Nathaniel Saylor | SCOPELITIS, GARVIN, LIGHT, HANSON & FEARY, P.C.
It’s common practice for 3PLs to look to “sales agents” to identify new customers or otherwise bolster their sales efforts. The relationship between the 3PL and the agent is outlined in a contract.
Unfortunately, agent agreements are often among the most ambiguous and poorly drafted agreements transportation attorneys see. And when the relationship with the 3PL goes south, the 3PL is often surprised to learn that not only might the agreement fail to protect the 3PL’s rights, it often even fails to define or address fundamental issues of the 3PL/agent relationship. Thus, the purpose of this article is to highlight some of the key shortcomings often seen in 3PL/agent agreements.
Before getting into specifics, it’s necessary to be clear about the type of agreement we’re discussing. In general, it refers to a situation where a 3PL agrees to pay an agent a commission with respect to business that the agent originates (in other words, the agent is a sales agent, and the 3PL is paying a commission). The agent is tasked only with originating the business. He or she does not have access to the broker’s TMS, does not arrange the transportation, negotiate pricing – with either the customer or the carrier – and does not interface directly with the carrier. These functions are far more complicated and would require that the contract between the 3PL and the sales agent address numerous factors beyond the scope of this article.
One fundamental fact regarding sales agent operations that is frequently misunderstood or forgotten is that when a sales agent sells the 3PL’s services, legally speaking, the 3PL, not the agent, is the party to the contract with the customer. This must be so because the sales agent (at least in the typical scenario) never has broker authority, so the brokerage must be performed by the licensed 3PL. As such, the 3PL should either have a signed contract with the customer, or the 3PL should have the customer’s assent to be bound by the 3PL’s terms and conditions of service. By logical extension, the agreement between the 3PL and agent should contemplate this situation and should, among other things:
• clarify that the agent has no right to bind the 3PL to any contract;
• that the 3PL has sole discretion in whether to enter into a contract or otherwise provide services to a customer;
• and clarify that the 3PL can extend, limit or revise credit terms in its sole discretion.
In this regard, as a practical matter, the 3PL should always ensure that it has the documentation evidencing the customer’s assent (whether a signed agreement or assent to the 3PL’s terms and conditions). Otherwise, it may be that the customer has not in fact assented to the 3PL’s terms and there is no contract in place, or worse, that the agent has purported to bind the 3PL to an unfavorable agreement with the customer.
One fundamental fact regarding sales agent operations that is frequently misunderstood or forgotten is that when a sales agent sells the 3PL’s services, legally speaking, the 3PL, not the agent, is the party to the contract with the customer.
From there, additional issues that require consideration in a well-drafted 3PL/agent agreement should be considered.
Defining When Commissions Are Owed
A shocking number of agent agreements do a poor job of defining which actions performed by the agent will result in commissions and which do not. It is important to have a mechanism by which an objective (not subjective) rule applies to determine whether commissions are owed. One simple example is to have a list of customers that the agent is entitled to compensation for added as an exhibit to the agreement. This schedule could be amended by mutual agreement of the 3PL and agent when new customers are brought on board by the agent. If the agent has larger accounts that might have multiple locations, but the agent only has contacts at one location, it might be necessary to define the customers not only by company, but by facility or traffic lane.
Addressing the Break-Up
Perhaps the single, biggest issue in a sales agent agreement is addressing what happens when the parties’ relationship terminates or expires. Careful consideration needs to be given to whether the agent or the 3PL will be subject to non-competes and, if so, to the universe of customers. For instance, assuming the agent demands that the 3PL agree to a non-compete, an arrangement might be structured such that the parties define, via a schedule to the agreement, the business that the agent initially brings to the relationship. It might also prohibit the 3PL from rendering services for such customers for a specified period, while clarifying that the agent is prohibited from directly or indirectly arranging transportation for any other customers serviced by the 3PL while the agreement was in effect.
