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

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By Cheng-yi Liu, Esq. and Thomas Crowe, Esq.

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 website-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.

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