The scenario

The CEO of a large sales rep group contacted my firm in a panic to inform me that his Agency had its representation terminated by a Principal for whom they had built their territory from $500,000 per year to nearly $10 million per year, in just 3 years; earning commissions of close to $1 million annually.

This Agency basically put this manufacturer on the map in their assigned territory. So this gentleman could not believe they were fired, and was apoplectic because they did not have a written contract, which he thought prevented him from bringing a valid lawsuit for damages.

Under such a lucrative relationship, it’s amazing that there was no formal (written) agreement, only an oral agreement confirmed in an email which did not address many important provisions that would be found in a normal Sales Rep Agreement (SRA).

What I informed this gentleman next shocked him:

His Agency was better off with an oral agreement under the circumstances.

Oral versus written contracts

What is better an oral or written SRA? Generally speaking, sales reps and their Principals should have written SRAs that address key terms such as duration of the relationship, termination notice, how commissions are earned, when commissions are payable, the right to further commissions upon termination, how potential breaches of contract can be resolved, choice of law and venue provisions in case of litigation.

However, roughly 75% of the SRAs presented by sales reps who contact my firm are ridiculously one-sided in favor of the Principal. In which case, it would have been better to have no written agreement at all.

Procuring cause claims

What is procuring cause?

Procuring cause is a legal theory that allows a sales rep to make a claim for commissions on post-termination sales, if they were responsible for procuring those sales before they were fired. It only applies when there is an oral contract, or when a written contract doesn’t address (or more importantly cut off) the right to post-termination commissions.

When it applies, it becomes a sledgehammer for a sales rep to settle their legal claims when wrongfully terminated, since the length of time the Principal might have to pay commissions is open ended. When pull through sales occur for years after initial solicitation, that can leave a large exposure to liability for the Principal, and long terms commissions available for taking by the sales rep.

Conclusion from

Written contracts between sales reps and their Principals are generally preferred, IF well drafted. However, written contracts that are one-sided in favor of the manufacturer should be renegotiated, or the sales rep is better off going with an oral agreement so they could always seek procuring-cause damages if they are wrongfully fired, such as this Agency.