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Renewing Representative Agreements Annually

by Glen Balzer

By Glen Balzer Email: GlenBalzer@msn.com

Manufacturers' representatives and their suppliers often cannot resolve disputes without outside assistance. That assistance is often a court, teams of lawyers, or arbitration. All three alternatives are expensive in terms of time and money. The least desirable alternatives for resolving those disputes involve legal action. Can a representative agreement reduce the likelihood of the involvement of courts, lawyers, or arbitrators? Absolutely. This article explains that inclusion of a provision for annual renewal can reduce the need for legal involvement upon termination.

What Is Annual Renewal?

An annual renewal clause calls for the automatic termination and renewal of the agreement at the end of each calendar or fiscal year. Such a clause can range from two to four paragraphs and those paragraphs are rarely intricate. A typical clause might suggest, "This agreement will automatically end, effective December 31 of the first full year after the agreement was originally signed. Should either party, (supplier or manufacturers' representative) choose to not enter into a new agreement, the party choosing to terminate the relationship must give written notice at least 30 days, and not more than 60 days prior to December 31.

"Termination during the middle of the contract year can be cumbersome. If one of the parties becomes dissatisfied with its partner during the middle of the year for a specific reason, that party could attempt to terminate the agreement "for cause." In some cases, the opposing party accepts the problem and responsibility for cause, (understaffing, poor performance, failure to organize customer meetings or seminars, or any of hundreds of other "causes"). In those cases, termination of the representative agreement occurs in the middle of a contract year; both parties go in their respective directions and life moves on. However, suppliers and manufacturers' agents can and frequently disagree over the nature and the cause of that problem. If one party chooses to terminate the other "for cause," and the other party disagrees with the original assessment and ownership of the problem, it can be difficult if not impossible to prove cause without legal assistance. A simple solution to this problem if there is an annual renewal clause in the representative agreement is to wait until 60 days prior to the end of the agreement. Draft and deliver a Notice of Intent to Terminate to the partner. In this case, both the supplier and the manufacturers' agent spend the remaining 30-to-60 days of the year dealing with customer issues and avoid spending energy squabbling over problems.

Advantages of Annual Renewal

There may be four or more advantages of annual renewal. First, legal proceedings rarely increase the long-term value or profitability of a supplier or manufacturers' representative. With an annual renewal provision in the agreement, neither party will feel forced to burn management time and money with lawyers, courts, and arbitration. Nonproductive activities in this case will not consume scarce resources.

Second, annual renewal forces both parties to think about and acknowledge the real possibility of termination at the end of the year. Neither party can operate under the illusion that termination cannot happen. Do suppliers and manufacturer's agents sometimes operate under an illusion? Unfortunately, yes. Observation of legal proceedings reveals the thinking of suppliers and agents prior to termination. Quite often, one of the parties believes either that the relationship is stronger than it really is, or that their non-professional assessment of the agreement without an annual provision allows them to believe that they are bulletproof. Inclusion of an annual renewal provision discourages overly optimistic thinking.

Third, customers are a vehicle in which suppliers and agents make investment. When annual renewal provisions are included and termination becomes inevitable, both parties spend the final days of an agreement focusing on the customer and their respective businesses and not on legal disputes. The annual renewal provision is a benefit to both the supplier and the rep. Customer goodwill sometimes suffers when there is a legal clash resulting from the absence of an annual provision. With the annual renewal position, goodwill is preserved and not diminished.

Fourth, taking legal action is less likely where an annual renewal provision exists. Both parties must acknowledge in advance that the agreement may truncate at the end of the year. A party to a rep agreement is far less likely to take its partner to court when it understands that termination at year-end is a distinct possibility.

Conclusion

[space]Including an annual renewal clause into a representative agreement can eliminate or significantly reduce the probability of a costly legal dispute. Absent such a dispute, a supplier and manufacturers' representative can apply greater resources toward serving customers and growing sales and profits, the original purpose of the representative agreement.