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Another sad story about a contract-renewal provision done badly

A company (let’s call it “Lead Source”) signed an agreement to work with a call-center serv­ice provider (“Call Center”).

  • The goal was for Lead Source to help Call Center land the business of a par­tic­u­lar cust­om­er (“Customer”).
  • In return, Call Center was to pay Lead Source a 5% comm­is­sion on the revenue that Call Center received from Customer during term of the contract between Call Center and Cust­om­er “and any renewals pursuant thereto.” (Emphasis added.)

Customer signed a three-year contract with Call Center. For those three years, Call Center paid Lead Source a 5% com­mis­sion on its revenue from Customer, as agreed.

When the three-year contract between Call Center and Customer was ending, Call Center and Customer could have extended or renewed the contract. But they didn’t do either.  Instead, they neg­o­ti­a­ted a new contract, which expressly stated that it “supersede[d] and replace[d]” the old one.

(According to the appeals court, the two con­tracts between Call Center and Customer were sub­stan­ti­al­ly similar in their terms, and the two even shared a misspelling.)

Call Center then stopped paying commissions to Lead Source, claiming that it was no longer required to do so because Call Center and Customer didn’t renew their original contract.  Lead Source said otherwise, claiming that the new contract between Call Center and Customer was indeed a renewal of the old contract. A lawsuit ensued.

Both the trial court and the appeals court agreed with Call Center that the agreement between Call Center and Lead Source was unambiguous: Lead Source was to be paid com­mis­sions only on renewals of the contract between Call Center and Customer — and that contract wasn’t renewed. See Gateway Customer Solu­tions, LLC v. GC Serv. L.P., No. 15-1878 (8th Cir. June 10, 2016) (affirming summary judgment).

Lessons for drafters:

  1. Look to the underlying business reality, and plan for the possibility that your counterparty might try to take advantage of (what you might think of as) loopholes in your agreement.
  2. If you’re going to be paid commissions for revenue that gets generated long after you help to put the deal in place, you should anticipate that the party paying you might want to stop paying, on grounds that you supposedly “didn’t earn it.” (I’ve heard sales people refer to this as getting paid on “farmed revenue.”)
  3. One possible comp­rom­ise might be to structure the commission agreement so that you continue to be paid farther into the future, but at a decreasing rate as time goes on, until at some point the commission payments stop altogether. (This will have the advantage of keeping you and/or your sales people looking for new business and not simply coasting on the commissions from old deals.)
  4. The appeals court ended its analysis with a useful reminder: “Because we agree with the district court that the relevant contract provisions are not ambiguous, we may not consider extrinsic evidence, nor does the doctrine of contra proferentum [sic; contra proferentem] apply (construing a contract in favor of the non-drafter).” Id., slip op. at 5-6 (citation omitted).
  5. There’s one more thing that’s not apparent from this case: Your business people might trust their counterparts on the other side. But that really means they trust the specific individuals with whom they’ve been dealing. If a “crunch time” were to come, those trustworthy individuals might not still be there; they might have been promoted, or left the company, or even died.  Their replacements might be folks whom you couldn’t trust as far as you could throw them.  So it’s best to plan accordingly.

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