Editor’s note: It’s always interesting to see parallels to representative-principal issues turn up in other industries. In this article we look at the similarities to the representative-principal relationship in the relationships between fashion showrooms (which operate somewhat like representatives) and fashion designers (which operate similarly to principals.)

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It’s a common story in the fast-paced world of fashion showrooms: A designer (principal) wants his or her work featured in a showroom and access to the showroom owner’s (representative’s) contacts and relationships in order to sell his or her line. The showroom agrees and upholds its end of the bargain, selling millions of dollars on his or her behalf and gaining exposure for the rising star. It boosts both the designer’s reputation and profits, but when it comes time to pay the showroom its due, the designer is unwilling or unable to honor their agreement. The showroom is blindsided, and considering that the cost of legal action frequently outweighs the money owed by the designer, it may be left with little recourse to collect its commission. (Sound familiar?)

This is a frequent dilemma that arises in the fashion industry, but can also affect any sales professional. However, through proper practical and preventative measures, sales representatives from any industry can protect their profits, greatly increasing their chances of being paid their hard-earned commissions, in full and on time.

Know Who You’re Doing Business With

In any legal matter, an ounce of prevention is worth a pound of cure. Therefore, before you agree to sell a client’s merchandise, make sure you know that he or she is sufficiently trustworthy and dependable. A diligent search into a potential partner’s history now can save you inestimable time, money, and hassle later.

Perhaps most obviously, a credit check can help reveal whether there are any claims for payment or outstanding judgments against your potential business partner. While reporting agencies like Equifax, TransUnion, and Experian are commonly used for individuals, Dun & Bradstreet Credibility Corp. is generally considered the industry standard for businesses. A basic information report from Dun & Bradstreet will cost about $120, most likely a bargain compared to the loss of potential commissions and definitely more affordable than the legal fees occasioned by action for a breach of contract.

If your prospect is a business entity rather than an individual, you can further look into its background by finding out where the entity is registered for business. Using this information, you can call the office of the secretary of state in the business’ area to find out if the entity is in good standing. Websites for local courts in areas where your prospective client does business also can uncover valuable information, as most state and federal court jurisdictions have their own case register that can be searched for lawsuits.

Low–Tech Checking

Finally, do not discount less formal or even low-tech means of assessing potential sales clients. A quick Google search or even Yelp reviews can often turn up helpful information about a business and its reputation. Additionally, if you’re well-connected, people you know may have valuable information about the individual or entity with whom you propose to work. Put your thorough networking to use by asking others within your industry about your prospect’s reputation or any previous experience they may have had with them.

Once you’ve gathered the information you need, it’s up to you to decide what to do with it. The important thing to remember is to have a candid conversation with the prospective principal and clarify any red flags you have uncovered early in the process before moving ahead with the new line. Be open with a potential principal, and ask questions about any misgivings you might have. There may be a perfectly understandable explanation for questionable information on an entity’s credit report or any legal action in which it is currently involved. However, if speaking with your potential client does nothing to assuage your doubts, you may want to reconsider your decision to work together.

Use a Well-Written Contract With Good Terms

Regardless of how clearly an entity’s obligation to pay your commission is outlined in your contract, taking legal action to enforce your agreement may render collection of your payment expensive at best and counterproductive at worst. The last thing you want is to lose money collecting your commission by bringing forward a lawsuit that costs you more than you are owed. The best way to cut legal fees and ensure that your contract is enforceable is to write your agreement with the worst-case scenario in mind.

First, be sure to consider an attorney’s fee provision. This will require the successful party to pay its opponent’s legal fees in case a lawsuit should arise over a breach of contract. This could be crucial if the state in which you file a lawsuit does not have statutes that protect your commission, including attorney’s fees, so you don’t find yourself in a situation where you eventually collect commission but pay more than the disputed commission in attorney’s fees. And an attorney’s fee clause also gives the tardy principal an incentive to pay overdue commissions to avoid paying legal fees for both parties.

Avoid Problems

However, when including an attorney’s fee provision, be sure to keep three common pitfalls in mind.

• First, if your complaint is settled before a decision is made by the court, or if it otherwise does not come to full fruition as a lawsuit, a court will sometimes decide that attorney’s fees are not recoverable. You can prevent this by specifying in your contract that attorney’s fees are owed by the party in breach of contract even if the matter is settled outside of court.
• Second, a defendant may dispute its obligation to pay your attorney’s fees if they are deemed unreasonably high; keep this in mind when negotiating costs with your attorney, and look to receive a reasonable deal even if you do not expect to be the one ultimately footing the bill.
• Finally, an attorney’s fee provision can backfire if you are not the prevailing party, meaning that you will foot the bill for both your attorney’s fees and your opponent’s, should the court decide in their favor. Therefore, an attorney’s fee provision should not be viewed as license to take legal action lightly or to carelessly rush into litigation.

In addition to an attorney’s fee provision, you can further discourage withholding of commissions by including interest on late payments or penalties for non-payment in your contract. Such provisions may also provide you leverage in extracting payment from your client before the matter ever reaches court. For example, many companies find it effective to send debtors a “last chance” opportunity to pay their fees before penalties come into effect. Although an unreasonably large penalty, such as a 50 percent interest rate or a $10,000 late fee on a $1,000 payment, may be struck down by the court, penalties within reason provide the owing party with extra motivation to pay on time and your company with a sum significant enough that it is worth the trouble to collect.

Practice Clear, Diligent Communication

When making and carrying out your agreement, be sure that all parties are thoroughly informed. Discuss the terms of your contract, and be sure that each side understands its obligations. If either of you perceives any ambiguity to your arrangement, the time to address it is before a contract is signed and your agreement is finalized. In addition to increasing the likelihood that each party understands and upholds its obligations, clear communication serves the added purpose of strengthening your case in the event that the other party does not uphold its side of the bargain; if expectations are clear, the offending party has no justification for ignoring them.

To ensure both clarity and a paper trail that can be referred to in the event of confusion, dispute, or legal conflict, be sure to keep a record of your communication with sales clients. One of the easiest ways to do this is to use e-mail, therefore preserving your conversations in print and giving each of you a written record to refer back to. Even if you prefer more personal communication, through phone calls or in person, you might both benefit from a recap e-mail recounting any important information.

In conclusion, although withheld commissions can be a common dilemma in the sales industry, precautionary measures can be taken to increase the chances that clients will understand and abide by your agreements, ensuring that you receive your hard-earned money. By carefully vetting prospective clients, writing a clear and advantageous contract, and diligently practicing and recording good communication, you stand a better chance of getting paid — without sacrificing your profits to expensive litigation fees.