This article is written by Gloria Gomes pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
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As quoted by Harvey Mackey, “you don’t get what you deserve; you get what you negotiate.” Negotiation occurs in all businesses, non-profit organizations, and government branches, legal proceedings, among nations, and on a daily basis on a personal level. We negotiate with friends, family, landlords, car sellers, and employers, among others. Negotiation is the process where two or more parties communicate in order to reach an agreement. Negotiation is also the key to business success. No business can survive without profitable contracts.
The term negotiation means the interaction of two or more parties having divergences and interdependencies, voluntarily seeking a mutually agreeable solution that allows them to build, sustain or establish a relationship. Negotiations are considered as an activity whereby parties with diverging interests search for agreement despite the contrasting view, which further involves some steps in the form of strategy, which mean ‘the overall plan to accomplish the ultimate goal in a negotiation’, and tactics, which mean ‘the short-term, malleable moves designed to pursue broad strategies.’
In a conventional contract negotiation process, each party compromises on some issues in order to get what it really is. Before knowing how the commission agreements are negotiated one should understand what the commission agreements are. Let us understand the meaning of commission agreements further below in this article.
Meaning of commission agreement
There are different ways people get their payments. Some get the payments on a monthly basis, some get paid hourly, and some on a commission basis. When payments are to be made on a commission basis, commission agreements are usually drafted. The company can use such an agreement when they wish to hire people on a commission basis. In return for their services, the agent will be paid on a commission basis. Typically, these agreements are drafted for specific agents/contractors. The agreement must essentially cover all the details of the commission-based payment.
One can make a commission agreement for:
- Agent’s commission,
- Business investments,
- Corporate duties,
- Financial support,
- Independent contractors,
- Non-disclosure commission,
- Real estate partnerships,
- Sales agencies/ representatives,
- Stock purchases, and
- Trading commissions.
Structure of the agreement
The structure of the commission agreement will depend on the preferences and the nature of each industry. A real estate commission agreement will be drafted differently from a sales commission agreement in terms of structure. This implies that one has to choose the structure of the agreement very carefully. There are no set rules for structuring these documents. The goal is to discover what will motivate the agent while also benefiting the company.
While drafting such an agreement one should know who it is for, this allows for proper use of language as well as the inclusion of all necessary details. For instance, appointing agents who are paid on a commission basis may be part of the business. In such situations, the company must draft such an agreement meticulously stating all the terms of the agreement. Generally, the agent will receive a commission each time he makes a transaction. For example, if a salesperson is hired to sell the products, the commission will be based on how many products were sold.
The company should state all the payment terms in the commission agreement so that the agent knows what to expect from their work ahead of time. Usually, such an agreement contains clauses as follows:
Definitions and interpretations clause
The definitions and interpretations clause is categorised as one of the boilerplate clauses of an agreement. It allows the parties to define any terms used throughout the agreement in one place. It is also where the parties may specify any general principles that will apply to the interpretation of the agreement.
The obligation of both parties
The obligation clause specifies the obligation of each party towards each other. The obligation would include points like, who will be responsible for obtaining all the licences, permits, and approvals. Both the parties shall comply with all applicable laws and regulations. Whether or not the agent can take part in negotiations with the third party. Both the parties shall provide the necessary information to each other. The agent shall be notified of any changes in the control (changes in shareholding, acquisition, etc).
The payment clause includes the provisions as to when and how (mode of payment) the payments will be done. Whether the payments will be exclusive or inclusive of taxes. How the outstanding payments will be made. The payment clause must also include a separate schedule for such commission based agreements.
Term and termination
The term clause defines the period during which the agreement will be effective, subject to earlier termination in accordance with its term. The termination clause defines under what circumstances (whether a termination for convenience or termination for cause) the agreement can be terminated as well as defines the provisions for damages as a result of such termination.
Non-circumvention and confidentiality
This clause is inserted in transactions when there is a high risk of unfair or unethical practices. One cannot describe all such practices but can mention that the agreement or benefits to the party will not be circumvented through indirect means and that the parties shall act in good faith. In addition, such a clause ensures that the intellectual property that a business discloses to another party during negotiations will not be disclosed to a third party. By signing a non-circumvention agreement, the restricted parties agree to refrain from conspiring with each other to circumvent or take advantage of the protected party in their dealings.
Post termination or non-solicitation
Such a clause will restrict the company or agent from soliciting any (a) employees, (b) customers, or (c) business opportunities from another company or organization for a period of time. The clause must specify that after the termination of the agreement the agent/contractor will cease to represent the company.
Notices clause set out the provisions to notify the other party of the matters which must be brought to their attention under the agreement. Such a clause shall also mention the designated methods/mode of the service of such notice, and the time period within which such notices must be served. What are the consequences of non-adherence to the notice clause. It must also specify the address, the name of the person to whom it must be sent, the language, and also when the notice will be considered as received.
