What is Your Agreement’s Term?

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Can you be terminated today for no reason?

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Lawyers are a lot of things, but we are not magicians. Most times, we cannot make language in your agreement appear different than it actually is. The basic rule in contract interpretation, which is generally followed by the courts, is to give the words in a contract their plain and ordinary meaning. And if your contract lacks a term, then there is simply no term, expressed or implied.

One of the most common calls that I receive from independent manufacturers’ representatives is the one where she or he has just landed the big sale, or is about to do so, and the principal terminates the agreement for no reason, for convenience, or for a bad reason, and the rep would like to pursue a claim against the principal for commissions from those future sales.

This is one of the most frustrating calls for me because, except for some policy arguments that have been established in the auto industry, there is little that can be done if the rep signed an agreement which contains no term. The term of an agreement is simply a provision that describes how long the agreement will last and, sometimes, how or whether it can be renewed for additional periods of time. Generally speaking, without the inclusion of a defined term, courts will consider the agreement to be “At Will” where either party can terminate it at any time, with or without a reason. Is that really what you intended when you negotiated the agreement with your principal? For most of you, I believe that the answer is “No.” And, for some, you may have thought that the law generally implies additional fair provisions into agreements, even though they are not written into them. For a provision like the term, your thoughts of implied fairness are misguided. Still, for others, you have attempted to negotiate a term, and your principal simply rejected your proposal. At least you have tried.

The Need for Education

I suppose that the concept of an agreement lacking a term flows from not only the rep’s mistaken belief that a long term and fair contract is implied, but also from principals’ misconception that orders should start flowing as soon as reps sign the agreement. More education is needed on both sides; but do not wait to learn this rule the hard way as many of my would-be clients have done.

I have found that one of the most effective approaches to negotiating a contract and getting what you want from a principal is through educating them. Instruct your principal about the typical sale gestation period in your industry. Explain and remind the principal that you will be spending your own money, time and energy cultivating, building and establishing relationships and that many of these opportunities will not come to fruition, but some of them will, and when they do, you would like a fair opportunity to make some money and recoup your investments along the way. I know it is sometimes awkward to think about the end of an agreement at the beginning, but in order to protect yourself, this is precisely how you must think.

What will happen under the terms of your agreement if you spend three years cultivating a prospect, and it finally starts ordering products, and then you are terminated? What is the term or length of your agreement and how are commissions handled after the agreement is terminated? Talk about it; reasonable people can devise reasonable solutions to these issues. And unreasonable people may not — which you should consider before going into business with them.

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

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John M. Riccione has been associated with MANA for over 18 years and has been instrumental in crafting MANA’s useful representative agreements and guidelines. He is partner in Taft Stettinus & Hollister, LLP, Chicago, Illinois, and has been a business litigator for over 30 years. His practice involves the representation of businesses and entrepreneurs in a wide array of complex commercial disputes, including distribution and manufacturers’ representation agreements, real estate, construction claims, trade secrets, computer fraud and abuse, UCC warranties and remedies, and labor and employment. He has been named an Illinois Super Lawyer since 2005 and nominated by a Fortune 1000 client to BTI’s Client Service All-Star Team, an honor extended to only 70 lawyers nationwide. He is a frequent speaker on the topics of force majeure, non-compete agreements, commission disputes and Uniform Commercial Code warranties and remedies, to various trade and bar associations and client groups.

Legally Speaking is a regular department in Agency Sales magazine. This column features articles from a variety of legal professionals and is intended to showcase their individual opinions only. The contents of this column should not be construed as personal legal advice; the opinions expressed herein are not the opinions of MANA, its management, or its directors.