Sales Commission Agreements Need to be Carefully Drafted

Sales Commission Agreements in Texas

Plenty of people in businesses that hire sales associates deal with a compensation arrangement. Typically, when a salesperson is responsible for a sale, some percentage of the value of the sale is payable to the salesperson directly as a way to incentivize effective selling practices and reward salespeople in proportion to how much they benefit the company. However, as a recent case before the Texas Supreme Court has demonstrated, trying to draft these agreements without the assistance of qualified legal counsel can lead to surprising outcomes.

The "Procuring-Cause” Doctrine

The default rule in Texas is that salespeople who receive commission pay are owed that commission whenever they are the “procuring-cause” of a sale. See Perthuis v. Baylor Miraca Genetics Lab’ys, LLC, No. 21-0036, 2022 WL 1592587, at *1 (Tex. May 20, 2022). These salespeople are the “procuring-cause” of a sale when they “set in motion a chain of events … which, without a break in their continuity, cause the buyer and seller to reach agreement on the sale as the primary and direct result of the [salesperson’s] efforts. Id. at *9.

What does it mean in practice to be the “procuring cause” of a sale? The answer depends upon the kind of sale, but the real estate agent industry provides an example. The Texas Realtors’ guidance on commission disputes identifies the procuring cause for a sale by posing the following questions:

  1. Who first introduced the buyer to the property?
  2. Was the series of events, starting with the original introduction of the buyer to the property and ending with the sale, hindered or interrupted in any way?
  3. If there was an interruption or break in the original series of events, how was it caused and by whom?
  4. Did the action or inaction of the original broker cause the buyer to seek the services of a second broker? For example, if the original broker did not call the buyer for three weeks after a showing, the hearing panel might decide that the broker abandoned the buyer and paved the way for the entry of the second broker.
  5. Did the second broker unnecessarily intervene or intrude into an existing relationship between the buyer and the original broker?

These questions may help to clarify how procuring-cause applies in other contexts. In addition to these questions, another important factor in determining commission is the salesperson's employment status.

Commissions after a Salesperson Leaves the Company

In a recent case, the Texas Supreme Court reached a decision about commission payments due for a contract amendment with one of the company's largest customers. The salesperson was responsible for negotiating the amendment, which substantially increased the minimum purchase requirements for the customer. However, the salesperson was terminated before the contract was finalized. See Perthuis, 2022 WL 1592587 at *1-2. The Court found that the Procuring Clause Doctrine governed the commission agreement even after the salesperson was terminated because no terms in the agreement were “inconsistent with the default rule.” Id. at *6. So, even though the amendment was not finalized before the salesperson's termination, the Texas Supreme Court ruled that he was owed commission payments for that contractual amendment, a payment of over $1 million. Id. at *2.

That particular employer may have been surprised about owing over $1 million to a salesperson who had been fired before the sale was even finalized. This case underscores the surprising ways that default rules may apply to the commission agreement. A qualified attorney is an important part of drafting these and other kinds of contracts in order to avoid costly misinterpretations of contractual agreements.

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