The forum selection clause or choice of court clause is a clause which states where the parties will resolve their future disputes (specified court). The governing law will indicate which state’s law will be used to decide the dispute.
Alternate dispute resolution procedure
Such a clause sets out the process by which the parties intend to resolve the disputes arising out of the agreement (can be a contractual dispute or a non-contractual dispute. There are a number of methods for dispute resolution such as arbitration, mediation. The parties may choose one of the methods depending on the factors such as which governing laws are applicable, who should apply such governing law and make a binding decision on any dispute, what steps, if any, must be taken by the parties to resolve the dispute before referring it for a binding decision.
Above mentioned clauses are the boilerplate clauses of a commission agreement. One can add more clauses according to the need of the transaction.
Negotiating commission agreements
Key components that need to be considered as a part of every commission deal negotiations so that more comprehensive and protective arrangements can be negotiated and formalised.
How long will the agreement be effective and will it be for a fixed term for instance 12 months or whether there will be any renewal and extension rights i.e. whether it will be subjected to early termination rights?
If the agreement is for a fixed term, who will have the right to determine the renewal or extension, or expiry of the agreement?
Note: It is important to consider how much control the agent has over any contract renewal, extension, or expiration, as this may inadvertently give rise to rights to renegotiate contract terms that you do not plan to offer.
What circumstances/events would lead to automatic termination i.e., bankruptcy, breach of the agreement, or any other cause such as fraud or other bad conduct?
Shall rights to termination for convenience (for a reason) be granted on reasonable notice i.e 30 days and, if so, whether to both parties or just to the company?
Note: If there is a relationship of “employment”, applicable employment laws must be considered in terms of serving proper notice of termination to agents.
Determining the scope of “earned commission”
How will the commission be calculated i.e. in percentage (%) of revenues or based on margin contribution or some performance metrics?
Will there be any change in the rate of commission in any event (i.e., lower rate on lower margin, lower rate when additional personnel is needed to support the services process?
Will the commission be calculated on gross excluding all taxes and net of all discounts or rebates or other customer incentives?
What will qualify as services which means a list of the items that will be considered as services?
What services will not qualify as services of an agent?
Will the commissions only be paid for certain products/services offered by the company or it will include the other products/services as well?
What will be the consequences of non-performance or delay in the services e.g. if the services cannot be completed within the set time period of 12 months?
What will be the maturity date for paying such commission i.e.within 30 days of collection by the company?
Will there be any formal invoicing process between the company and the agent?
How will the earned commission be dealt with the following termination? What will happen if the services were closed before or after termination?
Note: Negotiating the payment of commissions post-termination depends on the reason for which termination was done. For instance, if the agreement is terminated by the agent, it may be fair to exclude commissions on the grounds that the company has to bear the consequences of the early termination by the agent, on the contrary, if the agreement is terminated by the company without any cause the commission must be paid after termination on grounds that the agent was deprived of the opportunity to close same also a valid termination notice period must be given to the agent a fair opportunity to close all transactions before the effective termination date.
Will the agent be entitled to any reimbursement of the out-of-pocket expenses, in addition to the commission payable?
Intellectual property ownership
Will the agent hold any right on the new IP created in connection with the work product developed by the agent for the company during the term of the agreement?
Will the agent be restricted from sharing confidential information with the third party?
What extent of restrictions will be imposed on the agent against competing with the company or soliciting the staff or customers following termination in order to protect the reasonable business interests following termination?
Legal nature of the relationship
What auxiliary provisions are needed to ensure the legal relationship? This must be discussed with the tax advisors.
Authority to negotiate with customers
Will the agent have authority to sign any deal on behalf of the company or will the agent have the power over the customer contracts?
Note: The company must reserve the rights to formalize new business generated by the agent to avoid entering into any unprofitable new business.
There are a number of unique deal points to consider while negotiating commission-based deals with the personnel. This checklist hopefully will be a valuable tool in negotiating better “commission-based” arrangements with the agent/contractor.
While hiring a new agent who will be paid on commission, the commission agreement would be beneficial to clarify all the terms of such appointment. The commission agreement should be negotiated in such a way that it shall contain all the expectations and rights of both the parties. A well negotiated commission agreement can lay out the obligations and expectations of both the parties in a way to minimize any future dispute. Such agreement can come from the company or the agent. A well negotiated agreement is beneficial since it will outline the details of the working relationship between both the parties, which will further help them to avoid any misunderstanding and to safeguard the business of the company by adding clauses such as a non-compete clause or a confidentiality clause in the agreement.
- https://formswift.com/commission agreement#documentPreviewMobile
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