© Corgarashu | stock.adobe.com

This article will emphasize the importance of having a good underlying written contract between sales representatives and their principals. While “form” agreements may be available and are often used to attempt to recite the business relationship between parties, there is no substitute for a well-thought-out agreement that recites and accurately presents the relationship that the parties intend to follow.

In order to achieve this, an agreement must not only recite the undertakings by the parties but these must be viewed and clearly stated as obligations. Further, the contract should be one that embodies the laws of the state where, at least, it could someday need to be enforced. Thus, it is highly recommended that reps involve their local attorneys early in the negotiations in order to attempt to achieve these objectives with clear and enforceable provisions.

In considering the applicable laws, one must remember that our country is comprised of 50 different states/jurisdictions, each of which has its own body of laws and courts that are called upon to rule upon their applicability to any set of factual scenarios between parties to lawsuits. While many of those laws are similar from one state to the other, there may be differences that need to be considered. Some scenarios often encountered by attorneys representing reps follow.

Many states have enacted statutes which are commonly referred to as Commission Protection Acts (“CPA”). These are designed to protect sales reps domiciled in the enacting state and/or sales made within the territory of the enacting state by providing civil sanctions against principals who fail to timely pay reps, usually at termination of the contract, their due commissions on sales. Among other things, as a means to attempt enforcement of the contractual obligation to pay, these Acts usually impose a penalty upon the principal to pay double, or sometimes triple, the amount of the commissions due if not paid per the terms of the agreement or within a given time period. These Acts may also state that the penalty provision, or even the Act itself, is applicable only to wholesale sales. Care should be taken to understand how state law defines a sale at wholesale. For example, some may consider as retail a sale of a product to a manufacturer that incorporates it into its finished product, while others may consider it as wholesale.

In the absence of any such Act in a given jurisdiction or if the relationship is such that the rep cannot rely on the applicability of the Act, the contract may specifically provide for interest to be charged for overdue commissions and for damages for late payment. These sums would need to be only for such amounts as are deemed proper and lawful interest and/or liquidated damages under the local state law. A liquidated damage clause could also be incorporated for instances of early termination. Properly anticipated, these provisions could foreseeably protect wholesale and retail sales wherever made.

In today’s global marketplace U.S. reps are being sought by international principals to market their products in the United States. More often than not this usually involves developing brand identification efforts for such products. It is important that the rep understand what it is undertaking in that effort; and if it is to be involved in more than soliciting sales, the contract should very explicitly recite how the rep is to realize that work in order to avoid generalized allegations of default. In considering payment of commissions and other amounts in the event of termination of their contracts, reps should bear in mind that European principals, under EU legal mandates, are subject to payment of severance amounts in cases of termination of their sales agents, thereby providing an opportunity to discuss more equitable severance terms in the event of termination of the rep agreement.

An issue which often arises in the rep/principal relationship involves the standard contract clause which essentially states that the contract is binding upon the parties, their successors and assigns. Clearly, the parties to the contract are the rep and the principal. If the principal is a corporation and its shareholders sell their shares in that corporation, then all that has changed is the principal’s ownership. The “party’ continues to be the corporation.

However, the issue usually arises when the corporate principal itself sells its assets to a third party, including the rights to the products it manufactures and/or sells, but excludes the rep agreement from the sale which probably is not otherwise assumed by the third party. More often than not, this type of sale usually occurs when the principal is a small business owned only by one or a small number of shareholders. The third party then continues to sell the product. Local law would need to be consulted, but ordinarily the acquiring party would not be deemed to be a successor of the corporation nor of the contract; nor is it a party to the rep agreement. This leaves the rep with no one to perform or pay under the terms of the contract.

In anticipation of this possibility, the contract could provide that if the sale of the principal or of its assets should occur, the principal shall have the obligation to have the acquiring party assume the rep agreement in writing. Local law would need to be consulted to determine if the rep agreement could require that a guaranty of performance and payment be executed by an individual with sufficient interest in having the corporate principal sign the rep agreement and thereby have someone to look to for performance, for any relief that may be required for the breach of the agreement and/or for payment otherwise due.

In the event that a suit were to be instituted against a principal for reasons related to the sale or performance of the products being sold by its rep, a probability exists that the rep would also be joined in the litigation. Some states require that a manufacturer indemnify those in the marketing line, while others may not. Regardless, the contract should foresee the need for language of indemnification and possibly for a requirement that the principal add the rep as an additional insured on its liability policies.

Finally, it is important to consider the avenue by which to seek enforcement of the agreement if necessary. The two usual options are litigation or arbitration. In choosing which to follow, consideration needs to be given to which has the greatest probability of having a thorough review of the facts in dispute in order to arrive at a correct decision, the costs and possible time involved as well as the probability that a correct decision under the facts and law will be reached. It should be remembered however that if the agreement provides that any claim or dispute under the agreement is to be decided by arbitration, then in many states that language will trump any provision calling for litigation.

The topics covered in this article are obviously not intended as advice on any particular scenario, question or issue. Instead, the article is intended to remind reps of the importance and necessity to seek legal counsel in preparing their agreements. Hopefully, it has raised some themes that could be reviewed with counsel for any specific applicability.

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