Although most manufacturers abide by the MANA code of ethics and pay their agents in a timely manner all commissions owed, sometimes unfortunate circumstances arise causing an agent not to be paid. In the case where litigation thus arises, it is critical to have certain key contract terms to protect your rights.

Having seen many different representation agreements (contracts between sales agents and their principals) presented by sales agents in a wide variety of industries, there seem to be several universally misunderstood, absent or poorly written terms:

• Venue
• “Choice of Law”
• “ADR” (Alternative Dispute Resolution)

Each of these terms really should be included in a contract between principal and agent. Let me define them:

Venue means the place where a lawsuit or other form of dispute resolution will take place (the “forum” State).

ADR is an alternative to a traditional civil lawsuit, in deciding or resolving a dispute; and can take the form of Mediation, non-binding arbitration, binding arbitration, or trial by combat (just a joke, although they did use that procedure in the dark ages).

• Mediation is an often-misunderstood term and process; but, simply put, it means that a neutral “mediator” (often a retired judge or an accomplished attorney practicing in the field) will try to procure a settlement between the opposing sides, something that all parties will agree to and sign.
• Non-binding Arbitration is a process where a neutral “arbitrator” will hear and decide a case in favor of one party or the other, after submission of evidence (and sometimes testimony of witnesses) in a more informal setting than a court room, and under less stringent procedure. The outcome may generally then be appealed by the losing party.
• Binding Arbitration, although the same basic process as non-binding, results in a decision by the arbitrator that may not normally be appealed.

Choice of Law means which state’s or country’s laws will be applied in the dispute.

Venue

Venue is potentially the most important of these terms, and may be the key in deciding whether to move ahead with a lawsuit or not. If an agent agreed to venue in his principal’s home state of Florida, for example, while the agency is located in California and the customers are scattered throughout the west, it is tough, logistically, to bring that lawsuit in Florida. The witness costs and procedures alone may warrant settling cheap or deciding against legal action, unless one has a high-dollar value case. Although, we never know how far we need to push a lawsuit to settle it, and the witness procedures and associated costs may become moot if a case settles early; nonetheless it is still a difficult scenario under which to litigate.

Consequently, every agent should strive for a contract provision laying venue in their own state. If one cannot negotiate that, then as an alternative a venue provision in the home state of whichever party sues first is a good alternative. However, then it is time to have a close association with a lawyer, and be ready to get your sneakers on if a dispute arises (the old race to the courthouse steps).

If no venue provision is included in a contract, then any state that has a reasonable nexus to the dispute is probably a good place to file suit. That could be the agent’s home state or that of the key customers at issue, or where the agent performed the services. However, that is a technical legal question for which an attorney should first be consulted, on a case-by-case basis.

ADR

ADR is potentially just as important, and in certain instances more so, than venue. Most important, it can keep the duration of the legal dispute to a minimum, as well as curb potentially high legal fees. On the downside, it might take away an agent’s leverage to settle for higher value, since the principal likewise gets an expedited process and potentially much lower attorney’s fees; and gets to avoid a jury trial.

Furthermore, in the case of mediation, it takes an extremely skilled mediator to settle a case, and one lacking such skill may be a waste of time and money. In arbitrations, depending on the association used, my experience is that arbitrators often take a King Solomon approach and do not render fair damage awards. My firm uses only JAMS (Judicial Arbitration and Mediation Services) at this point, as they are made up mostly of retired judges who are highly qualified to push the right buttons to settle a case, or to render a fair arbitration award, if a case cannot be settled.

The cost of ADR can be rather expensive; so agents should have clauses in their contracts stating that the parties will share the costs on a 50/50 basis, and most importantly submitting the matter to JAMS.

Choice of Law

Choice of Law is the least important and most misunderstood of the contract terms I have been discussing. Most agents sign contracts making any disputes over their contract subject to the laws of their principal’s state. They then assume that their own states’ Commission Protection Acts do not apply; and that they are thus limited in damages (some states have mandatory treble damages statutes, for example; but many do not) or by application of definitions regarding sales reps, manufacturers, wholesale sales, etc….peculiar to each state (some states, e.g., require that sales be made within their borders for an agent to meet the definition that would allow for their Commission Protection laws to be applicable, while many do not).

Here’s a shocker! Neither a sales agent, nor a manufacturer can void state laws passed after many years of debate and legislation, just at their whim and the signing of a contract that claims the contract to be subject to a different state’s laws. Whether or not parties agree to make a particular states’ laws applicable in contract disputes does not conversely mean that another state’s laws do not also apply, though that does not mean cumulatively.

So, by way of example, a contract made subject to the laws of Minnesota, where the principal is located, while the agent is based and operates in California, selling to customers in California, would require a court to apply Minnesota general legal principles on contracts to any such disputes. That would include issues such as: jurisdiction (the court’s authority to hear a dispute); contract interpretation and principles (but they do not vary greatly from state to state except as to certain limited issues); statutes of limitation (again not a great degree of variance between states in contract claims, but it can make the difference if one waits a long time to sue, which they should not do for other reasons likewise).

However, the court would also be required to allow the agent to plead a claim under California’s Commission Protection Act (as well as any other states which might apply). In which case the damages would have to be mandatorily tripled on whatever is owed; whereas, if only Minnesota law prevailed on the claim, there would be no such triple damage requirements. That is a huge difference in gaining the right leverage to settle a case.

This principle is all the more obvious, though conveniently ignored by many defense lawyers, in light of the language found in many of the State laws that protect sales agents. North Carolina’s, e.g., states:

“A provision in any contract between a sales representative and a principal purporting to waive any provision of this Article, whether by expressed waiver or by a contract subject to the laws of another state, is void.”

North Carolina Gen Statutes
§ 66-193

Many other states have similar provisions; so be sure to check with an attorney before concluding certain laws may or may not apply.

Conclusion

It is best for any contracting agent to gain a venue provision in their own state, or have none at all. It is also wise to include a favorable ADR provision with at least an attempt at mediation before filing suit. However, beware of associations and independent ADR specialists that do not have the experience or know-how to bring the pressure necessary to settle oftentimes highly contentious cases between emotional parties. Finally, choice of law provisions are generally not something that should be allowed to blow up an otherwise agreeable contract. However, one needs to check on a case-by-case basis the effects of such a provision. Qualified counsel should be able to do so easily.