The Representor, Spring 2017 – Legally Speaking
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by ERA Legal Counsels Gerald M. Newman and Adam Glazer
Gerald M. Newman, partner in the Chicago law firm of Schoenberg, Finkel, Newman & Rosenberg, LLC, serves as general counsel to ERA and is a regular contributor to The Representor. He participates in Expert Access, the program that offers telephone consultations to ERA members. Gerry co-authored this article with Adam Glazer.
In certain industries, sales reps are accustomed to fighting tooth and nail to recover commissions from manufacturers, both during and after their representation. And in situations where the rep procured sales before termination that do not close until after — when a new rep is in place — the hunt for commission dollars can grow fierce, even cutthroat.
Surely, the upper crust world of yachting is above such unseemliness. The millionaire and billionaire customers occupying this segment of the social strata must dictate a more dignified and genteel marketplace. Double-dealing and selling behind the back of another are simply intolerable practices when the products involved are glistening, 64- and 78-foot luxury vessels. Surely?
As a recent California case demonstrates, visions of sales reps finding smooth sailing when seeking to recover commissions on yacht sales must be tossed overboard. The defendant on the winding voyage is the Taiwanese yacht manufacturer, Ocean Alexander Marine Yacht Sales or “OAMYS,” and the plaintiff cast adrift is Newport Beach yacht dealer Orange Coast Marine.
The sales of two ships procured by Orange Coast are at issue here.
Sale No. 1: The Halberda crossing
Orange Coast was appointed an independent dealer of OAMYS boats in Southern California with the right to receive a 6 percent commission on the total sales price of all sales to customers in the territory. When a Southern Cal customer named Halberda upgraded from his existing 47-foot Riviera to a new 64-footer from OAMYS, the commission payable to Orange Coast was complicated by his trade-in.
The commission on the cash portion of the deal was paid immediately, but as an OAMYS email made clear, the commission on the trade-in portion would await the sale of the Riviera boat. It took over a year for the trade-in to sell, reaping about $635,000, and Orange Coast waited patiently for its payment. During this interim period, Orange Coast was terminated and replaced with a captive OAMYS dealership.
With the termination, OAMYS demanded that Orange Coast remove from its website statements claiming it was the exclusive dealer of OAMYS boats. The website statements remained four months later, leading OAMYS to view this as leverage when Orange Coast finally inquired about its commission on the Riviera sale. OAMYS responded that it owed no further commission payment but would consider some “courtesy payment” if Orange Coast promptly changed its website.
Although Orange Coast then complied, no payment followed. Several months later, OAMYS answered a further Orange Coast inquiry by informing that fees were paid to an outside broker in connection with the Riviera sale.
Sale No. 2: The Smith passage
Well after the termination, an Orange Coast salesperson who previously sold the Smith family a 64-foot OAMYS yacht knew they were in the market for a replacement. The salesperson happened to meet an OAMYS manager at a shipyard and learned of a new 78-footer on its way, news he shared with the Smith mogul. Soon, the Orange Coast representative was taking Smith to the Lido Boat Show to tour the vessel, but not before he negotiated a four percent commission deal with OAMYS.
The OAMYS manager blocked the ship off from other attendees so the Orange Coast rep could make his sales pitch to Smith. The rep did his job well, and Smith told him the family was ready to make an offer, using their existing boar as a trade-in. Here is where it gets good.
Because the Orange Coast rep did not have a sales contract on him, he scurried to get one at the office located three miles away. Not long after he left, Smith called him to say he would no longer be “involved in the negotiations.” Instead, the Smiths would deal with OAMYS directly.
The next call, of course, was from the OAMYS manager to say he would be unable to pay more than three percent on this sale. After Orange Coast refused the deduction, the purchase directly from OAMYS proceeded, and no commission payment was made.
The ensuing squall
Orange Coast filed suit in Orange County to recover the unpaid commission on both yacht sales. OAMYS defended not on the grounds that it (or a third party) actually procured the sales instead of Orange Coast, but on the grounds that the suit was barred by the running of California’s two-year statute of limitations for oral contracts.
Had the court agreed the contract was oral, OAMYS would have prevailed. However, both the trial court and the appellate court recognized that the four-year statute applicable to written contracts controlled.
Although the parties plainly entered into a written Dealer Commission Agreement for the sale of Halberda’s yacht, OAMYS argued it did not govern because it lacked two material terms, leaving their relationship governed by oral promises. OAMYS seized upon the Agreement’s failure to state that the Halberda trade-in had to be sold in Orange Coast’s territory and its failure to spell out that payment was due on the actual sale of the Riviera.
The appellate court found neither omission “even remotely material.” First, the commission due Orange Coast was owed in the total sales price paid by Halberda for the new OAMYS vessel, and the amount owed on the trade-in was only “a component of that commission.” Second, OAMYS confused Orange Coast’s attempt to accommodate the delay in selling the trade-in with the basic terms of the Dealer Commission Agreement, specifically its provision that 6 percent of the total sales price was due on the new OAMYS yacht.
Of note with respect to the Smith purchase, OAMYS’ defense did not include any argument that Orange Coast did not procure Smith as the buyer of the 78-foot yacht, or that the parties’ agreement did not call for compensation to Orange Coast upon its sale. Instead, OAMYS essentially contended that because it successfully boxed Orange Coast out by preventing it from actually negotiating the sale or completing the paperwork, no commission was owed.
Not surprisingly, OAMYS was unable to cite any legal authority in support of its argument, and the appellate court did not consider it for very long. The court ruled “that a salesperson cannot be cheated out of a commission by the unimaginative expedient of having him or her cut out of the actual negotiations once the salesperson has done the real work of actually finding a ready willing and able buyer.”
Quoting long-standing California law, the court noted that “otherwise, one might employ an agent to interview persons, and secure them promises of contracts and then, by having another one ‘close’ the contracts, deny the agent the fruit of his labor.” The conclusion reached was “that if an agent (or broker) is the inducing or procuring cause of the contract, he is entitled to the commission, even though the principal takes it out of his own hand and completes it.” Finding that Orange Coast unquestionably found Smith, the buyer for OAMYS’ yacht, the appellate court determined it plainly earned its commission.
Charting the way
This same rule has potentially broad application to other reps who find business for their principals and are then terminated in response or otherwise denied the resulting commissions. Equitable, common sense principles will generally protect the rep’s right to compensation for successful sales efforts, unless the contract is unusually manufacturer-friendly. If the practice of cheating reps out of their hard-earned commission dollars is a tub that won’t float even in the elite yachting industry, then legal remedies are equally applicable to industries where such misconduct is more traditionally found.