Contract Templates:
One Size Does Not Fit All

When using contract templates, sales agencies tend to think of them as one size fits all: Just insert the agency’s name, the other party’s name, the effective date, names in the signature blocks, and voila! You’ve created a ready-to-sign contract!

If Only It Worked That Way!

Contract templates are valuable; they address the issues important to a sales agency and incorporate “time-tested” language that defines what happens in case of a legal dispute.

However, the very definition of a “template” is that it is a standard form; and when one ponders this, each deal made with a principal has unique aspects to it and is somewhat different from the deal made with another principal. Consequently, standardized forms need to be modified.

These differences are not simply limited to territory, products and commissions, which can be addressed in exhibits. Some principals insist on house accounts or the right to change territory on 30-days’ notice; others have longer post-termination commission backlog time periods; many reserve the right to negotiate (downward) the commission rate, if the customer price is “reduced” from list in order to obtain the business.

Whatever the issue, the goal in every contract is to modify the language to reflect the specific deal points.

Unfortunate Reality: You’ll have to modify your standard sub-rep contract.

Many agencies have prepared (or have had their lawyer prepare) a contract template for use with their sub-representatives. That’s great: the issues germane to the negotiation have been thought through, thereby expediting the contracting process.

However, one must give thought to ensuring that their sub-rep agreements conform to the terms and conditions addressed in their principals’ contracts. For example, does the contract with your sub-rep:

• Permit your agency to delete product(s) commissionable to the sub-rep, or cancel if your principal has removed a product or the contract is terminated?
• Provide for a change in commission if a principal changes your agency’s commission structure?
• Remove the right to commission payment relating to an account designated by the principal as a house account, mid-stream?
• Contain a post-termination commission structure that mirrors your principals’ contracts?

Ideally, of course, the principal would never have the unilateral right to make any of these contract modifications. Too often, however, the contract gives them that one-sided right.

One of the biggest discrepancies I find in “standard” sub-rep agreements is that they often don’t align with the issues as they are addressed in the agency’s agreements with its principals.

Issues Should Mirror Representation Agreements

If your sub-rep contract addresses an issue one way but your representation agreements address it differently, you’ll want to make changes to your sub-rep agreement to ensure consistency. Optimally, the language in a sub-rep contract should permit the agency to make the same changes that the principal is allowed to make to the primary contract.

Give thought to the following issues before handing your standard contract to the prospective sub-rep. You’ll want to ensure they “mirror” your representation agreements. They are mostly inter-related and will appear several times in various clauses throughout the contract.

1. Commissions

Earned: The definition of when a commission is “earned” is often the basis for dispute between agencies and their sub-reps (and employees!) Frequently, it is ill-defined or simply not defined. Does the definition in your sub-rep contract align with the definition in your principals’ representation agreements?

• For example, what happens if a principal terminates your agency contract? Assume your contract says that the sub-rep “earns” the commission on acceptance of order by the principal. One of your principal’s contracts provides that on termination, the principal will only pay commissions for those orders shipped within 30 days after termination.
• Assume the order in question does not ship for 60 days after termination.
• Have you set up a situation in the sub-rep contract which makes you obligated to pay commissions to the sub-rep on an order for which your agency will not receive commission payment?

Change in structure: If a principal modifies its commission structure is the agency allowed to make a corresponding change to its sub-rep’s commission on those products?

Split commissions: Does your sub-rep contract specifically identify the split commission percentage, or should it be based on the percentage determined by the principal? You may choose the former, but consider the issue.

2. Change in Products, Territory, House Accounts

Unfortunately, principals often reserve the right to delete products, designate a customer as a house account, or change the territory. Does the sub-rep contract allow for similar rights if any of the agency’s principals do the same?

3. Termination, Non-Renewal of Principal Contract

What if a principal (or agency) terminates or fails to renew the contract? Does the sub-rep contract permit the agency to remove that principal’s products as commissionable to the sub-rep?

4. Post-Termination Commissions

Disputes relating to commission entitlement with regards to backlog orders on termination are the most frequent types of disagreements between agencies and their principals.

Contract termination by a principal: Post-termination commission clauses in representation agreements generally run the gamut: from limited protection (which may include only those orders accepted prior to termination/shipped paid for within 30 days thereafter) to much more generous (and equitable!) post-termination backlog protection.

If a principal’s contract has a cut-off point after which the agency is not entitled to receive commissions, the agency should have a similarly limited entitlement to commissions written in its sub-rep contract.

Termination of the sub-rep contract: What type of post-termination commission structure does the agency have with its sub-rep? Is your agency entitled to stop paying commissions to the sub-rep if the principal stops paying your agency?

5. Protection of Confidential Information

Your agency would be well-advised to include a confidentiality clause in which the sub-rep is obligated to maintain the secrecy of both your agency’s and its principals’ confidential information. That non-disclosure language should be broad enough to cover the principals’ definition of confidential information and the time period during which confidentiality is required.

6. Prohibition Against Handling Competitive Lines

Many representation agreements will prohibit the agency from handling “competitive” lines, which is often subjectively defined as those deemed as competitive by the principal. Does the sub-rep contract contain a similar restriction?

Another Key Issue to Consider

7. Non-Compete and Non‑Solicitation of Principals/Customers

Many agencies have experienced this unfortunate conundrum:

• Agency retains a young sub-rep with good sales potential to work with principal’s products. Agency teaches and the sub-rep learns the products/business. Over time, sub-rep develops a close rapport with the principal and customers. Sub-rep’s contribution becomes significant in developing sales of principal’s products.
• Several years later, principal terminates the agency’s contract and appoints sub-rep as the new exclusive independent sales representative for the territory. (Sub-rep has likely accepted a lower commission structure than the one the principal paid its former sales agency).

Can the agency protect against the sub-rep establishing its own business and taking the agency’s principal with it? The answer is an emphatic yes in most states, except for California, North Dakota and Oklahoma.

The agency must include non-compete and non-solicitation clauses in its sub-rep contracts.

Clauses of this type (called “restrictive covenants”) are generally disfavored by courts because they can have the negative impact of impeding a person’s ability to earn a living. In order to be enforceable in most states, they have to be very narrowly written in scope, geography and time period so that the person may still engage in his or her occupation.

Generally, restricting a sub-rep from becoming an independent rep for one of the agency’s principals would not impede one from engaging in his or her occupation.

However, some states, like California, consider certain restrictive covenants unenforceable except in very limited situations which include the sale of an ownership interest in a business or the sale of a business asset.

• In California, a clause prohibiting the use of agency confidential information to solicit principals or customers post-employment is a valid protection of agency confidential information. This allows a former sub-rep to compete, so long as they are not using confidential information.
• Caveat: If the agency chooses this approach, the challenge is to establish that the information provided by the agency to the sub-rep rises to the level of confidential information and that the agency has been diligent in taking steps to protect and maintain the confidentiality of the information.
• Note: Check with one of the MANA attorneys before including a non-compete or non-solicitation clause in your sub-rep contracts, and be sure they are very narrowly drafted so as not to bar one from engaging in business in their industry.

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