While this might seem an equitable split, because the customer’s contract is (or, as noted above, at least should be) with the 3PL, the reality is that such a split might result in the 3PL being prohibited from servicing a customer with which the 3PL has a contract (which might in turn require consideration of whether the contract requires the 3PL to continue rendering services for the customer notwithstanding the non-compete between the 3PL and the agent). An obviously preferable alternative, from the 3PL’s perspective, is to have the agent agree to a non-compete for any customers serviced by the 3PL during the relationship, but of course, such a demand may not be palatable to the agent. As you can see, identifying an equitable split that all parties can agree to can be difficult (and might cause the parties to simply forego a non-compete altogether).
Another important consideration with respect to non-competes is whether, if required, they will be enforceable. This is typically a question of state law. Even if the agreement includes a governing law provision, if suit is brought in a different state it may well be that the court refuses to enforce the governing law provision as it relates to the non-compete because of the public policy of the state where the court is seated. As such, it is important to consider potentially applicable law and draft non-compete provisions that are narrowly tailored to protect the 3PL’s interests while remaining enforceable.
Just as important in defining when commissions are owed is the importance of defining how commissions are to be calculated. Here again, the commission calculation should be stated in an objective manner, so there is no question as to the amount owed. For instance, if the 3PL is going to pay based on a percentage of the 3PL’s margin, then the agreement should clearly state any amounts that will be subtracted from the total amount paid by the customer in order to determine the margin (e.g., line haul amounts, surcharges, etc.).
As noted above, the 3PL should have the direct contractual relationship with the customer. As such, the 3PL should be invoicing the customer directly in the 3PL’s own name. The question then becomes whether the 3PL should pay the agent prior to receiving compensation from the customer. If not (that is, if the agent is only paid if and when the customer pays), then the issue of clawback becomes moot. But if the 3PL agrees to pay the agent prior to receiving payment from the customer, then the 3PL might consider drafting a clawback provision into its agreement whereby the agent is responsible for repaying commissions where the customer has not paid the underlying charges. 3PLs should bear in mind that clawback provisions in place with employees (as opposed to independent contractors) may be subject to state laws regarding wage deductions.
Policies and Special Considerations
One area of potential risk to the 3PL has to do with loads entailing special considerations. For instance, if the sales agent brings on a customer that is tendering high value loads (loads with a value that far exceeds $100,000 per conveyance) or is tendering loads requiring special handling, the 3PL may be at greater risk of facing claim liability. Here again, the 3PL can mitigate this risk by negotiating a contract with the customer, but ideally, the 3PL will have in place policies and procedures regarding shipment intake which can then be incorporated into the agreement with the sales agent. While the agent should ultimately control the method, manner and means of its operations, the 3PL may nevertheless want to impose certain limitations on the type of cargo it will accept.
If the sales agent or its personnel are to be provided access to the 3PL’s TMS, the 3PL will first want to ensure that access is permitted by its licensing agreements. If so, the agreement should include provisions imposing responsibility on the sales agent for any use of the TMS deriving from the login credentials provided to the sales agent. Ideally, those credentials will only allow limited access and functionality to the extent necessary for the sales agent’s operations. In any event, and even if access to TMS is not granted, the agreement should contain strong confidentiality provisions that prohibit use or disclosure of any competitively sensitive or other confidential information of the 3PL which is obtained by the sales agent.
Will the agent be exclusively dedicated to the 3PL or not? While the 3PL might prefer exclusivity, it might be that the agent is already working with one or more 3PLs and only needs to work with your company to service a specific client. In these or similar circumstances, the 3PL may well need to decide whether it is willing to work with an agent on an other-than-exclusive basis.
While this article does not present a comprehensive list of issues to be considered in a sales agent agreement (for instance, we have not addressed termination, how to handle cargo claims, risks related to independent contractor reclassification, insurance requirements, etc.), it does provide a list of key issues that are often either not addressed, or not addressed well, in agreements between sales agents and 3PLs. Both the 3PL and the sales agent can benefit from well-drafted agreements and from actually negotiating and understanding the provisions in the agreement. Having both parties understand their arrangement at the outset minimizes the risk of disputes as the relationship continues. Hopefully, by addressing the issues noted in this article, 3PLs and sales agents can find themselves in situations that foster long term and mutually successful
Nathaniel Saylor is Partner with Scopelitis, Garvin, Light, Hanson & Feary, P.C. in Heber City, UT. He can be reached at [email protected]
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