Contracts: What Are the Basic Components of an Agent Agreement? December 2009

Carefully negotiated agreements are key to minimizing risk and uncertainty in any business venture, and especially in agent-service provider relationships. Agents often are all too eager to hastily enter into a contract without carefully considering the potential pitfalls that may lie ahead. Executing an agent agreement and “closing the deal” may seem like an exciting start to a business relationship, but agents need to understand that in order to make the relationship prosperous and lasting, careful analysis and attention to detail must be invested in the courtship process. In short, all aspects of an agent agreement need to be thoroughly reviewed and thoughtfully negotiated with an eye toward the future.

Signing a contract is the first step in establishing a framework that will determine how all aspects of the relationship play out. Issues and concerns about payments, penalties, commissions, disputes, renewals and terminations — among others — undoubtedly will arise, and a carefully negotiated agent agreement will prove to be an authoritative guide down the road. More importantly, a well-drafted agreement will define the rights and responsibilities of the parties involved, so as to minimize the risks that come from uncertainty and misunderstandings. Major service providers understand these issues, rights and responsibilities intimately, and will often employ teams of specialized attorneys to customize template agent agreements to their benefit. Agents must invest adequate time and care into the process and, at a minimum, have a thorough understanding of how key contract provisions will affect their businesses.

Basics

Clarity. There probably are very few people in this world who can honestly say that they enjoy reading through contracts. Complex contractual terms can make reading through an agreement, not to mention understanding it, a terrible chore. Confusing and complex contract provisions often are deliberately inserted (by service providers) to heavily favor the party that drafted the agreement. Thus, an important first step in reviewing an agent agreement is to ensure readability and understandability. Clear, well-drafted provisions allow an agent to identify the rights and responsibilities that are part of the agreement, which can prevent costly breaches of the contract terms as well help ensure enforcement of the agreement should violations occur.

Definitions. A strange side effect of drafting agreements seems to be the inclusion of words and phrases that have somehow taken on meanings beyond that which is generally agreed upon. Frequently, these words and phrases will be used without being adequately defined. To avoid misunderstandings, any terms that do not adopt the typical dictionary definition, especially industry-specific words or acronyms, should be clearly identified and defined.

Exhibits. Another critical step to negotiating a sound agreement is to ensure that all of the integral parts have been carefully considered. Agent agreements often reference exhibits or external documents (e.g., order forms, commission formulae, sales and performance guidelines, other agreements, etc.) that are incorporated into and deemed to be a binding part of the agreement. These documents may, and often will, contain important terms that can affect an agent’s rights and/or responsibilities under the agreement. Therefore, it is crucial that agents recognize that no less attention should be devoted to these addenda and schedules than to the rest of the agreement. Agents should make it a point to, at the very least, request and thoroughly review all documents that are referenced in an agreement, including Web site-linked materials that may involve critical conditions. A comprehensive review of an agreement should not be commenced until all of the pieces have been obtained since even documents as simple as an order form may contain terms and conditions that an agent may find objectionable or would need to otherwise consider more carefully.

Payment

One of the most important and obvious concerns for agents is remuneration. Various provisions in an agent agreement will affect when and how much an agent is paid.

Volume. Typically, agent agreements require the agent to sell a minimum volume of service per month in exchange for a flat-rate commission on services sold. On the other hand, if a minimum commitment is not met, template agreements can sometimes impose a monetary penalty on the agent or, even worse, allow for unilateral termination of the agreement by the service provider. Prior to binding itself to an agreement, an agent should conduct a thorough review of its business plan and realistically evaluate how much volume it reasonably would be able to sell in any given month.

Commission. It also is critical that an agreement clearly and plainly spell out the commission structure and its functioning details. Among other things, the agreement should clearly identify how and when commission payments are made; the applicable commission rate or percentage; the basis upon which commissions are calculated (e.g., billed amounts versus collected revenues); and liability for bad debt (i.e., uncollectibles).

Evergreen Payments. An important goal for every agent is an “evergreen” clause, which provides for continuing, ongoing commissions after an agreement terminates. Evergreen provisions often are difficult to obtain and can be structured in a variety of ways; some are open-ended and virtually indefinite while others are more limited in duration. Nonetheless, the case is strong for an agent seeking some sort of evergreen payment since the agent originated the customer.

