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Crafting a Win-Win Contract

Posted: 06/1999

Crafting a Win-Win Contract
By Liz Montalbano


Even the best contracts don’t always protect agents from hassles or
litigation, and the worst ones can cheat them out of their money and sanity faster than a
nasty divorce.

Agent contracts are like spouses–sometimes you love ’em, sometimes you hate ’em, and
they can ruin your life if you don’t pay enough attention. To them even the best contracts
don’t always protect agents from hassles or litigation, and the worst ones can cheat them
out of their money and sanity faster than a nasty divorce.

"Trust me, I’ve been burned by three or four carriers and a lot of [the contracts]
had the clauses in there I wanted," says Rick Ribas, former master agent turned
agency sales manager for OneStar Long Distance Inc., Evansville, Ind. "If they’re
going to burn you, they’re going to burn you."

Maybe there’s no smart bomb to stave off potential disaster in an agent contract, but
there are a few things to watch for that can mean the difference between a successful
carrier relationship and a nightmare that ends in front of a judge. That’s why it’s
absolutely essential not only to read a contract after it has been sufficiently
negotiated, but also to read between the lines of legalese. Like Alice through the looking
glass, things are not always as they appear to be.

Begin at the End

"The most frequently abused section and the one that people generally spend far
too little time [on] because they think, ‘This is part of the boilerplate,’ is the
termination section [of the contract]," says Charles C. Hunter, P.C., Hunter
Communications Law Group, Washington. "If you write your termination provision well,
essentially the contract will be terminable at will by you."

But often that’s not the case. In fact, some contracts are written in such a way that
it’s just the opposite, allowing carriers to terminate an agent’s contract without notice
or reason, unduly relieving the agent of his or her commission stream.

Hunter explains how they do it: "If you (the agent) put in provisions that say you
will be in full compliance with law, statute, regulation, all provisions of this contract
and all provisions of [the] tariff, essentially, the agent is going to be always in
violation–it’s just the way life is. You’re always in violation of law, you’re always in
violation of regulation, you’re always in violation of the nitpicky stuff in contracts and
tariffs."

Carriers then use this provision to punish agents for some breach of contract, he says.
To add insult to injury, Hunter says carriers sometimes use what he calls
"Draconian" tactics, in which the punishment far outweighs the
"crime"–an other-wise minor discretion becomes a reason for termination.

According to Hunter, there are three provisions an agent can make in a contract to
safeguard against unwarranted termination: "materiality, proportionality and a notice
for cure."

In other words, a carrier must provide a valid material reason for the termination of
an agent contract to show that he or she seriously ran afoul of the agreement, the
punishment must fit the breach and an agent should be given a chance to remedy a minor
violation before the contract is terminated. Otherwise, Hunter says, "you’re
essentially handing the other side a loaded gun and saying, ‘Shoot me.’"

Making Moves

Moving the customer base is another hot button in an agent contract. For the most part,
agent contracts include a provision that if a carrier does not live up to its end of the
bargain and there is a serious problem in service, back-office support or payment of
commissions, an agent can move his or her customer base, provided that the carrier has a
period of time to remedy the complaint.

This is the case in agent contracts with reseller TransNational Communications
International Inc., Boston, says Brian Twomey, senior vice president, sales and marketing.

"If we don’t live up to any of the commitments that we’re making relating to
compensation, both the amount and the timing–[if] we don’t deliver on that, my
expectation would be that people would take their business away," he says. "The
contract absolutely gives them an out, and it’s without penalty to move it."

Twomey adds that there’s a clause in TransNational agent contracts that allows the
agent an escape hatch within 30 days if the carrier "can’t meet either the agent’s
requirement or the competitive situation in the marketplace."

Under the direction of Ribas, OneStar is working out a similar plan. Before taking the
helm of OneStar’s program, Ribas spent 11 years as a master agent with his own company,
Online Telecommunications Inc. As an agent, he says the question of who owned the customer
was a sore spot with him. Now he sees it from a different perspective.

"Whether the agent likes it or not, the carrier does own the contract, does own
the customer," Ribas says.

