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MARKETING AGREEMENTS BASED ON COMMISSIONS WITH OUTSIDE VENDORS-DOES YOUR BUSINESS UNDERSTAND THE TIME LIMITS?

Does your business really know the time limits of payments in its marketing agreements based on commissions with outside vendors? Your business should scrutinize these agreements closely and understand the time limits, especially after a recent decision by a Federal Judge in Spring Investor Services, Inc. v. Carrington Capital Management, LLC

According to the case, the Defendant Carrington Capital Management, LLC, is a hedge-fund manager responsible for the investments and operations of several funds. In 2004, Carrington entered into an agreement with Plaintiff Spring Investor Services, Inc. to market its product and identify qualified investors. In exchange, the agreement provided for Spring to receive commissions based on the monthly management fees and annual performance fees earned by Carrington on investor accounts "serviced" by Spring. In October 2005, Carrington terminated the agreement. At the time of termination, Carrington provided written assurances that it would continue to pay commissions on all investor accounts serviced by Spring. However, in the spring of 2006, it ceased making payments.

In February 2010, Spring filed a civil action in Federal Court seeking payment of all unpaid commissions, as well as attorney's fees, treble damages under c. 93A, and punitive damages. Carrington filed a counterclaim and both parties moved for partial summary judgment.

Carrington admitted that the contract required it to pay certain fees to Spring, and that the amount of those fees was determined based on the assets invested in the funds by investors who had been "serviced by" Spring. The issue between the parties was whether the agreement established a time limit for the payment of such fees.

Carrington contended that all rights and obligations under the agreement, including Spring's compensation rights, automatically expired after three years. Therefore, any payment obligations by Carrington to Spring ceased on October 1, 2007, three years after execution of the contract. Spring argued that the contract set forth no such time limit, and that the agreement provided for compensation rights to continue for as long as any investor introduced by Spring remained invested in a Carrington fund.

The Court held that the language of the contract provides no support for Carrington's interpretation of a time limit:

The compensation provision of the contract provides that Spring will be paid a fee on all fees collected by Carrington on all assets from investors serviced by Spring subsequent to September 21, 2004. The contract contains no time period or end date to limit its compensation provisions. There is no reference to the three-year contract term anywhere in the compensation provision. While the parties undoubtedly could have negotiated for an end date for the contract's compensation provisions, there is no indication in the contract that they did so. The Court will not read a term into the contract that simply is not there.

The Court held that "such a time limit is contrary to common sense and imposes a restriction that is unsupported by industry custom and usage and that the parties did not intend." Accordingly, the Court interpreted the contract as providing that Spring should receive fees for as long as investors serviced by Spring remained in the fund.

This case serves as a reminder to businesses to carefully review and understand the terms of any marketing agreement based on commissions. Especially, your business should understand any terms of the marketing agreement governing the time limits, termination provisions and obligations after termination. Courts will not read terms into a contract that simply are not there so make sure what your business bargains for is always included in the plain terms in the contract.

Contact Attorney Mucci, an experienced business litigator, if you or your business have any questions about obligations under the terms of a contract or if you are already engaged in a breach of contract dispute.

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