The Danger of Termination Clauses in Agent Agreements

Most carrier agency agreements have been unclear at best and one-sided and oppressive at worst. However, for much of this time, the telecom industry has plodded along as carriers generally have paid enough of the commissions due to their agents to avoid wholesale defections. With the deteriorating economy, however, some carriers have made a business decision to reduce their losses – or widen their margins – by refusing to pay commissions to their agents. Some of these carriers are using vague and oppressive terms of their agency agreements as the stated, legal justification for terminating those agreements. Carriers are resorting to these tactics even where the agency agreement does not support their position and where the agent’s conduct was in good faith and well within the spirit, if not the letter, of their agreements. This article takes a look at some of these terms and ways agents can protect themselves.

Clauses Commonly Cited in Contract Terminations. Some carriers have used open-ended and broadly worded termination rights – often referred to as “termination for convenience clauses” – as the basis for terminating fully performing agents. These clauses can allow carriers to terminate an agency agreement without cause or a failure to perform or wrongdoing by the agent or other cause of any kind, merely upon notice to the agent. Of course, in those instances, the carrier retainer, the customer relationship and all the economic benefits of the relationship were gained through the agent’s efforts and the agent is left out in the cold.

Other agent agreements include vague and ambiguous terms setting forth the agent’s responsibilities. These terms are as varied as the mind is capable. Two often seen terms of this nature are “best efforts” and “non-disparagement” clauses. While each of these terms address a different kind of conduct and the underlying rationale may be legitimate, they share a common flaw; the obligations are so broad and undefined that they create an open invitation to abuse.

For example, agents often are required to exercise their “best efforts” to secure new business. Yet, nowhere in the agreement does it identify the specific obligations or tasks that are sufficient to demonstrate “best efforts.” As a result, where the agreement fails to set any standards for assessing the quality of an agent’s efforts, it can be difficult to distinguish between “best efforts” and reasonable efforts with any degree of certainty or precision. This problem can be acute particularly where the agency agreement is non-exclusive and where the agent will, by definition, be spreading its time among multiple carriers. Indeed, as there can only be one “best,” non-exclusive agreements with “best efforts” clauses inherently are ambiguous and thus risky.

Non-disparagement terms create a similar danger. These terms generally prevent agents from making any statement that could be interpreted as casting a bad light on the carrier. Again, the problem is that the agreements never identify with specificity the kinds of statements that could be deemed to cast a bad light on a carrier. For example, would a truthful and accurate statement that one carrier’s provisioning is better than another’s violate this term as it could put the lesser carrier in a bad light? What about accurate statements regarding rates, terms and conditions?

Executing agreements that contain these kinds of clauses creates risk for agents. As discussed, whether by intent or negligence, these clauses virtually are impossible to interpret with confidence, thereby exposing the agent to endless uncertainty as to how and whether it is meeting its obligations and to the carrier’s discretion as to when an alleged violation has occurred. As a result, these kinds of provisions either need to be removed entirely from agent agreements or the specific obligations that they impose need to be set forth expressly and specifically in the agreement.

Of course, the most significant danger created by these kinds of provisions is not in the provisions themselves but in the consequence of an alleged violation. Indeed, most agent agreements containing these kinds of provisions pair them, either directly or indirectly, with a “termination” or “default” clause setting for the consequences of an alleged violation. Many of these agreements provide that, upon termination – even where the termination is without cause and merely for convenience – the carrier no longer has any obligation to pay commissions to the agent. In many cases, no advance notice is required and the agent is not given an opportunity to dispute or to cure the alleged violation. Moreover, in most agreements, upon termination the agent remains subject to the non-compete terms of the agreement, which the carrier will argue precludes the agent from moving its customers to recover lost commissions. As a result, if the combination of these terms is enforced, the agent not only loses its commission stream, but is prevented from recapturing any of the commission revenues that the agent is now being denied.

How Agents Can Protect Themselves. First, it is essential that all the terms of your agent agreement – and especially those imposing obligations on you or limiting the scope of your conduct – be clear and specific. If you cannot determine with precision exactly what you need to do to comply with the term or what you cannot do to avoid violating that term, insist that it be clarified or removed. One easy way to start that discussion is to ask the carrier representative to tell you what you can and cannot do. If the representative is able to provide details, insist that those details be included. If the representative is not able to provide those details, then you have all the evidence you need to support a demand that the term be removed.

Second, if any term of this nature remains in your agent agreement, insist that it be limited to knowing acts or failures and that it require the carrier to provide advance and specific written notice of the claimed acts and failure and a right to cure within a defined time period before a violation is deemed to have occurred.

Third, and most importantly, never, ever agree to a termination provision that allows the carrier to stop paying commissions on existing business. The carrier’s termination right must be prospective only; that is, upon an alleged violation, the carrier can refuse to take additional customers from the agent and terminate the agreement. The carrier also has the right under virtually any agent agreement to bring legal action for damages in the event of a violation of the agent agreement (e.g., for fraud or defamation). However, termination, regardless of cause, should never be tied, either directly or indirectly, to the carrier’s continuing obligation to pay commissions on billings or revenues (depending on the payment arrangement in the agreement) obtained from existing customers for as long as such billings are sent or such revenues are received. Indeed, we strongly recommend that specific language be included in every agent agreement expressly establishing the carrier’s continuing obligation to pay commissions following termination, including a termination for cause. Anything less is an open invitation to carriers to find a reason to terminate your agent agreement and to retain all commissions revenues for themselves.

Agreements are nothing more than statements of agreed conduct and allocations of risk. Well-crafted agreements set forth the rights and obligation of each party with specificity and they allocate risk in a balanced and reasonable manner. Properly and thoughtfully addressing each of these imperatives in your agent agreements – particularly as they relate to termination rights – will not only provide each party with a road map as to how they must act, thereby helping to avoid disputes borne out of uncertainty – but also will prevent either party from being incentivized to seek an advantage based on an unfair allocation of risk. Indeed, armed with the proper information, girded by a strong-willed determination and proper advice, your agreements can create a solid foundation for your business, facilitating your ability to plan, to grow and to avoid many of the many hazards that can prevent you from achieving your business objectives.

Looking for More?
Technology Law Group will be discussing agent agreement basics at the Spring 2010 Channel Partners Conference & Expo, March 1-3, in Las Vegas. For more information, visit www.channelpartnersconference.com.

Neil S. Ende is managing partner of Technology Law Group LLC, a Washington, D.C.-based law firm specializing in telecommunications transactional and litigation issues. He can be reached by phone at +1 202 895 1707 and by e-mail at nende@tlgdc.com. The opinions expressed in this article are those of the author and are not and should not be construed as legal advice.