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You just received a representative contract from a potential new principal. The product line looks like a winner. You read the contract. You look at the territory, the commission rate, the length of the contract, and the reasons for early termination. You may also look to see if you are to be compensated if the principal undergoes a change of control. Hopefully, you look to see if there is a non-competition provision that prevents you from selling competitive products while the contract is in effect and after it ends.

Another provision that should be carefully read is the one that deals with your entitlement to commissions. You might have started to read that paragraph and not paid it much attention. Your eyes glazed over, after all, if there’s a sale, you get a commission. Increasingly, representatives are signing contracts that limit exclusivity in a variety of ways that can result in your not being paid commissions on all sales in the assigned territory.

One way that contracts limit your entitlement to commissions is by providing that the sales representative is entitled to commissions on sales “generated” or “made” by the representative in the territory. The contract may provide for payment of commissions on “sales made by the representative” or “orders secured by the representative.” One contract that recently crossed my desk said, “Commissions are earned on sales as a direct result of an order obtained by the Representative.” This language allows manufacturers to take the position that the representative is not entitled to commissions because it was not directly involved in securing the order. Language of this type does not reflect how sales are made and how territories are managed. A sales representative is charged with developing a manufacturer throughout an entire territory; because orders may go directly from the customer to the manufacturer, the sales representative may not know of a specific sale until the commission statement is sent. But judges look at the language of the contract, not reality in the marketplace.

Another way that contracts limit exclusivity is by providing that the manufacturer has the right to make direct sales into the territory. Hidden in the contract may be language confirming that the sales representative is not entitled to commissions on such sales. This language may seem superfluous, or even nonsensical in a commission relationship where all sales are actually made by the manufacturer directly to the customer. Such language has troublesome implications in that it can allow the manufacturer to take the position that it need not pay commissions on all sales in your territory.

To reflect the way representatives function in the real world, the contract should clearly say that the representative is entitled to commissions from all sales in the territory. Any limitation or qualification on the right to receive commissions should be avoided. In today’s marketplace, most representatives spread seeds around their territories, they do not necessarily pick the fruit.

These clauses dealing with entitlement to commissions cause problems when the manufacturer refuses to pay commissions — or suggests a reduced commission — on a sale to which the sales representative is expecting a commission; or when the sales representative learns about a sale that already occurred but for which it was not paid a commission. In these situations, the sales representative may find itself in a weak position to argue that it was entitled to a commission under the contract.

All provisions of a representative contract must be read, analyzed and negotiated. Entitlement to commissions should not be ignored. Manufacturers need good representatives to sell products. Most will negotiate to try to arrive at a mutually-acceptable contract.

The process of negotiating contracts has multiple benefits. First, you will probably get a better contract. But even if you do not, the process of negotiating will give you additional insight into the manufacturer and how it operates. If, in negotiating the contract, the manufacturer clarifies that you will not be paid commissions on certain sales in your territory, you have gained valuable information that will inform your decision about whether to move forward with the agreement.

I have heard manufacturers state outright that they need to be able to protect their interest by having the flexibility to terminate on 30 days’ notice and to enforce a one-year non-compete. Others talk about wanting a long-term mutually beneficial relationship. By having these discussions, you have information to make thoughtful business decisions.

Negotiating also gives the manufacturer insight into you. Cheryl Sandberg famously drove a very hard bargain in her job negotiation with Mark Zuckerberg. When he expressed exasperation, she said, “Well, this is the only time we will be on the opposite sides of a negotiation.” You can communicate to your manufacturers that as their representative, you will work for their interests as vigorously as you work to negotiate a fair agreement.

If a principal is unwilling to enter into a fair contract, it probably will not treat the representative fairly after the relationship begins. We are all aware of situations where sales representatives have built sales in a territory from nothing to millions of dollars only to have the manufacturer take the territory direct or sell the business with no benefit to the sales representative. Like negotiating termination and change of control provisions, negotiating contractual terms that ensure that you receive commissions on all sales in a territory will ensure that you receive the full value of your work and investment.

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