The Fundamentals of a Sales Representative Agreement
Sales representative contract agreement is an enforceable contract between a product supplier (the principal) and a sales representative. The former hires the latter to sell or introduce the supplier’s products. The agreement outlines the specific role of each party, their responsibilities, and other relevant points that determine how the contract will be enforced.
A sales representative agreement is necessary for all manufacturers and distributors. As a written contract , the agreement is useful during disputes with the sales agent. Some courts require proof of a sales representative contract in order to prove an agency relationship existed between two parties.
The core components of a sales representative contract agreement are similar to any other business contract. They are: An express agreement can be two-fold for a sales representative contract agreement. The principal could pay a commission to the sales agent to sell their products. The compensation, however, could also be based on sales results.
One way for the sales representative to reduce his or her risks is to insert a clause that prevents the principal from selling the same products the sales representative already sold. This clause is restrictive but it establishes that the sales agent is the sole representative of a particular product.
For more information on crafting an effective sales representative contract agreement, contact an experienced lawyer.
Ensuring Proper Clauses are in Place
Key Clauses to Include in a Sales Representative Contract Agreement
Everyone wants an agreement that sets forth everything that they believe between them and any independent sales representatives. But since they are independent, there is certainly the ability of the parties not to include certain clauses or completely address certain issues. You can still have a complete agreement, but there are some clauses that you really must have and should have in every sales representative agreement. First, as discussed below, the compensation must be clear. The compensation can be quarterly; annually; trigger based on certain sales happening; on levels of sales; a commission based on a sliding scale or flat percentage. Another important point to figure out is always the territory. Many times there can be confusion as to where the sales representative can sell the product. It is important that the territory be defined so that the rights of each party are clear and that there is no overlap between sales representatives. Of course the role of the independent sales representatives in your company should be clearly spelled out and that you also require the sales representative to be clear and specific as to their role and duties so that it is absolutely clear what is expected from the sales representative. One clause that I have seen drape a lot of disputes is the confidentiality clause. One way or another, sales representatives will come across confidential information about certain products, price points, customers, research and development or other information. Another key clause is general execution of the contract so that all parties to the agreement understand that they all hold up their end of the bargain. In addition to binding the parties to the agreement, the clause may also provide that failure to comply with the agreement will result in penalties or be actionable whether or not a patent has been issued. Many sales representatives work directly with the clients and have access to many people within that client’s company. Any good sales representative will even ask if you are dealing with the legal department and have them sign something to indicate whether it is or not. And of course, jurisdiction and place of venue is important. This clause will indicate where any suit will be brought in case any disputes arise regarding the sales representative contract or agreement.
Pitfalls to Watch Out For
One of the most common mistakes is to not put the agreement in writing at all. Verbal agreements are enforceable; however, having the terms in writing can help avoid disputes down the road.
Another mistake is to apply a generic form. Be sure you have something in writing that specifically addresses your particular business model and relationship with this particular sales representative. Generic forms often do not address specific issues to your industry, so a poorly drafted contract could lead to tasks and issues going unaddressed.
Some common problems include:
- Not excluding sub-agents or sub-sales representatives from compensation.
- Not addressing warranty, return, discount, or rebate issues.
- Referring to an exhibit that is not attached or properly referenced.
- One party using a hand-written amendment or change when the other does not agree.
- Not having the appropriate parties sign.
- Changing the parties position. The buyer/seller should be the same person, and the seller/agent should be the same person.
- If this is an international sales representative agreement, the laws of each country should be followed, and the contract should comply with any laws.
Even if you don’t have a lot of experience with drafting contracts, take the time to make sure it’s clear. If you cannot get it done, hire someone to do it properly.
Refining an Existing Template
It’s a good idea to customize the representative agreement so it’s suitable for your industry, your types of customers and their specific needs. You do not want to rely on boilerplate agreements that haven’t been proven to be effective. It’s also important to address your unique company policies or state law requirements if those apply to you.
Here are a few considerations for customizing:
• Make sure the sales rep agreement you use is appropriate for your particular industry and customer base. For instance, selling insurance is different from selling clothing , so a clothing sales rep agreement should differ from an insurance sales rep agreement.
• Adjust the contract terms to suit your business. For example, you can adjust the commission rates to make the product or service more attractive to your potential sales reps.
• Make sure the agreement complies with your unique company policies. For example, what is the sales rep title? Is he or she an employee or independent contractor?
• You need to comply with relevant state laws. Depending on how the business is organized, whether an employee or independent contractor, and other circumstances, there may be other requirements.
Legal Aspects and Must-Knows
As with many matters relating to employment, there are numerous state and federal laws that need to be taken into account when drafting sales representative contracts. For example, wage and hour, tax, and workers’ compensation laws may all apply to a particular sales representative and those laws may change depending on the class of the sales representative (independent contractor versus employee). The language of the contract must account for any of these legal requirements. This is especially true in the context of the newly enacted California bill addressing who qualifies as an "employee" under California law. If the bill is signed into law, it will shape the relationship between many employers and their sales representatives.
Further, because sales representative contracts are contracts, they are subject to contract law. Generally, courts will enforce contracts that are drafted to maximize the rights of the drafter. Therefore, generally speaking, employers should seek to adopt contracts that, in most circumstances, will favor their rights. However, there are also many public policy reasons that could prevent an employer from enforcing certain terms. For example, depending on the nature of the employment, employers need to be careful not to draft non-compete clauses that are overly broad or would otherwise effectively bind an individual without giving them any legitimate business interest. Furthermore, if the individual is an employee, the administrative procedures and tests employed to determine whether the individual’s job was terminated for the employer’s convenience (and thereby entitling them to a commission) must be followed. Employers should make sure that the individual can recover commissions where required by law.
Finalizing and Enforcement
After drafting and reviewing the contract, the next step is to come up with a final negotiated version for signature. This will hopefully not be too difficult. However, some of the more common issues during this "final stage" include:
- Changing the term: The Company may request a 2 or 3 year term to start, while the potential Sales Representative may prefer to limit the term to 1 year (to "test the waters" before committing to the lengthy term).
- Termination: Similarly, the Company may wish to limit the Company’s ability to terminate "for convenience", while the potential Sales Representative may prefer the ability to simply terminate upon 30 days’ notice .
- Compensation: There may be negotiation over whether to pay an up front cash advance against future commissions.
Now that a final version has been agreed upon and signed by the parties, you should make sure to:
While ideally you would have worked out all issues and concerns during negotiations before getting to the signature stage, frequently there are last minute changes that are sometimes necessary for one party to secure the deal. In the end, you will want to minimize making those changes if at all possible.
