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MANA continuously endeavors to provide educational aids for its members, agents and principals alike. Its most constant reminder is that you should consult your attorney before embarking on your contractual relationships. This is because the law is ever changing and as attorneys we attempt to not only stay abreast of legal developments but when possible to anticipate and avoid problems for our clients. We prefer to practice “preventive” rather than “remedial” law. Despite the 45+ years that I have practiced in the area of law involving sales distribution, I still see things that are overlooked not only by business persons but by lawyers as well or that are minimized by them to a detrimental degree. All aspects of a contract are important. None is trivial. None is benign. In this article I will attempt to address a few of those possible pitfalls.
Name of Parties
A Sole Proprietorship is a business owned by an individual without the benefit of any legal structure that would make it autonomous from the owner. The owner is always personally responsible for the business’ actions. If operated under a name other than the name of the owner himself, that name is known as an Assumed Name and usually required to be registered with a public registrar in order to apprise the public of its ownership.
A partnership is a business owned by two or more persons without the benefit of any legal structure that would make it autonomous from its co-owners. The owners are always individually and jointly responsible for the business’ obligations. Further, one partner may obligate all the partners. If operated under a different name other than the full names of all the partners, that name is known as an Assumed Name subject to similar registration as a proprietorship.
Corporations and Limited Liability Companies, on the other hand, are entities created by permission from the state of its residence. They are responsible for their own obligations. Their owners, (stockholders and members, respectively) have no personal liability for the businesses’ actions unless corporate formalities are not followed. They can be required to use appendages such as “Inc.”, “Corp.”, “Company”, “Ltd.”, and the like, in order for the public to be apprised of their corporate status. A corporation or an LLC may also operate under an assumed name and must register it.
It is therefore important to ascertain the correct legally binding entities to a contract. Is “ABC Industries, Metal Division” a division of a corporation or a separate corporation? Is it an Assumed Name?
Another example of a common oversight is that of a representative who begins working as “John Doe, Sales Rep” (as a Sole Proprietorship); then Jack Roe joins and the business became Doe and Roe Metal Sales (a partnership); then it is incorporated as Doe and Roe Sales Reps, Inc. for tax purposes, but because of the goodwill developed, the owners continue using the name “Doe and Roe Metal Sales.” This name should now be registered as an Assumed Name of the corporation, but too often it is not. Consequently, the risk of responsibility continues as a partnership. Further, if the business was incorporated as Doe and Roe Metal Sales, Inc., but failed to use the appendage “Inc.” in its contracts the owners could still be at risk of being seen as a partnership
Successors and Assigns
Almost every contract has a clause that says that “this agreement is binding upon the parties, their successors and assigns.” Is it? In many, if not most states, no one can bind a successor to a contracting party unless the successor assumes the contract, in the case where the successor only buys the assets of the original contracting company. On the other hand, if the new owner simply bought the shares of the original contracting company, the contracting company continues unchanged.
Anticipate this possible event in a manner beyond the scope of the boiler-plate verbiage. Perhaps require that the principal obtain the purchaser’s signature to an assumption agreement. Of course, the only remedy for failing to do so would be to terminate for breach. Otherwise if you continue working thereafter, you probably will have no contract other than a verbal understanding.
While the “Successor and Assigns” language is typical, then so is the clause that says that “this Agreement may not be assigned.” The conflict between the two should be obvious; therefore, should be instantly addressed before you sign.
Choice of Law and Venue
Lawyers and their clients alike in multinational contracts would prefer to resolve any contract disputes using their local laws and in their local courts. The natural result, unfortunately, is that in too many instances if one party is not willing to accept the other party’s law and venue, the parties will reach an impasse and this issue becomes a “deal-killer.” Before rejecting the opposing party’s position, one should become familiar with the law of the other’s country through the research and advice of local counsel. It might just be more favorable than your own, or at least benign enough that will allow the deal to happen. Europe, for example, has adopted laws that directly apply to the traditional activity of the Sales Agent (as a “Rep” is called there). The European Union (“EU”) has adopted Directive 86/653/EEC (“Directive”) with the purpose of harmonizing the corresponding national laws of the independent EU States that are applicable to principals and their commercial agents. This is necessary since each state, retains the right to enact specific legislation concerning these relations, inclusive of setting the amount of compensation.
A most important feature of the European Agent is that it has the authority to negotiate a sale on behalf of and thereby bind the principal. Also, while in the United States the sales representative and principal are free to contract as to when the commission is payable, which typically is due after the customer pays the principal, in Europe, the commission is due when the sales transaction has or should have been executed by the customer. Further, some EU member states provide that an agency contract shall be in writing. A contract may be for a stated term, and if it continues past its expiration, it automatically continues as an agreement indefinite of expiration date terminable upon notice, which notice may not be shorter than one month for every expired contract year, up to six months in some cases.
Moreover, upon termination an agent is entitled to be “indemnified” or to be “compensated” by the principal, depending upon the manner prescribed by the legislation of each member state. Indemnity refers to payment in respect to the goodwill the agent accumulated during the contract term to which the agent would be entitled if and to the extent it has brought new customers to the principal or significantly increased the principal’s business with the customers. Under the compensation rules, the agent is entitled to payment for the damage it suffers as result of the termination of the contract, in particular if the termination deprives the agent of the commissions which would have accrued to it while continuing to provide the principal with the contractual benefit.
Whether a U.S. representative, who signs a rep agreement with a European principal to perform the rep’s usual services in the United States, has the same or similar rights as a European agent if suit is filed in the European country of the principal, may vary from country to country. Some countries allow recovery by a U.S. agent against one of its own principals even when the work is performed in the United States. England does not allow this. Denmark will allow the U.S. agent to recover unless contractually he has waived the application of the compensation section which normally may not be waived by a Danish agent. So, does this mean that the U.S. agent should set up a Danish entity to enter into the contract?
Review your deal carefully and decide the priority of each term. Negotiate with as much knowledge possible; and above all be conscious on a daily basis of your principal’s and your actions to ensure that the letter of the agreement is being followed.
