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Many independent sales representatives have shared this experience: after negotiating an agreement with a principal that gives the sales representative a right to commissions on sales to certain customers or within a certain geographical territory, the principal announces to the rep that he is converting a customer into a house account or taking away a territory that is clearly identified in the contract. Although this situation may be common, it can present a difficult challenge to the rep. What should he do?

The sales representative has a number of options, including:

• He can continue representing the principal on the remaining business and say or do nothing;
• He can continue representing the principal on the remaining business after complaining about or objecting to this decision, either orally or in writing;
• He can attempt to negotiate some accommodation with the principal, such as agreeing to the loss of customer or territory in exchange for something else: the possibility of regaining the customer or territory, the addition of another customer or territory, or an increased commission rate or performance bonus on the remaining business;
• He can terminate or threaten to terminate the contract and then either move on or attempt to negotiate an acceptable resolution; or
• He can sue or threaten to sue the principal and either continue to represent the principal or terminate the principal during the pendency of the lawsuit.

The decision about which option works best for the rep depends upon many business considerations that are too particular to permit any bright line rule for how the rep should proceed. In addition, the decision becomes even more complicated if the principal’s action is not an isolated example, but instead has happened on a number of occasions or even worse indicates a pattern of conduct. Of course, in addition to these business considerations, the decision will also be influenced by legal considerations, such as what the contract says and what the law governing the contract and the dealings of the parties provides.

Address the Problem

Notwithstanding the difficulties inherent in generalizing what a rep should do under these circumstances, I usually suggest to a client confronted with this type of situation that he should address it in some way when it occurs — and that postponing a response presents significant risk to the rep to ever remedy the breach, either by getting the principal to properly follow the contract while it is in effect or to pay damages for his breach of it.

The law not only requires a rep to say what he means in the contract to create contract rights, but it requires him to say what he means and mean what he says in his dealings with the principal after that contract has been placed in some actual or digital file, especially when the principal breaches the contract, to preserve those contract rights.

Incredibly, even though a contract may be perfectly clear on the point at issue and a principal may be unquestionably wrong in what he did, the rep may lose (or substantially decrease his chances of prevailing on) his claim for breach of contract if he does not effectively address the principal’s breach when they occur.

Waiver by Estoppel

One way that this can occur under the law is through a defense that is known under a typically convoluted legal name — Waiver by Estoppel.

Generally, a waiver occurs when a person voluntarily and intentionally gives up a known right, with full knowledge of the facts, in exchange for something else. The party not breaching the contract decides that he’ll overlook the breach and not sue the breaching party for damages in exchange for something he values more, e.g., the breaching party maintains the contract that he can terminate at will, amends it to provide some consideration to the non-breaching party that is not contained in the original contract, or makes a payment to the non-breaching party outside the terms of the contract.

In short, generally waiver involves a deal between the two parties, whether it is an actual deal or one implied from the facts or circumstances.

However, the Waiver by Estoppel doctrine has nothing to do with making an informed decision about waiving a right in exchange for something else perceived to be more valuable. This doctrine can be applied where:

• The rep first acts inconsistently with the intent to claim a contract right at the time the wrongful conduct occurred (the rep continues to perform under the contract and says nothing about the breach or just complains about it).
• This conduct operates in such a way as to mislead the principal to his prejudice (if the principal had known that the rep considered his conversion of a customer to a house account a breach of contract, the principal would have terminated the contract before paying the inside salesman his compensation and commissions).
• At some later date (such as after a termination of the contract) the rep asserts the breach of contract claim that he previously had not asserted, or even indicated that he had.

Where Waiver by Estoppel is found, the rep’s claim for breach of contract is prohibited, even though there may be absolutely no dispute that the principal breached the contract by what he had done previously.

This is one reason why saying what you mean in a contract can only be considered a preliminary step. After the contract is signed, a rep must continue to say what he means and to mean what he has said to protect his contract rights. While it may be difficult to speak up to the principal about the breach under most circumstances, a rep should generally address a principal’s improper conduct with the principal. If the rep does not make clear to the principal that the rep considers the conduct to be improper; that he is asserting or reserving his rights; and that he is continuing to represent the principal under the contract without giving away any of his rights, the rep may risk losing his breach of contract claim at a later date, just like he lost the customer or territory sometime before. Of course, what the rep should say and do to protect his rights when a breach of contract occurs depends upon the specific facts and circumstances of the situation, as well as applicable law, and is best done with advice from an attorney.