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I represented sales representatives in two lawsuits recently where the definition of “Order” was a key issue.

Both cases involved the sale of automotive production parts but the principles in this article can be applied to any sales representation agreement that involves the sale of any kind of production parts pursuant to a blanket order with issuance of periodic releases. Both cases were litigated in Federal Court in Detroit.

The Problem

The sales representation agreement in the first of the two cases had a “Definitions” section which included the following definition: “‘Orders’ shall mean a firm, contractual commitment by and between Principal and a customer, for the sale and purchase of products.” The Definitions section also included a definition of “life of part/life of program” which effectively defined “life of part/life of program” as the total production life of the part including parts used for “service.”

The sales representation agreement in the first case required the principal to pay post-termination commissions “…on all orders: (i) obtained by Agent and placed with Principal prior to the effective date of termination of this Agreement; and (ii) quoted by the Agent and placed with Principal during the shortest in duration of either the period of 12 months (12) following the effective date of termination of this Agreement or until the end of the contract term.”

Any sales representative experienced in obtaining blanket purchase orders knows that the sales representative (referred to as “Agent” in this agreement) solicits or “obtains” purchase orders including blanket purchase orders. “Releases” are effectively shipping schedules and are not solicited or obtained by the sales representative. The above language supported our position that “orders” meant “purchase orders/blanket purchase orders” and not “releases.”

We initiated the lawsuit when the principal failed to comply with post-termination commission obligation contained in the sales representation agreement. The principal’s argument during the lawsuit was that the blanket order does not meet the definition of “order” for the reason that it is not a “firm, contractual commitment by and between the principal and a customer.”

The principal’s argument was based on the fact that blanket purchase orders generally do not contain a commitment to purchase a specific quantity of parts. The blanket purchase order generally contains the part description and the purchase price and often requires the supplier to provide 100 percent of the requirements. The problem is that no parts are shipped and billed until the customer issues a release. The argument by the principal in this case was that the release is the “order,” i.e., the blanket purchase order was not the “order.” The reason claimed by the principal was that the blanket purchase order was not “firm contractual commitment by and between Principal and a customer, for the sale and purchase or products.”

In the second case the definition of order was similar as follows: “‘Order’ shall mean any commitment to purchase Principal’s products which calls for shipment to Representative’s customers…” In this case there was also language which stated that “All orders are subject to acceptance or rejection by an authorized representative of Principal …”

The language regarding post-termination commissions required the payment of commissions “on all orders … that are dated prior to the effective date of termination and shipped to said customers within 36 months of the date of termination …. Any RFQ/quotation …. initiated by Representative that results in an order within 12 months following termination would be subject to the general post termination commissions.”

Again, the principal argued in the lawsuit that the blanket purchase order was not a commitment to purchase until the release was issued. In both of these cases there were additional factors that we were able to capitalize on to support our position that “order” meant “purchase order/blanket purchase order” and not release. This included the following:

• We had expert testimony that the primary responsibility of the sales representative is to solicit the purchase order. Releases are not solicited. They are essentially scheduling documents to identify how many parts are needed during a specific time period.
• Releases are not subject to acceptance or rejection by the principal, but purchase orders are. Therefore, the language that stated the principal could accept or reject any order was clearly intended to apply to purchase orders and not releases.
• RFQ’s result in purchase orders and not releases. Therefore, the language stating that the sales representative would be entitled to commissions on any orders received within 12 months of termination resulting from an RFQ or quotation prior to termination could only be interpreted as applying to purchase orders. The reason is that RFQs and quotations result in purchase orders, not releases. The releases are only issued after the purchase order is received and production begins.

In a recent article that I wrote entitled, “Beware of the Difference Between ‘Expiration’ and ‘Termination’ in Your Sales Representation Agreement” (July 2020, Agency Sales), I referred to what I call “landmines” that are sometimes planted by lawyers drafting sales representation agreements for the principal. The use of a definition of “order” to mean release and not purchase order, is an example of such a landmine.

One problem is that most sales representatives will not identify this as an issue because sales representatives intuitively know that they solicit orders and not releases. This is not an issue that will jump out at them. The other problem is that the judge will look at the plain language of the agreement and will pay little attention to the sales representative’s understanding.

If the definition used for an order effectively means a release, you may find yourself getting paid post-termination commissions for the life of the release issued prior to termination, rather than for the life of the part. The obvious problem is that releases only call for shipments for a short period of time such as 30, 60 or 90 days. The purchase order is the document for which life of part applies.

I would note that in both of these cases we were able to work out a very good settlement for our sales representative clients.

The Solution

The first step in solving any problem is to first identify the problem. The purpose of this article is to help sales representatives identify this problem. Once the problem with the definition of “order” is identified, there is a pretty simple fix. I include the following definition in all of my sales representation agreements: “For purposes of this Agreement the term ‘orders’ shall include, but not be limited to, individual purchase orders, blanket purchase orders, contracts to purchase and long-term agreements.” This should eliminate the possibility of there being an issue as to whether order means “purchase order” or if it means “release.”

Plus, if there is going to be a dispute as to whether you are going to be paid for life of part or for any lesser period, you should know at the beginning as to whether the principal is only paying you for the agreed period of post-termination commissions for releases received prior to termination instead of the agreed period of post-termination commissions based on purchase orders received prior to termination.

The Moral

The moral is that you should get the assistance of an experienced attorney during the negotiation process of the sales representation agreement. Further, you should not seek help from just any attorney. The practice of law is like the practice of medicine in many respects. You do not want to go to a general practitioner for brain surgery. By the same token, you should try to find an attorney who is experienced and familiar with sales representation agreements in your area and that he or she understands your business. I would recommend that you contact one of the attorneys listed in the member area of the MANA website (members.MANAonline.org).

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