Using a Contract Breach to Defend Against a Sales Rep’s Claim for Breach of Contract

Some sales rep cases turn on persnickety contract language or ambiguous terms. Other rep cases involve arcane questions of law. Then there’s the case brought by sales rep Lindsie Williamson that worked its way up to the Supreme Court of Utah in November 2022.

That the defense to the claim devised by her principal was even taken seriously is a testament to the great patience of the Utah judiciary.

The background

As alleged in her complaint, filed in Provo, Utah, Williamson represented MGS by Design, Inc., per a verbal agreement starting in 2016. Although she repeatedly requested a written contract, MGS never complied. 

MGS did maintain written standard sales prices, payment schedules, and commission rates applicable to sales reps, including Williamson, and commission payments were previously made pursuant to the terms found in these written documents. However, from January to August 2018, Williamson sold more than $300,000 in goods and services for MGS, and earned over $32,000 in commissions that went unpaid.

In her suit, Williamson invoked the Utah Sales Representative Commission Payment Act, which, like many state rep statutes, enables the potential recovery of three times the unpaid commissions, plus attorney’s fees and costs. On very unusual grounds, MGS moved to dismiss the complaint (spoiler: “unusual” = absurd).

MGS seeks to exploit the Utah rep statute

Agreements between sales reps and principals are required by Utah’s rep statute to be in writing (“[t]he business relationship between a sales representative and a principal shall be in writing signed by both the principal and the sales representative”). 

Meanwhile, a separate section of the statute authorizes reps to bring claims for a failure by the principal to comply with “any provision of an agreement relating to the payment of commissions.” 

Even though it was MGS that refused to reduce her agreement to writing, MGS still responded to Williamson’s complaint by arguing the absence of a written agreement served to excuse it from the rep statute’s treble damages provision. It moved to dismiss Williamson’s complaint, actually arguing that she was not entitled to statutory relief because the “agreement” referenced in the statute must be in writing for the court to entertain Williamson’s claim and the parties’ contract was only verbal.

Surprisingly, the district court in Provo somehow bought this interpretation of the statute and granted the motion. Williamson then appealed to the Supreme Court of Utah.

The rep statute gets a fresh look on appeal

At the state’s highest court, the statute received a much more careful read. Because the term “agreement” is not defined in the statute, the court looked to its “ordinary and usually accepted meaning” as a “mutual understanding between two or more persons about their relative rights and duties regarding past or future performances.” Nothing here suggested an agreement must be in writing.

As it did in the lower court, MGS reasoned that the separate section of the statute requiring rep contracts to be in writing should carry over to the operative section, meaning its breach of the contractual requirement to furnish Williamson with a written contract should provide an escape hatch from her suit. MGS sought a ruling that claims for a failure to comply with “any provision of an agreement relating to the payment of commissions” can only be brought if the agreement is in writing. 

Fortunately, this argument was squarely rejected.

“MGS conflates the definition of ‘business relationship’ with this separate writing requirement,” wrote the court. This was a separate provision of the statute, and there was no indication that the Utah legislature intended to prevent sales reps from asserting claims without a written agreement.

Again, in the words of the court: “Just because the parties fail to reduce their relationship to a signed writing in compliance with the writing requirement does not mean that no relationship exists. We decline to incorporate the Act’s writing requirement into the definition of ‘business relationship’ where the legislature chose not to define it that way.”

MGS’s other arguments get summarily rejected

After its primary position failed decisively, perhaps it was no surprise that the court made short work of MGS’s secondary arguments. Pointing to the Utah statute’s treble damages provision, MGS suggested that due to the “hefty penalty” for not making timely commission payments, “it makes sense that the legislature wanted the business relationship between the two parties to be in writing.” 

Of course, nothing in the statute supported MGS’s view of what “makes sense.” Further, the court found more sense in Williamson’s argument that if recovering treble damages was conditioned on a written contract, then principals could “sidestep liability” for such damages when they wrongfully withhold commissions simply by refusing to enter into a written deal. 

Finally, the court had no difficulty rejecting the MGS argument that the statute should be “harmonized” by reading the writing requirement together with the treble damages section. Finding no harmony problem, the Utah high court made clear: “The Act can, in one section, require business relationships to be in writing, while also holding principals accountable for their promises where there is no writing.”

Conclusion

Consistent with most common-sense approaches – even if not MGS’s – a statutory requirement for parties to reduce their contract terms to writing does not furnish cynical principals with a trick door to use to avoid the treble damages made available by the same statute for failing to timely commission a sales rep. Like most non-paying principals, MGS would have to answer for its unfair treatment of a highly performing sales rep. 

Please contact Adam Glazer with any questions at (312) 648-2300 or e-mail at adam.glazer@sfbbg.com.

 

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