Mistakes to Avoid in Representative Contracts
There are several factors great representative contracts depend on. Linking a supplier and a manufacturers’ representative can be visible at the end of the life of a representative agreement. They are not spotted at the time of creation, but at the end. These are called controversial clauses. There are mandatory clauses that are not to be omitted and there should not be ambiguous clauses used by the representative contract to avoid problems during termination. Strictly stay away from ambiguous words as the supplier and representative contract. Some common sales representative contract mistakes that should be avoided are listed below;
Annual Termination and Semi-automatic Renewal
Opportunity for termination is being minimized sometimes by parties that are new to representative contracts. Players who are experienced calls for annual termination and semi-automatic renewal routine. Provision is made for termination of contract at the end of the first year the contract is placed in effect and the following year. If either party does not object, a year automatic renewal is given. Parties also need to agree to the terms and conditions which allow either party to submit a Notice of Intention to Not Renew 30 days prior to the end of the year.
After the contract must have contained annual termination and semi-automatic renewal, ability is given to both parties to be able to exit the contract once in a year. Partnership is being strengthened by performance and not collection of words in a contract by using this method. The appropriate binding force in partnership is performance.
Termination for Cause Only
Termination comes in for cause and for convenience and representative contracts that deals with seasoned representative and manufacturers allows them. Partners who are new to the system tend to give room for termination for limited causes. There are straightforward and non-controversial situation in termination for cause just like a partner declared bankrupt. Presence of cause and responsibility for cause are often disagreed upon by partners.
Termination for cause and convenience are allowed by professional representative contracts. A more than 30 day heads-up is given by a partner who wishes to disengage from the contract under termination for convenience. This will help to avert a representative contract ending in a legal skirmish. This will help the manufacturer’s’ representative and supplier to be able to divert their attention on their respective customers and business without wasting management time, corporate focuses and preserve financial resources on attorneys and court as there will not be confrontation of any kind.
Back in the early days of modern manufacturing, transactions by customers are made on a single site. These includes; product design, purchase orders, delivery of component parts and shipping finished goods; making a single point interface between the manufacturers’ representative and the customer. Customers nowadays spread their facilities beyond single site and even go as far as out of the single manufacturers’ representative with the help of modern technology.
Representative contracts must include sections that calculate commissions and payment to more than one salesman so as to handle commissions across many territories. This can be effectively done by allocating one-third of the commission to Point of Engineering, one-third to Point of Procurement and one third to Point of Manufacture. The three manufacturer agents are not to be given equal commissions. E.g. the energy used at the Point of Engineering will definitely be more than that used at the Point of Procurement and Manufacture; therefore, Point of Engineering will get more commission than others. The rule therefore is that the sum of the 3 commissions must never be more than the commission allocated to a single rep.
Termination by Only One Party (Not Both)
This kind of representative contract is biased as termination by only one partner is allowed. This usually results in legal dispute. Balance is kept when both parties are allowed for termination. Longtime relationship is built when balance is kept in the contract. A representative contract that allows both parties to terminate is the best.
Amendment Allowed Annually
Relationship between suppliers and manufacturers’ representative can grow, develop, mature and even expire. There are external factors that can pressurize representative and suppliers. Representative contracts can be changes as a result of these pressures. The contract can be one sided i.e. allowing changes only once in a year. This can cause either one or both of the partners to be under pressure until it is possible to alter the contract again the following year. Representative contract that allows changes throughout the year is the best.
Too Much Too Fast
New partnerships between manufacturers’ representative and a supplier are born out of optimism. A representative has a limited number of engagements. An alternative rep is not allowed after alignment must have been made with a new representative. A small territory is advisable when signing up with a new representative. You should then go further to expanding the territory to a bigger one by having a sound relationship with the new representative.
What Happens After Termination
The responsibilities and obligations of each partner must be told to each of them during and after the life of the contract by the representative contract. There should be a defined understanding of responsibilities of the parties during the operation of the contract. Sales upon which commissions will be paid upon termination must be well documented by manufacturers’ agent and manufacturers. The day of the payment on shipment should be clearly stated; either 30 days after the notice date or after the effective date of termination. Expenditure of financial resources and management time spent with the legal system can be avoided by the use of unambiguous text.
Comparison with Standard Industry Contracts
Some partners tend to make mistakes when they try to gain advantage over their other partner which is not supposed to be so. These shows lack of experience in creation and negotiation on the side of representative contracts. They do this by inserting a bias to favor the party with the more experience in the contract.
Several methods are used in negotiating by the representative contracts that are inexperienced. The first method is to trade association or solicit a model contract from your industry’s manufacturers’ representatives. For comparing the contract you are requested to sign, the model is a good baseline. The second method is the use of friends influence in the industry. Friends in the industry tend to have no problem in sharing their contracts with indirect competitors. The third thing is that foreign network should be used if the representative contract is in a foreign land. Some commercial chambers around include American Chambers of commerce, china chamber of commerce; initiate yours if they are not close to you. There are lots of benefits embedded in being a member of these organizations. The last thing is to demand for a blind copy of two or three contracts that are currently effective from the representative you are negotiating with.
Leaving the Negotiation Process Strictly to Attorneys
There are other problems that are discovered with the representative contracts even after negotiation and signing the contract. There are some industry norms some attorneys are not aware of and they eliminate onerous clauses. Legal industry professional should be given the contracts for assessment. Assistance should be sought for by an industry that does not have industry professionals.
Acquisition of Supplier
Start-up suppliers and representative contracts experience natural fear sometimes. One of them is the competition from larger and established competitors. Larger acquiring suppliers possess surviving reps most of the time. The fear of start-up suppliers come in two ways which are; the opportunity to engage with a start-up supplier may be declined by a rep and second is that the energy he puts forward in the representative relationship may be dampen if the rep engages with start-up supplier.
Relationship can be developed between a manufacturers’ representative and a supplier through a well written contract. Representative contract also helps to achieve this. Relationships are not extended when contracts end. Legal quarrels arise from a poorly written contract. This in turn waste management time, financial resources and involvement of attorneys and courts. Though there are many more, these are many of the common sales representative contract mistakes.