that sets forth a transition period between the formal notice of a party’ s intention to end the relationship and the effective date of the termination. By providing for notice and a transition period for the transition of sales, the rep can obtain some protection for future commissions on sales already or likely to be made for future shipment of product.
Set Period for the Agreement
Another option in structuring a termination clause is to agree to a set term for the relationship, such as one year, and have the agreement automatically renew for another term after a specified date. For example, a clause may include a one-year initial term, with automatic annual or semi-annual renewal. A contract for a specified term will also provide a period of time in which either one or both parties can terminate the relationship by notice, prior to the automatic renewal. Like a voluntarily termination provision, an agreement that includes a term for the relationship can protect a rep and ensure they are fairly paid their earned commissions.
A termination clause can also provide that the relationship can only be terminated for certain enumerated causes.“ For cause” reasons can constitute anything that the parties agree upon, but some common examples include:
Failure to meet sales quotas. Misconduct or willful neglect of duties or responsibilities. Death. Permanent disability. Bankruptcy.
A“ for cause” termination clause that includes a principal’ s ability to terminate the relationship for bad conduct or poor performance is not a desirable provision for the rep to include in the agreement. This is because a“ for cause” provision that so allows gives the principal the ability to claim that the sales representative is not performing their obligations under the agreement as a basis for getting rid of them. Whether or not there is merit to this allegation will usually be a complicated, fact-sensitive question that could be difficult for a sales representative to refute. Moreover, regardless of the merits, disputes over performance often lead to expensive and timeconsuming litigation. If a rep must agree to the inclusion of a“ for cause” termination provision, it is recommended that— at minimum— they negotiate the precise definition of“ for cause” in as much detail as possible. It is also in the representative’ s best interest that any“ for cause” provision includes advance notice of the purported“ for cause” event and a period of time for the rep to cure it.
Entitlement to Commissions
Another important aspect of a well-drafted termination clause is a provision that establishes the manufacturers’ representative’ s entitlement to commissions earned during the notice period and after the termination of the relationship. The method of how commissions are earned and due after the notice of intention to terminate should be agreed to at the outset of the relationship. As with all aspects of the termination clause, it is at the outset when the rep will be in the best position and