That doesn’t mean he’s willing to bite the hand that fed him. At press time, Ribas said
he was working on a "first right of refusal" that would give OneStar five
business days to solve a problem an agent presents but allow the agent to move the
customer if the carrier could not or would not make the necessary change.

"[Agents say,] ‘Hey, if I’m a consultant and my customer’s unhappy, I have to act
in their best interests, not in your best interests,’" Ribas says, explaining the
reason for the coming addition. "And I agree with them 100 percent."

Though Hunter also concedes that agents must realize they don’t own their customer
base, he offers a provision that could change that. He calls it the "option
option."

"Essentially, [what] you write into your contract is [that] the carrier grants you
an option to acquire your customer base for say $100," he states. "It’s a
personal, irrevocable option exercisable at will that provides you sufficient time to move
that base through the regulatory process or re-LOA (letter of agency)-ing, but effectively
you have a quasi-ownership in the customer base through the option even though the carrier
has the direct contractual relationship."

Though it seems agents have a better chance of winning free commission for life from a
carrier of their choice than landing the "option option," Hunter says it’s not
without precedence. He does concede, though, that it may call for some Kissingerian
negotiating skills.

"I’ve gotten it for a number of my agent clients, but generally the carrier has to
want the agent’s business," he says. "With smaller carriers, you can usually
sell it [along with] a provision that says we will not move if you present us with a
competitively comparable package to the carrier that we were going to move the base to …
and during the course of the negotiations you throw out all the warm and fuzzy stuff. It’s
amazing what you can sell if you just play it right."

Even more important sometimes than who owns the customer is who owns the agent. Another
trouble spot in an agent contract can be the issue of nonexclusivity, which gives neither
the carrier exclusive rights to an agent nor an agent exclusive rights to a carrier.
Sometimes, says Ernest Chen, president, Horizon Marketing, Berkeley, Calif., carriers may
try to use this to their advantage.

"Nonexclusive can be interpreted to mean that carriers can hire other
people," he says. "It doesn’t necessarily mean that agents can work for other
people."

And few agents want to be bound to just one carrier, Hunter says. "Not only does
it limit your ability to sell, but when it gets to the point where you want to move that
base, you may be contractually blocked from doing that if you’ve got an exclusive
arrangement."

To ensure this doesn’t happen, a contract should be explicit in its terms that an agent
is free to sell other carriers’ services. If an agent somehow does get stuck in an
exclusive contract with one carrier, Hunter suggests the agent provision for mutuality
with his or her customer base so the carrier can’t send someone else to work the account.

"The last thing in the world you want to do is bring a carrier a customer and then
have that carrier essentially send its direct salespeople out to poach that customer from
you," he says.

Tips for Landing a Winning Agent Contract

  • Select your carrier carefully
  • Be realistic about your leverage
  • Beware of hidden prohibitions
  • Know and prioritize your objectives
  • Account for regulatory constraints
  • Avoid exclusivity/noncompete clauses like the plague and beware of provisions that have
    a similar effect
  • Prepare (as best you can) for bankruptcies
  • Scrutinize termination provisions carefully
  • Understand your deal as written
  • Have alternatives available
  • Remember that everyone loses in litigation

Above all, no matter how strong an agent contract is, it’s really the relationship
agents have with their carriers that are critical. It’s common sense: If an agent has a
good relationship with its carrier, the carrier won’t try to use a contract’s legal
terminology to bend the rules in its favor. Though Ribas says he’s been burned despite a
satisfying contract, the reverse may be the case if the agent/carrier relationship is
strong: Even if a contract isn’t ideally provisioned (and what contract is?), there is an
element of trust between agent and carrier that precludes any negativity in the
relationship.

"It’s the relationship [that’s important]," Ribas says. "The heck with
your contract."

Sounds simple enough, but in a country where even the president’s been caught in a lie,
how does an agent decide who to trust as a business partner?

Hunter suggests that, aside from "quantifiable things like litigation searches to
see if your carrier’s been in litigation," the old-fashioned way will do: ask.

"What I generally tell people is: Telecom is a very small, incestuous
industry," he says. "We all know each other, we’re all bumping into each other
at the trade shows. Ask a lot of people. Ask around. And listen carefully to what they
say."

Liz Montalbano is news editor for PHONE+ magazine.


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