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I’ve had many clients over the years who have drafted their own sales representation agreements without the help of an attorney. While I encourage my sales rep clients to negotiate their own sales representation agreements, I strongly recommend that they send me any proposed drafts to review before they are sent to the other side.

The Problem

A sales representative drafting their own agreement will often copy someone else’s agreement thinking that if it worked for their friend, it would also work for them. Not generally a good idea. Many of my sales rep clients are also engineers. My engineer clients sometimes think that since they are good at engineering, they will be good at drafting their own contract. The problem is that they sometimes don’t know what they don’t know. I have been doing this for 40 plus years and most of the changes to my form sales rep agreement were the result of issues I had in my cases. We all learn as we go.

One problem I have seen in two recent cases is the lack of a provision specifically allowing the sales rep to terminate the sales representation agreement, i.e., no escape route. The sales rep drafted the agreement without legal help in both instances. I think the reason there was no escape route for the sales rep is that most sales reps don’t think about whether there may be a time when they will want to end the relationship with a principal. The reality is that there may be a time when it will be necessary for a sales rep to terminate the sales representation agreement.

One of these cases involved a sales representation agreement with a Chinese automotive parts supplier. My client, a former purchasing agent who also happens to be an engineer, drafted his own sales representation agreement based on a form agreement he obtained from another sales rep. He actually did a very good job and covered most of the key issues except one: There was no express provision allowing him to terminate the agreement. My client worked for about two years getting his principal known by some key customers and ultimately on the list of qualified suppliers able to bid on new programs. My client was successful and landed some significant new business. After the tooling purchase orders were issued and the principal was designated as the source for the new program, the principal advised my client that they would not be paying commissions on those programs to my client. Needless to say, that did not go over well with my client.

The problem was that there was no express provision in the sales rep agreement for my client to terminate the agreement for breach or for any other reason. We filed suit after terminating the agreement for material breach, which we are allowed to do under Michigan law. The termination was important for three reasons:

• The first and most important reason was that there was no point in my client working on obtaining any more new business when the principal had refused to pay him for the business that he had already obtained. My client could not afford to work another two years on obtaining new business without getting paid. He has a family to support.
• The second reason was that there was a non-compete provision in the sales rep agreement prohibiting him from representing a competitor during the term of the agreement. He did not want to risk the possibility that he would be in violation of the non-compete provision of the sales rep agreement if he started representing a new principal who may be a competitor.
• The third reason is that the Michigan Sales Representative Commission Act (SRCA) only applies in the event of a termination. The SRCA allows a sales representative to recover penalty damages up to $100,000 and reasonable attorney fees if a principal intentionally fails to pay commissions.

The main argument made by the attorneys for the Chinese principal was that there was no provision in the sales rep agreement specifically allowing my client to terminate the agreement. Therefore, they argued, my client was not entitled to the termination commissions specified in the agreement. Apparently, they thought my client should have continued to work without pay. Involuntary servitude, however, is prohibited by the 13th Amendment to the United States Constitution. The attorneys for the principal filed a Motion for Summary Judgment requesting the Court to dismiss the claim for post-termination commissions. We won that motion based on other language in the Agreement, but it was a battle that we could have lost. The issue could have been avoided altogether by having an attorney experienced in sales commission disputes review the sales rep agreement before it was sent to the principal. The good news is that we were able to settle the case for a confidential amount shortly before trial during a judicial settlement conference. My client was thrilled.

The Solution

There is an easy fix to this problem. Sales representation agreements should always include a provision allowing the sales representative to terminate the agreement. One of the ways to do this is to include language in the sales rep agreement that allows either side to terminate in the event of a material breach by the other party. My standard language in my sales rep agreements requires the payment of the agreed-upon post-termination commissions in the event of any termination of the agreement by either party for any reason. This should be in your sales rep agreement. I also recommend that you read my article published in the August 2015 edition of Agency Sales magazine entitled “Beware of Termination for Cause Language in Your Sales Representation Agreement.” That article includes my thoughts on why there should be no difference in the amount of post-termination sales commissions regardless of the reason for the termination.

Conclusion/Moral of the Story

If you are going to negotiate your own sales representation agreement, always include language that will allow you to terminate the agreement and still be paid your post-termination commissions. It is a good idea for a sales rep to negotiate their own sales representation agreement. There are many reasons for this. Probably the best reason is that it’s not a good idea for the sales rep to bring his or her lawyer to the negotiation session with the principal. In order for a sales rep to be able to negotiate the sales representation agreement, he or she must do his or her homework well in advance. A good article to read before beginning the process is one I wrote that was published in Agency Sales magazine in April of 2018 entitled “Don’t Negotiate Your Contract Backwards.” You can either get a copy of these articles from MANA or feel free to contact me and I will email a copy of them to you. My email address is [email protected]. It is also a good idea to meet with a lawyer who knows your business and is experienced in negotiating and litigating sales commission disputes, prior to negotiating the sales rep agreement, and to have the attorney review any written contract before it is signed. A good place to start is the MANA list of qualified attorneys.

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