Good facts and good judge support rep’s claim for breach of the duty of good faith and fair dealing

… When a principal terminates a contract not for any legitimate or neutral reason, but to shed the rep before a sale closes and commissions become due, raising a bad faith claim, which may make additional damages available, should at least be explored.

The commercial lighting products rep Boston Light Source Inc. (BLS) grew the business in its territory, introduced its principal to many new customers and qualified for incentive-based bonuses as part of its successful performance. Poised to collect on the incentive pay it had earned, the principal terminated and paid neither the incentive nor the earned commissions.

BLS didn’t take the termination lying down, and sought recourse with more than one remedy. Sometimes, limiting the relief sought in a commissions dispute to a breach of contract theory is akin to a rep calling on a customer with one product line tied behind its back.

While asserting non-payment for work performed breaches the rep agreement is nearly always a viable claim, when short-sighted principals terminate rep contracts solely to avoid paying commissions due (or to become due), one lesser known remedy can be a bad faith claim.

The law in many states holds that contracts not for a fixed term can ordinarily be terminated for any reason or for no reason, but generally, not to avoid paying a debt for work already performed. This can be viewed as breaching what the law calls the “implied duty of good faith and fair dealing.”

Asserting such claims can prove tricky because states view bad faith claims differently, and some jurisdictions are much more favorable than others. However, when a principal terminates a contract not for any legitimate or neutral reason, but to shed the rep before a sale closes and commissions become due, raising a bad faith claim, which may make additional damages available, should at least be explored.

Asserting a good bad faith claim

Oftentimes when the affected rep is forced to take legal action and asserts a bad faith termination, the manufacturer will seek to dismiss the claim by arguing to the court that alleging a termination was carried out in bad faith is duplicative of the allegation that the termination breached the parties’ contract.

Fortunately, more astute judges do not get bamboozled by such flawed views of bad faith theories and recognize the distinction. The BLS action brought in the Boston federal court late last year proves illustrative.

Axis Lighting Inc. terminated its 2007 contract with BLS under a common provision enabling either party to terminate with 30 days notice. The contract also stated, however, that BLS was entitled to commissions for three months for any orders registered with Axis within 30 days, or where evidence established that BLS worked on the order.

BLS performed under the contract with great success, helping Axis achieve brand recognition, increasing its sales in the BLS territory, and introducing its customers to Axis management personnel. When Axis added a “sales incentive program” in 2016, BLS became eligible to receive an “incentive bonus” upon achieving certain benchmarks.

Soon after, with many substantial orders pending, including BLS working to finalize the “largest specification for an order of Axis products it had ever created,” the incentive bonus was within reach. Then, Axis lowered the boom.

A “territorial reorganization” was offered as the rationale behind Axis terminating its long-serving and highly successful rep, but BLS wasn’t buying it. In its complaint, BLS asserted Axis terminated in bad faith to avoid paying commissions and incentive bonuses.

Other facts alleged by BLS provided additional color. Axis deliberately delayed accepting orders it had worked on, concealed other orders BLS had generated, falsely credited orders for itself or other reps that BLS procured, and understated other commissions by withholding credit for orders from BLS.

The court recognized that, in Massachusetts, a covenant of good faith and fair dealing is implied in every contract. Massachusetts courts have construed this covenant to mean that “neither party shall do anything that will have the effect of destroying or injuring the rights of the other party to receive the fruits of the contract.”

The Complaint filed by BLS sought to recover for both breach of contract and breach of the implied duty of good faith and fair dealing, among other claims. Axis responded by moving to dismiss all but the breach of contract claim.

In its motion, Axis argued the bad faith claim “does nothing more than allege a breach of contract,” which BLS already pled separately. Suggesting the two claims were duplicative, Axis sought dismissal on the basis that both were based on the premise that after terminating, it failed to pay the commissions and bonuses due.

Bad facts show bad faith

Fortunately for BLS, the perceptive judge determined that the bad faith claim did more than rehash the breach of contract theory. Far from merely repeating the allegation that Axis breached the parties’ contract, the court spotted BLS’s separate assertions that Axis consciously terminated “when it did because it knew there were several large impending orders which if fulfilled would obligate Axis to pay BLS a substantial commission and bonus.”

Together with the other allegations of wrongfully withholding commissions, the court ruled the BLS Complaint “with ease adequately pleads that Axis acted in bad faith and breached an implied covenant of good faith and fair dealing.”

This is not the same as entering judgment in favor of BLS, of course, but the denial of the motion to dismiss is a necessary hurdle to clear on the way to a potential recovery. The ruling proves significant because it contrasts with other court decisions that erroneously fail to draw the distinction between merely breaching a contract and operating in bad faith.

BLS had the goods to demonstrate its principal’s bad faith. When commissions are withheld following a termination, a bad faith claim may likewise lie, but such claims do not enjoy a high success rate. Each situation requires careful consideration of the circumstances surrounding the termination, the contract language, and the law of the particular jurisdiction.