Court can ‘declare’ a rep’s contract rights for future sales, even sales to Iran
by ERA Legal Counsels
Gerald M. Newman and Adam Glazer
Gerald M. Newman and Adam J. Glazer are partners in the law firm of Schoenberg Finkel Beederman Bell & Glazer LLC, and they serve as general counsel to ERA. They are also regular contributors to The Representor, and participate in Expert Access, the program that offers telephone consultations to ERA members.
What is a rep to do when terminated before the sales come in?
As most faithful readers know by now, framing a claim for breach of contract requires that the rep has suffered “damages,” that is commissions withheld on orders received, shipped and/or paid for by the customer. But if orders have not yet come in despite the rep’s best efforts, is the principal able to escape liability?
The Swiss rep Pyrrhus AG, whose customer was the Iranian government during a relative lull in the sanctions regime, found itself confronting such a possibility. Pyrrhus’s plight furnishes a helpful example of a rep making use of a “declaratory judgment action” to lay claim to commissions on sales not yet shipped.
Iran to court
U.S. company Dresser Industries Inc. had signed Pyrrhus as its exclusive rep for the two-year period, August 1986 through August 1988, of Dresser’s earth-moving products to the country of Iran. During 1987-88, the Ministry of Mines and Metals of Iran allegedly agreed to purchase 140 products known as “Dozers” for $255,000 each. Pyrrhus also claimed its services culminated in the sale to the National Iranian Steel Company of 20 trucks and parts.
In exchange for its services, Pyrrhus was due 5 percent of:
“The net FOB value of any shipment of the products of whatever origin made by Dresser or a Dresser Subsidiary to Iran and pursuant to either orders received and accepted or contracts entered into during the term of this agreement.”
The contract further provided:
“Dresser will pay or cause to be paid to Pyrrhus the foregoing amounts within fifteen (15) days of receipt of payment by Dresser or the relevant Dresser Subsidiary in respect of any order or contract with respect to which such fee is due.”
When Dresser refused to pay commissions on the Dozer or truck sales, sales that seemed to fit squarely within this contractual agreement, Pyrrhus filed suit in the Chicago federal court.
Its complaint alleged that Pyrrhus’s services led to the formation of Dresser’s contracts for the sale of equipment to the Ministry and to the National Iranian Steel Company, both of which called for shipments to be made in the future. The shipments on which commissions would be payable had not yet occurred, so Pyrrhus’s complaint sought a “declaratory judgment,” a remedy calling upon the court to declare the rights of the parties under their contract. When the shipments did occur, a declaration favorable to Pyrrhus would oblige Dresser to make payment.
The trial court, however, saw things Dresser’s way. Dismissing Pyrrhus’s claims, the court construed the rep agreement to require that “the goods must have been shipped into Iran” to be commissionable. Pyrrhus sought “commissions due on future shipments for sales that have not been consummated,” the court ruled, and Pyrrhus did not qualify for such commissions at the time of termination.
Pyrrhus quickly appealed.
Iran to appeal
Fortunately for Pyrrhus, the appellate judges proved more willing to give the contract a fair read. The federal appeals court determined the trial court improperly interpreted the language stating that commissions are only due on products that ship (“5 percent of the net FOB value of any shipment of the products … to Iran”), and the timing provision (“within fifteen (15) days of receipt of payment by Dresser”) as pre-conditions for commission liability. “But it is clear,” said the reviewing court, “that if ‘orders [are] received and accepted or contracts entered into’ during the term of the instrument, Dresser owes Pyrrhus a commission for the sales.”
The contractual factors relied upon by the lower court, namely the actual shipment of products into Iran and payment received by Dresser, merely defined when payments were to be made, not Dresser’s obligation to pay. Reversing the trial court’s decision, the appellate court noted: “While the payments may not yet have been due under the contract because of shipments to Iran or payments to Dresser that are as yet unfilled,” this was no reason to dismiss Pyrrhus’s claims “since Pyrrhus may eventually be entitled to commissions for the sales.”
Bringing a declaratory judgment action was specifically approved by the court of appeals “to determine whether Dresser owes Pyrrhus payments when Dresser has shipped the products and received payment.” The case was returned to the trial court to ascertain if the alleged sales took place during the contract period (August 1986 through August 1988) and were, therefore, commissionable to Pyrrhus, even if the shipments took place later.
Reps are frequently terminated in situations where no commissions are due immediately upon termination, and the value of the rep’s work is only realized by the principal months or years later. If the rep generates orders, just as Pyrrhus did, compensation should follow. In the right cases, seeking a declaratory judgment from the court that the rep is entitled to commission payments when the sales are ultimately consummated is a highly valuable, if underappreciated, means to avoid walking away from a years-long effort with nothing to show for it.