Audit Rights. Since the calculation of commission is often based on records solely in the possession of the service providers, agents should seek the inclusion of audit rights in the agent agreement. This will help to ensure that the agent has some means to determine if commission payments are being properly calculated and paid by the service provider.

Modification. Circumstances allowing modification of commission rates and key contract terms (especially payment terms) also should be clearly addressed. Template agreements often will allow the service providers to have sole discretion in modifying the commissions paid to agents. A sudden change in rates or contract terms (often with minimal notice) may have a serious impact on an agent’s business model. In order to alleviate this problem, agent agreements should a) restrict commission payment adjustments and modification of terms; b) require the service provider to give adequate prior written notice of any rate modifications; and c) require that any modifications to key contract terms be mutually agreed upon in writing.

Termination

As mentioned earlier, an agent agreement not only signifies the beginning of a business relationship, but will also govern the way that the contractual arrangement is brought to a close. Contract terminations always are risky as they not only end the business relationship, but can entail substantial penalties and costs, and even litigation if not properly approached. It seems somewhat melancholic that one of the preliminary considerations when an agent begins negotiating a contract involves planning for the end. However, a careful planner always will be prepared to implement a graceful exit strategy, if the circumstances warrant it, and will understand what rights it has in case the other party terminates the agreement.

Duration. Determining the length of a contract term requires a careful balancing of a company’s needs. Shorter-term agreements may allow for greater flexibility if an arrangement becomes undesirable. On the other hand, longer-term agreements can offer relative stability and may potentially include more profitable arrangements to compensate for the added commitment. Regardless, agents should be well aware of when a contract is set to expire, as well as renewal or non-renewal deadlines. Many agreements will provide for automatic renewal terms at the end of a term unless the requisite amount of prior notice is given to terminate the contract.

Penalties. Most agent agreements impose a potentially heavy financial penalty if the agreement is terminated by the agent prior to the end of the contract term. Often, agents fail to understand the financial burden that might arise from such provisions. As a result, the agent may discover too late (i.e., after the deal is signed) that it is financially chained to an unprofitable deal because terminating the contract early would prove even more costly. (This underscores one of the possible benefits of having a shorter term contract.)

Breach. Often, template agent agreements will allow the service provider to terminate the agreement at will if the agent is in violation, however minor, for any provision in the contract. Agents should insist on being provided with “notice and opportunity to cure” any alleged breach before a service provider can either penalize the agent and/or terminate the agreement.

Assignments. Agents should examine carefully contract provisions governing assignment or transfer of the agreement, and sale of the company or its assets. Service providers often place limitations on the ability to assign or transfer. These limitations range from requiring prior written notice to requiring the service provider’s written consent. Some service provider template agreements also could completely forbid the assignment or transfer of the rights under the agent agreement. If an agent ever plans to sell its company or assets, it should pay close attention to these types of limitations.

Escape Hatch. It is prudent practice to start thinking of contingencies even before entering an agreement, especially if it’s a new business relationship. A well-negotiated agreement will provide for the flexibility of an “escape hatch” — the ability to terminate the contract for convenience and without penalties. Entering into an agreement with no strings attached is a rare occurrence, so “escape hatches” sometimes will need to be conditioned on a breach of contract or other action of the service provider that materially alters the conditions of the agreement or the service provider’s ability to perform (e.g., bankruptcy, discontinuance of services, modification of rates, etc.).

Counsel

The issues identified above are merely a sampling of the key considerations involved with the typical agent agreement. Numerous other standard issues will exist in any agent agreement, and certainly there will exist a multitude of other unique issues depending on the particular agreement and service provider involved. Given the importance of these agreements to an agent’s business model, prudence would dictate that adequate time and resources be allocated to ensuring that the agreements are sound. Working with experienced communications counsel to draft and negotiate these agreements can help to achieve these goals.

Cheng-yi Liu, Esq. and Thomas Crowe, Esq. are Washington, D.C.-based attorneys specializing in communications legal/regulatory matters. They can be reached at +1 202 263 3640, via e-mail at [email protected] or through the firm’s Web site. This article is provided for informational purposes only, and is intended neither to provide nor to substitute for legal advice.

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