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The Problem

Many of my clients represent principals based in foreign countries. Most of them represent automotive parts manufacturers. The automotive industry is a global industry. Many principals are based in Europe, China, Japan, India, Korea, and other countries. One of the topics in the negotiation of the sales representation agreement is often the state or country that will have jurisdiction and venue in the event of a dispute. Many principals will attempt to include a provision requiring any disputes to be resolved in their home country. I strongly recommend that any sales representative located in the United States or Canada never agree to have to go to another country to resolve any disputes. There are several reasons for this.

• All legal disputes center around the payment of earned sales commissions owed to the sales representative.

I have been litigating sales commission disputes for more than 40 years. My first sales commission dispute was in 1979. The primary issue in the lawsuits that we have filed over the past 40-plus years was the payment of earned sales commissions to my client. Occasionally, one of my sales rep clients will be sued by his or her principal. The primary purpose for each such lawsuit was to avoid paying earned sales commissions to my client.

The reason why this point is important is that many principals will want to have a provision in the sales representation agreement mandating that any litigation take place in their home state or country.

• The cost may be prohibitive to pursue your claim in a foreign country.

Deciding whether to pursue a claim for unpaid or underpaid sales commissions involves the same financial considerations as most other business decisions. The primary issue is whether it is economically feasible to pursue the recovery of the unpaid sales commissions.

I had a client who came to me a few years ago who had a problem getting paid the commissions he was owed from a company based in Czechoslovakia. The problem was that the sales representation agreement required the application of Czechoslovakian law. To make it worse, any disputes had to be resolved in Czechoslovakia. This means my client would likely have to hire an attorney in Czechoslovakia and then travel to Czechoslovakia for the resolution of the case. It probably would have been difficult to find an attorney there who regularly handles sales commission disputes. I declined to represent him in the case. He ended up hiring an attorney in Michigan. That did not work out well for him. He spent a lot of money on attorney fees and got nothing.

Some principals make it extremely difficult for the sales representative to pursue a claim for unpaid sales commissions. One way of doing this is to require the sales representative to travel to a foreign country to get paid. This would normally also require the sales representative to hire an attorney in a foreign country.

• Why should you have to go to a foreign country or another state to get paid?

Most of my clients solicit orders from automotive customers located in Michigan. This is the primary reason most of my clients are based in Michigan. My clients’ principals generally ship their products to customers located in Michigan. Representatives of the principal will be interfacing with customers located in Michigan and will sometimes travel to Michigan. It is not a hardship for the principal to come to Michigan to justify why it is not paying their sales representative. On the flip side, it can be a major hardship for a sales representative to go to a foreign country to get paid his or her commissions.

I had a meeting recently with a new client who was in the process of negotiating a sales representation agreement with a principal located in New Delhi, India. The sales representation agreement proposed by the principal would have required my client to go to New Delhi to resolve any disputes. That is even farther than Timbuktu. The cost to go to New Delhi to resolve a legal dispute could be close to or more than the amount of the commissions in dispute at any given point in time. There would be travel and lodging and you may have to hire an attorney in India who likely knows nothing about your business. Plus, this makes the sales representative open to the death-of-a-thousand-cuts scenario. The principal can make many small breaches such as reducing commissions on one order, taking an account in-house, refusing to pay commissions on certain jobs, etc. These individual breaches may not justify initiating legal action in India. By the time there is a significant enough breach, you may have waived your right to go after the smaller breaches. Even the bigger breach may not justify the time and cost of going to India/Timbuktu to get paid. The same problem can arise if the principal is located in another state in the U.S. The sales representative may have to hire a local attorney in the state where the litigation would be filed. This can increase the cost. Also, it is generally not easy to find an attorney in another state that handles sales commission disputes. I like to litigate in my backyard with judges who know me and know what I do. The judge is still going to be fair to both parties, but home court advantage can be an asset: An intangible asset, but still an asset.

The Solution

Never agree to go to a foreign country or another state to get paid. That type of provision makes it much more likely that you will have to sue for your commissions. Plus, the nut you would have to crack to break even could be too high to justify the risk of losing the case. Too many cards may be stacked against you. The cost to initiate a lawsuit in most states is relatively small. The filing fee is approximately $500 in federal court. My firm handles litigation on a contingent fee basis so the out-of-pocket expenses will be much smaller than if the lawyers are paid on an hourly basis. Most likely you will need to hire an attorney on an hourly basis in a foreign country. This can be very costly and difficult for a sales representative whose principal has stopped paying his or her sales commissions.

Arbitration can sometimes be a solution but too many people think that arbitration is cheaper than litigation. That is generally not true for sales representatives. Filing fees and other costs can run into many thousands of dollars depending on the amount of money in dispute. Also, the arbitrator/arbitrators are paid hourly. Often, the hourly rates are close to $750 or more. Plus, I have to do the same work whether the case is in litigation or in arbitration. That will be the case with most attorneys representing the sales representative.

Conclusion

Contract negotiations are all about allocation of risk. The big question for the sales representative is: “Are you willing to take the risk of not having a cost-effective remedy to collect your commissions?” Keep in mind that most commission problems do not occur until the commission dollars are large. It is hard enough when your principal stops paying your commissions. Don’t make it harder on yourself by having to go to a foreign country or another state to pursue your claim.

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