing to place in the contract reveal a great deal about the principal to the sales representative. In fact, I would further suggest that this is a reliable mechanism to learn whether a red flag should be raised that must be considered as part of the decision to represent the principal or as part of the way that the sales representative should manage its risk in dealing with the principal.

Many contracts between a sales representative and a principal lack many obligations on the part of the principal beyond paying the sales representative commissions that were earned and providing the sales representative with some information to promote the principal’s product and to back up the commission calculation each month. However, I believe that there are many other responsibilities that should be in the contract. I’ll point out a few that are sometimes overlooked.

Product Competitiveness

Many principals tell a sales representative that they have great products and, if the sales representative is willing to invest its time, energy and money in promoting them, the sales representative will earn a substantial amount of commissions. Unfortunately, many contracts between a sales representative and a principal do not include a provision in which the principal promises the sales representative that its product will perform as they are promoted and that they are competitive in the marketplace.

This is a significant omission. A sales representative should not be responsible for spending its time, energy and money promoting a product whose performance is problematic and that cannot effectively compete against other manufacturer’s products being offered to customers, especially if the contract contains a non-compete during the term of the contract or, even worse, for a period after its termination.

Product Responsibility

Every principal wants the right to make and sell what products it chooses. Principals do not typically afford a sales representative any say in this matter. For instance, a sales representative might receive a proposed modification to its territory, list of accounts, or commission rate (assuming the contract requires such modifications to be by mutual consent and does not permit a principal to do so unilaterally). However, will the principal agree that it is solely responsible for its products and their design and performance? Will it agree to indemnify the sales representative for any lawsuit the sales representative is dragged into, if it is based upon the principal’s products and their design and performance? Will it designate the sales representative as an additional insured under its product liability policy?

Since the design and performance of the product is solely in the principal’s control, the principal should be willing to promise the sales representative that it will take complete responsibility for its product and ensure that the sales representative will not be harmed by any claim based upon the principal’s product.

Product Orders and Shipments

Every principal also reserves the right to accept or reject any order from a customer and to control the manufacturing of the product, the shipment of the product, the invoicing for the product and the collection of payments from the customer for the ordered product. The sales representative may have procured the order, but it is not involved in the process that follows the accepted order, even though the sales representative procured the order that starts this process and has a definite interest in the process progressing efficiently, both in terms of nurturing the ongoing relationship with the customer and in the receipt of commission from the order the sales representative procured. Since the sales representative cannot control this process but has a definite interest in it, the principal should be willing to promise the sales representative that it is solely responsible for the fulfillment of orders and for invoicing and collecting payments from the customers and that it will do so efficiently and diligently, or, at least, in a commercially reasonable way.

Product Service and Warranties

The principal is responsible for providing customers service on its products and meeting its obligations to the customer under its warranty program. Of course, if the principal does not provide the requested service or operates its warranty program ineffectively, the sales representative may have to spend its time, energy and money performing these principal functions instead of marketing and soliciting orders from customers. Additionally, securing orders from dissatisfied customers can prove to be challenging. Since the sales representative has an interest in the principal performing these functions effectively, the principal should be willing to promise the sales representative that it will do so efficiently and diligently, or, at least, in a commercially reasonable way.

If a principal is unwilling to make these promises to the sales representative, then the sales representative is forewarned that, if it does business with this principal, it is investing in a principal which will not vouch for its own products or methods of doing business. Under such circumstances, the sales representative’s decision to conduct or continue to do business with the principal should be considered carefully. The investment that the sales representative is making may be riskier than need be and the reward on that investment may prove more elusive than anticipated.

Of course, it goes without saying that, if the sales representative and principal have a dispute, especially if the dispute ends up in court, the existence of these provisions may prove useful to the sales representative, since, without them, it will be difficult, if not impossible to hold the principal accountable for any failure to meet such responsibilities. It will also be difficult, if not impossible, to claim that the principal may not enforce other provisions of the contract, such as a non-compete, due to its own breach of these responsibilities. Additionally, the existence of these provisions may help the sales representative achieve a resolution of the dispute with the principal that otherwise could not be achieved, either before any litigation is filed or before the case proceeds to trial.

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